CA Amresh Vashisht, Meerut
No Capital Gain Chargeable to Tax on Sale of Asset acquired by way of Adverse Possession for any Cost of Acquisition u/s 55(2) despite Amendment in the Income Tax act in the year 1995 covering those assets which are having a NIL cost of acquisition. However the amendments still don’t cover the transactions on account of proceeds from reverse possession thus do not attract any capital gains.
Adverse possession is a situation under which a person holds possession of land owned by someone else may acquire valid title to it, so long as certain ordinary law requirements are met, and the adverse holder is in possession for a sufficient period of time, as defined by a statute of limitations. The adverse possession means to get hold of title to land through clear occupancy of the land, while claiming ownership for the period of years set by the law of the state where the property exists. In such situation the person bought the asset without incurring anything towards its acquisition cost, but became owner with the passage of time as defined in the law. Actual Adverse possession consists of actual occupation of the land with the intent to keep it solely for oneself. Merely claiming the land or paying taxes on it, without actually possessing it, is insufficient. Entry on the land, whether legal or not, is essential. `Animus possidendi’ is one of the ingredients of adverse possession. Unless the person possessing the land has a requisite animus the period for prescription does not commence.
JUDICIAL ORDERS WELL SUPPORTED NO GAIN IN CASE OF NIL COST OF ACQUISITION.
The Courts had held that capital gain tax was not chargeable where the cost of acquisition was nil or not ascertainable. Such issues were covered by a number of decisions of the Hon’ble Supreme Court as well of various High Courts of the country.The base decision is in the case of CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294; (1981) 2 SCC 460 wherein the Hon’ble Supreme Court has held that all transactions encompassed by section 45 must fall within the computation provisions of section 48. If the computation as provided under section 48 could not be applied to a particular transaction, it must be regarded as “never intended by section 45 to be the subject of the charge”.
The Hon’ble Supreme Court in the case of ‘PNB Finance ltd. vs. CIT (2008) 307 ITR 75’ has reiterated the above proposition of law .In the case of CIT v. B.C. Srinivasa Shetty (supra) the court was considering whether a firm was liable to pay capital gains on the sale of its goodwill to another firm. The court found that the consideration received for the sale of goodwill could not be subjected to capital gains because the cost of its acquisition was inherently incapable of being determined. The principle propounded in B.C. Srinivas Shetty (1981) 128 ITR 294 (SC) has been followed by several High Courts with reference to the consideration received on surrender of inter alia tenancy rights sale of Good Will etc. It was to meet the situation created by the decision in B.C. Srinivas Shetty (1981) 128 ITR 294 (SC) and the subsequent decisions of the High Courts that vide Finance Act, 1994, Section 55 (2) was amended to provide that the cost of acquisition of, inter alia, a tenancy right , good will etc. would be taken as nil.
1994 AMENDMENTS DO NOT COVER ADVERSE POSSESSION
The Finance Act 1994 has amended section 55 and bough the assets with a NIL cost of acquisition into the ambit of taxability. The amendment covered the asset like tenancy rights, goodwill, financial assets like Bonus shares, etc. The said amendment was as follows. In section 55 of the Income-tax Act, in sub-section (2), for clause (a), the following clauses have been substituted, with effect from the Ist day of April, 1995, namely:–
“(a) in relation to a capital asset, being goodwill of a business, tenancy rights, stage carriage permits or loom hours,-
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
(ii) in any other case [not being a case falling under sub clauses (i) to (iv) of sub-section (1) of section 491, shall be taken to be nil;
(aa) in a case where, by virtue of holding a capital asset, being a share or any other security within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956.) (hereafter in this clause referred to as the financial asset), the assessee becomes entitled to subscribe to any additional financial asset, then subject to the provisions of sub-clauses (i) and (ii) of clause (b),-
(i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset;
(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee;
(iii) in relation to the financial asset, to which the assessee has subscribed on the basic of the said entitlement, means the amount actually paid by him for acquiring such asset and
(iv) in relation to any financial asset, purchased by any person in whose favour the right to subscribe to such asset has been renounced, the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid amount paid by him to the company or institution, of the said entitlement, meant the amount actually paid by him for acquiring such asset and of the said entitlement, means relation to any financial asset;
ADVERSE POSSESSION IS NOT EQUIVALENT TO GOODWILL /TENANCY RIGHTS
Section 55(2) states that the cost of acquisition in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business , tenancy rights, stage carriage permits or loom hours etc. Still Adverse possession consideration is not at par with the monies received on surrender of inter alia tenancy rights sale of Good Will etc which are now taxable in post 1995 era. Now the same have been charged to tax by specifically providing that if there is no cost incurred by the assessee in this respect, the cost shall be taken as nil. But the adverse possessions still have not been brought into the ambit of charging section.
ITAT MUMBAI AFFIRMS ADVERSE POSSESSION RECEIPTS OUT OF TAX NET.
IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI ITA 807/Mum/2013 ; Assessment Year : 2006-07 Smt. Seetha S. Shetty (Appellant) vs Dy. Commissioner of Income Tax (Respondent) Date of Order: 11-09-2015 The order establishing the clarity on the adverse possession concluded as follows.
Thus, it may be noted that after the amendment of 1995, certain assets like goodwill, tenancy rights etc. have been charged to tax by specifically providing that if there is no cost incurred by the assessee in this respect, the cost shall be taken as nil. However, we find that vide amendment, particular assets like goodwill, tenancy rights, trade mark etc. have been brought into the ambit of charging section. However, the rights obtained by way of adverse possession have not been included in the provision neither in the charging section 45 nor in the section 48 which provides mode of computation. There is no any provision regarding the charging of capital gains tax on an asset title to which has been acquired in recognition of rights of adverse possession. Even u/s 49, the cost of the asset with regard to certain mode of acquisition, such as by way of gift or will, by succession, inheritance or devolution or on any distribution of assets on the dissolution of a firm, body of AOP or liquidation of company etc.; the rights attained in an asset on account of adverse possession have not been included.
Though the Parliament has made an amendment that in certain type of assets like goodwill, tenancy rights etc., the cost of acquisition would be taken as actual cost incurred and if no cost incurred, the same be taken at nil, however the said deeming section is applicable to the assets which have been specifically brought within the purview of the said provision. The assets or the rights which do not find mention in the relevant provision cannot be brought within the ambit of charging section, in the light of the decision of the Hon’ble Supreme Court. We further find that the issue is now squarely covered by the direct decision of the Humble Bombay High Court in the case of CIT vs. Star Chemicals (Bombay) Pvt. Ltd. (Income Tax Appeal No. 1110 of 2009& Income Tax Appeal No. 1153 of 2009, dated 14th August, 2009) wherein the Hon’ble Court while answering the question of chargeability of capital gains in relation to an asset/title which was acquired by way of adverse possession, has held that the Tribunal was right in holding that for want of acquisition cost, capital gains tax would not arise. Since a direct decision of the Humble jurisdictional Court in relation to the chargeability of capital gain on asset acquired by way of adverse possession is available, hence, the same is binding upon this Tribunal. We therefore hold that no capital gain is chargeable to tax in relation to the asset acquired by way of adverse possession. Appeal of the assessee is allowed and order of the lower authorities is set aside. 9. In the result, the appeal filed by the assessee is allowed.
About the Author– Author was Member of ICAI- Capacity Building Committee 2010-11 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email firstname.lastname@example.org or on phone Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2 having office at 1 1 5, Chappel Street, Meerut Cantt, UP, INDIA