No Capital Gain on Transfer of Land Having Nil Acquisition Cost

IN THE ITAT PUNE BENCH ‘A’

Manohar Pyarelal Sadane

versus

Income-tax Officer, Ward – 3(1), Dhule

IT APPEAL NO. 220 (PN) OF 2011

[ASSESSMENT YEAR 2007-08]

JULY 26, 2012

ORDER

Shailendra Kumar Yadav, Judicial Member

This appeal has been filed by the assessee against the order of the CIT(A) on following grounds:

 1.  The learned CIT(A) erred in holding that the land situated at Village Kharghar was a capital asset within the meaning of section 2(14) of the Income Tax Act.

 2.  The learned CIT(A) erred in holding that the said land was not an agricultural land and hence, the enhanced compensation received was taxable as long term capital gain.

 3.  The learned CIT(A) failed to appreciate that the said land was an agricultural land and since it was outside the municipal limits, the said land did not constitute a capital asset and hence, the enhanced compensation received for the compulsory acquisition prior to 06/01/1994 was not taxable as long term capital gain.

 4.  The learned CIT(A) failed to appreciate that the said land was allotted to the assessee’s father by Govt. of India because he was a refugee from Pakistan, there was no cost to the assessee nor the cost of acquisition was determinable and hence, the capital gains were not taxable.

 5.  Without prejudice to the above grounds, the learned CIT(A) failed to appreciate that the cost of acquisition of the said land was not determinable and hence, as the computation provisions failed, the enhanced compensation could not be taxed as long term capital gain.

2. The assessee, an individual, is a proprietor of M/s. Mai Selection and is engaged in trading business. He filed return of income on 31.03.2008 declaring total taxable income of Rs.97,750/- and Rs.34,000/- as agricultural income. Assessee received compensation amounting to Rs.26,33,433/- from Special Land Acquisition Officer (hereinafter called SLAO) Panvel, District Alibaug, on 04.11.2006. The said compensation had not reached finality at relevant point of time as the matter is sub-judice before the Hon’ble High Court. The assessee, during assessment proceedings, claimed that amount under reference was agricultural land and, therefore, enhanced compensation of Rs.7,01,781/- and interest thereon of Rs.19,31,652/- u/s.28 was outside the purview of the capital gain tax under Income Tax Act, 1961. The Assessing Officer did not agree with the contention that land in question was agricultural land and therefore not a capital asset in accordance with section 2(14)(iii) of the Act. The Assessing Officer did not accept the contention of the assessee that enhanced compensation was not taxable and added Rs.26,33,433/- on account of compensation received.

3. Matter was carried before the first appellate authority who confirmed the order of the Assessing Officer. Same has been opposed before us.

4. The first three issues are against CIT(A) in holding that land situated at Village Kharghar was capital asset within the meaning of section 2(14) of the Act. Though the land in question was agricultural land as per revenue records, but land in question was located 6.2 km. from Panvel city. Taking all facts and circumstances into consideration, CIT(A), vide para 21, held that lands under reference are capital assets and not agricultural land within the meaning of section 2(14)(iii) as claimed by the assessee.

This reasoned finding of the CIT(A) need no interference from our side. Assessee fail on this account.

5. Second issue before us as raised in Grounds No.4 and 5, is that enhanced compensation awarded on acquisition of land is not liable to tax as land was allotted to his father free of cost and there was no cost of acquisition. It is undisputed that land was acquired by the State Government so capital asset. In this regard, stand of the assessee has been that CIT(A) failed to appreciate that the said land was allotted to the assessee’s father by Govt. of India because his family migrated from Pakistan and took shelter at relevant point of time, there was no cost to the assessee nor the cost of acquisition was determinable. The CIT(A) also failed to appreciate that cost of acquisition was not determinable and hence compensation thereon could not be taxed as long term capital gain. The Ld. Authorised Representative relied on the decisions of

(a)  ITAT, Pune ‘A’ Bench in the case of ITO v. Pashu Mohammed Zainuddin [2012] 50 SOT 45

(b)  CIT v. H.H. Sri Raja Rajagopala Thandaiman [2006] 282 ITR 126 (Mad.),

(c)  CIT v. Manoharsinh P. Jadeja [2006] 281 ITR 19 (Guj.), and

(d)  CIT v. Markapakula Agamma [1987] 165 ITR 386

In view of the above legal and factual discussion, the Ld. Authorised Representative submitted that assessee is not liable to capital gains and enhanced compensation of land allotted by the Government to his father being refugee from Pakistan at the relevant point of time and there was no cost to assessee and his father. So same is not liable for capital gain. On the other hand, Ld. Departmental Representative supported the order of the CIT(A) on both accounts that land is situated at Village Kharghar was capital asset within the meaning of section 2(14) of the Act and enhanced compensation on the same was liable for capital gain as per relevant provisions of Income Tax Act.

6. After going through the above submissions and material on record, we find that the ITAT Pune Bench ‘A’ in the case of Pashu Mohammed Zainuddin (supra) has decided similar issue in favour of the assessee by observing as under:

“4. We find that for charging of capital gain, the assets referred to in section 45 of the Act have to be such, in the acquisition of which, the assessee had incurred a cost. Admittedly, the assessee has not incurred any cost for acquisition of assets under consideration. The Assessing Officer has not brought anything on record to show that the assessee had incurred any cost for acquisition of the land in question. The Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294 that the liability to tax on capital gain would arise in respect of only those capital assets in the acquisition of which, an element of cost is either actually present or is capable of being reckoned and not in respect of those assets in the acquisition of which, the element of cost is altogether inconceivable. In the present case, the land was acquired by the assessee’s ancestor free of cost as Inami land as Choli Bangdi for maintenance and services of Dargah Peer Bahuddin Bhandari shah. Therefore, any element of cost in an acquisition of aforesaid land by the ancestors of the assessee is inconceivable. Further in case of Inami land as Choli Bangdi there being no cost of acquisition, the question of capital gain does not arise. In this view of the matter, the order of the CIT(A) does not call for any interference at our hand. We uphold the same and dismiss the grounds raised by the Revenue.

5. In the result, the appeal of the Revenue is dismissed.”

7. Nothing contrary was brought to our knowledge on behalf of Revenue in this regard. According to us for charging capital gains, the assets must have been acquired by incurring cost. In the instant case, the assessee has not incurred any cost for the acquisition of asset because the same was allotted to the assessee’s father by Government of India being refugee from Pakistan at relevant point of time. We also find that Hon’ble Gujarat High Court in the case of Manoharsinghji P. Jadeja (supra), wherein the assessee sold inherited property which was acquired by forefathers by conquest. The property did not have any cost of acquisition. Capital gain was held not assessable in respect of sale of such properties. Provisions relating to deeming cost of acquisition was held at nil for the purpose of computation of capital gain because deeming provision applies only to the specified item. Though provision of section 45 of the Act is charging section, the legislation has enacted detailed provisions in order to compute capital gain under that head and no provision on variance to such computation provisions can be applied for determining chargeable profits and gains. The assets referred to in section 45 of the Act has to be

 (i)  in acquisition of which it is possible to envisage cost

(ii)  in acquisition whereof assessee has incurred a cost and onus of showing that assessee had incurred cost is on Revenue, if Revenue failed to show that assessee had incurred a cost, it would be impossible to compute the income chargeable to tax under the head capital gains. By Finance Act, 1987m w.e.f. April 1st, 1988, the amended section 55 of the Act only ropes in taxability of goodwill on transfer of the same even if there is no cost of acquisition. Similarly, section 55 has been amended from time to time to enable taxability of other assets wherein no cost of acquisition is envisaged. Therefore, even if amendment is taken into consideration, section 55 can be invoked in case of nil cost of acquisition for the purpose of bringing tax the entire sale consideration only in relation to specified assets, as held in CIT v. Manoharsinhji P. Jadeja (supra), by driving strength from the decision of the Hon’ble Supreme Court in CIT v. B. Srinivasa Setty [1981] 128 ITR 294 (SC). Even the case of the assessee does not fall in the specified assets to attract amended provisions of section 55.

8. In view of the above factual and legal discussion, we hold that the land in question was not having cost because the same was allotted to father of the assessee being refugee from Pakistan by Government of India at relevant point of time which is not in dispute. So the land in question was acquired by father of the assessee free of cost. Therefore, there is no question of capital gain on transfer of such land. More so because it does not fall in specified items under section 49(1) (i to iv) of the Act. Accordingly, the same is not liable for capital gain. The Assessing Officer is directed accordingly.

9. As a result, the appeal of the assessee is partly allowed.