Whether when the title of the assessee on the impugned land is not clear, income arising from transfer of such land is to be treated as capital gain or income from other sources?

Bachhraj Factories Pvt Ltd Vs ITO (ITAT Mumbai)- in regard to 14 bighas, the assessee was found to be a trespasser. The law does not recognize the rights of a trespasser. Ordinarily, it is said that the possession is the nine point of ownership. The possessor has got right over the property and his right cannot be challenged by any one except the true owner. Undoubtedly, for some time, the assessee was the possessor of the land and building. But from the facts culled out from the records, it cannot be concluded that the possessory rights of the assessee bear any legal recognition. Unless such rights are protected by law to associate the word ‘right’ with the said type of possession will be a misnomer, since right is a legally protected interest. 

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH ‘B’ MUMBAI

M/s. Bachhraj Factories Pvt. Ltd., Vs. ITO

ITA No. 55/Mum/2009
Assessment year- 2004- 05

O R D E R

PER ASHA VIJAYARAGHAVAN (JM)

This appeal filed by the assessee is directed against the order dated 25.9.2008 passed by the ld. CIT(A)-XXVII,  Mumbai  for  the Assessment Year 2004-05.

2. The brief fact of the case is that during the course of assessment proceedings, the Assessing Officer  found that the assessee had shown ITCG on sale of land at Ujjain amounting to Rs. 11,05,556/- The assessee was asked to furnish details of capital gain on sale of land along with cost of the land and  also to explain as to whether the sale value has been taken as per the provisions of sec. 50C of the IT Act. In response, the assessee filed details of the sale of land along with the copies of the MOU. As regards the valuation as per provisions of sec 50C, it was submitted that the property has neither been conveyed nor the Document whereby the assessee has transferred its rights has been executed for the purpose of payment of stamp duty and therefore the provisions of sec 50C cannot be applied. It is also submitted  that it was not possible to convey the said land in view of the  status quo direction of the Courts and the transfer has not been registered. The Assessee has merely entered into a MOU and the capital gains  have been offered in the year under consideration in view of the provision  of sec 2(47) by which a part performance of a contract contemplated in sec 53A of the transfer of property act is deemed to amount to a transfer. Therefore the Assessee submitted that sec 50C is not applicable as the stamp valuation authority has not adopted to assessed any value of the property for the purpose of payment  of stamp duty. The AO observed that the property has not been conveyed and the Assessee has merely entered into a MOU. Hence, the Assessee was asked to explain the treatment of capital gains given to the receipt of moneys alleged to be in consideration of  the Ujjain Property and to show cause why the same should not be taxed under the head Income from other sources. The Assessee in response stated that it has sold the property along with their rights title and interest in the said property and the same constitutes a capital asset. The AO noted that as admitted by the Assessee there has been litigation as regards the right to the property that has been pending  for last 35 years and it has been in possession of the property and as such the same constitute a capital asset.

3. Regarding the litigation about the said property, the assessee submitted that the S.C. vide order  dated 7.9.1989 had observed that since the civil suits have already been filed before the Civil Court, the Civil Court shall investigate the matter and decide the issue of title to the land. The  Civil Court in  one suit in respect of plot of land of 14 big has has decided in favor of the Assessee and the Ujjain  Municipal Corpn. has preferred an appeal before the High Court of M.P. against the said order. The  other suit in respect of plot of 27 big has has been decided against the assessee and the assessee has  preferred  an appeal  before the high court of  MP. The Court has passed an interim order directing the parties to maintain status quo and both the appeals are pending for disposal till date. The Assessee further submitted that the purchasers have purchased the property on as is where is basis and no person would pay an amount of Rs 2,28,00,000/- without getting any benefit. The purchasers have paid the price for acquiring whatever rights title and interest the Assessee had in the Ujjain property. The Assessee has stated that possession of the said property was given to the purchasers vide letter dated 16.12.2003 during the previous year relevant to the AY under consideration and therefore the sale proceeds received on transfer of th Ujjain property is to be taxed under the head capital gains and not under the head  ‘Income  from other sources’.

4. The assessee stated that in case of the sale proceeds received as per MOU in connection with the transfer of right title and interest in the Ujjain property does not constitute a transfer of any capital  assets then the amount received cannot automatically be treated as a casual or non recurring receipt taxable under the head Income from  other sources and the amount received would have to be treated as capital receipt not exigible to tax.

5. The AO examined the assessee’s submission and noted that the facts of the case are that the assessee had purchased the land somewhere in 1962 from Seth Nazar Ali. The land was a leasehold land given to Seth Nazar Ali by the Govt. of M.P. for establishing a factory and the condition of the  lease was that if for any reason it  was not possible to run a ginning or cloth factory the property shall revert back to  the government. This property was taken over by the Addl. Collector, Ujjain as the terms of the grant of the said property were violated and no compensation was paid to the Assessee. The property comprised  of 2  plots  of  land of 27 Big has and 14 Big has respectively. The acquisition of the plot of 27 big has was made as the land was given for running a cloth factory and there was a stipulation in the agreement that in the eventuality of the cloth factory being  stopped, the land shall be reverted to the government. The plot of 14 big has was acquired on the ground that the assessee company was a  more trespasser. The Assessee company has disputed the acquisition of the said land and as stated by  the Assessee himself the appeals filed by the Assessee and the Ujjain Municipal Corporation are  pending in  the High Court of MP The question therefore arises as to whether the Assessee at all  had  any saleable right in the property. The title of Seth Nazar  Ali, the above facts would reveal also was not absolute as he had only a limited right in the said property which was subject to certain encumbrances and therefore he could not be said to have any absolute ownership under the general law or even under sec 27(iii) of the IT Act not to mention that he had no right to transfer any valid title even by executing a registered deed. As regards the 14 big has of land it has been acquired treating the Assessee as a trespasser and the law does not recognize the rights of a trespasser. Though the Assessee claimed to be the possessor of the land and buildings for some time, it cannot be concluded that the possessory rights bear any legal recognition. The rights are legally protected interests and to associate the word right with the said type of possession will be a misnomer.

6. The AO quoted certain relevant paragraphs from the MOU signed by the Assessee with the alleged purchaser. This memorandum of understanding (MOU) mainly records in principle the basic terms which have been agreed between the parties hereto regarding sale by BFPL of the said property more particularly described in the 2ND schedule here under written on as Is  where  is  basis and  by  itself  is not to be or should not be constructed as an agreement for sale of the said property. It is also expressly agreed and declared that the purchaser shall not be entitled to the possession of the said  property  or any  part  thereof  until  such  time as the transaction is completed and  proper conveyance Is executed in favor of the purchaser by BFPL. It shall be the responsibility of the purchaser to proceed with or prosecute the said litigation in such manner as it may deem fit and proper or to settle the same with the Chief Secretary, State of Madhya Pradesh and Ujjain Municipal Corpn. Before the High Court of MP at Indore and Ujjain District Court respectively or any other appropriate court or forum where such litigations are being fought out entirely at its own costs charges and expenses.

7. From the above the AO observed that the MOU is not to be constructed as an agreement for sale and that the purchaser is not entitled to possession of the said property till such time conveyance is executed  in  his  favor. The  Assessee has himself stated  that  it  is not possible to convey the said  land in view of the status quo direction of the Courts. Sec 53A of Transfer of property Act 1882 defines part performance as where any person contracts to transfer for consideration any immovable property by writing signed by  him or on his behalf  from which the terms necessary to constitute the  transfer can  be ascertained with reasonable certainty and the transferee  has in part performance of  the contract  taken possession of the property or any part thereof or the transferee being already in possession continues in possession in part performance of  the contract and has done some act in furtherance of the contract and the transferee has performed or is willing to perform his part of the contract. In the instant case the Assessee has received the money but as found above cannot give clear possession of  the property. The letters giving possession filed by the Assessee are only self serving as when the Assessee does not have a clear title to the said property no possession valid in law can be given. There  is therefore no part performance as stated by the Assessee. The  assessee’s  argument  that no prudent person will pay an amount as Rs. 2,28,00,000/- without getting any benefit does not hold good as that is the fact in this case. It is clear from para 2.3 of the MOU that the purchaser will proceed with the litigations in the Court or settle the same with the MP government and in the event of the purchaser being successful he will enjoy the benefit arising from the transaction.

8. Section 45 of the I.T. Act defines capital gains to be profits or gains arising from the transfer of a capital asset and sec 2(47) defines transfer in relation to a capital asset to include the sale exchange or relinquishment of the asset or the extinguishment of any rights therein. The capital gain will only arise if there is transfer of an asset and as such existence of the asset is a must. In the instant case as discussed above the clear right title of the assessee over the property at  Ujjain  has not been proved. It is clearly born out of the  assessee’s records that the covenants contained in the original lease executed between the said Shri Nazar  Ali  and  the Government of M.P have been flouted leading to the re  possession of the  impugned property by the government. The fact that there is litigation  regarding  the  trespass  to the property  by the assessee, whether with an understanding   with the said Nazar Ali or not, cannot judicially be  said  to have  been decided to confer  any  right  to  the  property in favor of the assessee. What sec 2(47) or sec 2(14) of the I.T  Act contemplates is only a legal right to the asset in the first place. Then and only then can one look to the deeming effect of  ‘transfer, sale, exchange or extinguishment’ of such right. As regards the transfer of the right subject to the condition that the purchaser would prosecute the pending litigation again cannot be said to be an answer to the question whether there is a transfer of any asset much less whether there is any asset at all in possession of the Assessee. This is so because the accused is the assessee and that status cannot be shifted to any other person except by moving any interlocutor petition by such other person. The Assessee has not brought out any such fact in this case.

9. The AO also observed that the above position would reveal that there is no asset in the possession of the assessee as of date and there is also no factual or legal transfer of any asset as alleged by it.

10. As regards the  argument that the amount involved is in any case a capital receipt not exigible to tax is not tenable because for the consideration being termed as a capital receipt there must be either a tangible or intangible asset which in both the cases should exist. The assessee has not traced the receipt to any tangible asset except by merely stating so. Even in the case of any intangible asset the essential indicia is that the assessee holds a right therein. In this case the assessee has failed to indicate any such right to any such asset.

11. The I.T Act does not stipulate anywhere that the income or receipt sought to be brought to tax  should be legal or genuinely sourced. All what the Act envisages is that if a person earns taxable income the same should be taxed as per the charging provisions of the act. If the assessee should  resist such a levy it I the duty of  the Assessee to prove that the amount did not fall within the charging provisions of the act. Having offered  under a fictitious head as capital gain the Assessee has admitted that the amount in question is exigible to income tax. The only factual position us that the assessee  has physically received Rs. 2,28,00,000/- and now to say that the same is a capital receipt not exigible to income tax amounts to a volte face which does not fit in any alternative situation under the law. To exempt this receipt from any charging  provision of  this act there must be a specific section available under the act to which also the  assessee has not pointed out. Sec 14 specifies specific heads of income and that the last thereof is  other sources which is residuary in nature. Since the assessee’s receipt does not fit in any other heads it has to essentially fall in the category of other sources. In these circumstances, the amount of Rs. 2,28,00,000/- is neither a capital receipt nor a casual income but is indeed  exigible to income tax as income from other sources. Accordingly, the AO taxed the amount of `.2,28,00,000/- under the head“Income from other sources.”

12. On appeal before  the  Ld.CIT(A),  the  assessee reiterated its submission made before the AO which is as under:

Briefly  the  Assessee  submitted  that  the  company  had purchased  land  at  Ujjain  during  the    year  1962. The  said  land was  acquired  by  the  Govt.  of  MP  in  the  year  1979-80.    The Company  filed  two  separate  suits  before  the  District  Court  of Ujjain of which  one was decided in  favour  of  the  company. Ujjain Municipal  Corporation  has  filed  an  appeal  against  the  order  of the District Court which is still pending. The company’s other Suit against  the  said  acquisition  was  dismissed  by  the  District  Court of  Ujjain.  The  Company  has  filed  an  appeal  against  the  order  of the  District  Court  and  has  obtained  status  quo  order  from  the Madhya  Pradesh    High  Court,  Indore  bench,  which  is  pending for final  disposal.    This  property  was  written  off  in  the  books  of account  in  the  same  year  1979-80  since  no  compensation  was received  there  against.  The  Company  in  terms  of  Memorandum of Understanding (MOUs) executed on 23 October  2003 agreed  to  transfer  the  said  land  on  as  is  where  is  basis  to  Mahakal Infrastructure Pvt. Ltd  and Mahakal Projects P. Ltd. The parties to the  MOUs  have  further  agreed  by  way  of  execution  and acceptance of a binding irrevocable Power of Attorney that under no circumstances and on no account whatsoever will either party have  a  right  to  terminate  this  deal  which  effectively  concludes the sale transaction  between the  two parties.   In  view  of what is stated  above  and  since  the  Company  has  handed  over possession  of  the  land  it  has  accounted  for  the  income aggregating  to  Rs  22,800,00,000/-  of  which  Rs  22,500,000/-  has already been received.

More  than  30%  of  the  front  side  of  the  said  property  has been  encroached  by  the  State  Government  Ujjain  Municipal Corporation and a  Fire Brigade  Station  has also been established by the  State  Government on  the  said  land.   The  said  property is under litigation  since more than  35 years  and  the  company does not  have  a  clear  title  to  the  said  property  on  the  date  of execution  of  the  MOUs.    Therefore  it  cannot  convey  the  said property  in    favour  of  the  transferees  and  consequently  the MOUs  are  on  as  is  where  is  basis.  In  view  of  the    fact  that  the High  Court has issued a status quo on the said property, the  said property  cannot  be  adjudicated  nor  conveyed  and  accordingly section 50C is not applicable.

While explaining the transaction as a transaction leading to capital gains the Assessee relied on the following decisions.

1.  CIT Mumbai ciy-1 vs Tata Services Ltd 22 ITR 594(Mumbai)

2. A.R. Krishnamurthi vs CIT 176 ITR 417 (SC)

3. CIT vs Ashoka Marketing Ltd 164 ITR 664 (Cal)

Relying  on  these  decisions  the  Assessee  submitted  that  this property   was  originally  purchased from  Shri Nazar  Ali sometime in  the  year  1962  and  since  then  the  Assessee  has  acquired  this property  till  litigation  started  in  1976.  It  is  a  fact  that  this property  was  given  in  Nazar  Ali  by  the  Madhya  Pradesh  State Government  for  the  purpose  of  establishing  a  factory  and  it  is   also  a  fact  that  if  on  by  event    such  factory  could  not  be established the property shall revert back  to the government.   In view of non fulfillment  of  the conditions the  MP  Government had taken over the property in  the  year  1979  leading to the litigation  in  Civil  Court.    The  Assessee  has  disputed  the  acquisition  of  the said  land  and  the court  cases are  pending  before  the  High  Court of P in any event the Assessee claimed to be the possessor of the land  and  buildings  thereon  for  sometime  enjoying  the  property and  same  has  subsequently  been  transferred  to  Mahakal Infrastructure  P.  Ltd  and  Mahakal  Projects  Pvt.  Ltd.,  in  terms    of MOU  executed  on  23.10.2003.    Since  the  Assessee  has  handed over the possession of the  land and since the sale proceeds have been  received  by  the  Assessee  the  same  is  offered  for  taxation under  the  head  Capital  Gains.    In  view  of  the  provisions  of  sec 2(47) and provisions contemplated  under sec 53A of the Transfer of  property  Act.    The  Assessee  however    admitted  that  as  the said  properties  were  under  litigation  since  many  years  and  the Assessee  does  not  have  a  clear  title  to  the  said  property  on  the date  of  exclusion  of  MOUs  it  cannot  convey  the  said  property  in favour  of  transfers  and  consequently  the  MOU  as  is  where  is basis.  In  view  of  the  above  facts  the  Assessee  urged  that  it  has rightly  offered  the  amount  of  sale  proceeds  for  taxation  under the head capital gains.”

13.  The  Ld.  CIT(A)  rejected  the  contentions  of  the  assessee observing as under:

“I  have  gone  through    the  facts    of  the    case  and  also  the assessment  order.  I  have  also  perused  the  submission  made  by  the  appellant.  I  have  noted  that  during  the  year  under consideration  the  appellant  in  its  return  of  income  had  shown LTCG  on  sale  of  land  at  Ujjain  amounting  to  Rs  11,05,556/-  This land was claimed to have been  purchased by  the  appellant  from Shri  Nazar    Ali  sometime  in  the  year  1962.    This  land  was originally government land and the same was given to Shri Nazar Ali  by  the  government  of  MP  for  establishing  a  factory  with  the condition  that  if  for  any  reason  it  was  not  possible  to  run  a ginning  or  cloth  factory,  the  pr operty    shall  revert  back  to  the government.   As Shri  Nazar  Ali  failed to set  up  and  run  a  factory as aforesaid the land  was  taken over  by  the  Additional  Collector, Ujjain as the term of the grant of the said property were violated. From the facts  of the case and materials on record, I have noted that    the  property  comprises  of  two  plots  of  land  of  27  bighas and 14 bighas respectively.

The  plot  of  27  bighas  was  originally  given  to  Nazar  Ali  for running  the  factory.  The  other  plot  containing  14  bighas  have been  acquired  by  encroachment.  In  the  event  of  acquisition  of the  said  plots  by  the  State  Government  the  appellant  filed appeals  before  the  High  Court  of  MP  and  the  matter  is  still subjudice.  In  view  of  litigation  in  the  Court  of  law  and  in  view  of the facts brought on record both by the appellant and the AO it is to  be  decided  whether  the  appellant  has  the  absolute  right  or clear  title  of  the  land  in  question,  The  AO  while  examining  the facts  of  the case has given  his  finding  that  while  taking  over the possession  of  the  land  from  Shri  Nazar  Ali  by  the  appellant  the appellant  could  not  be  said  to  have  acquired  title  as  the  vendor i.e.  Shri  Nazar  Ali  did  not  have  absolute  ownership  of  the  land given  to  him  by  the  State  Government  of  MP.  The  AO  has  also examined  the  issue  leading  to  the  aforesaid  fact  as  to  whether the appellant   at all only  any  saleable right in  the  property.   The title of  Shri  Nazar  Ali on  this  plot of  land  was  not  absolute  as  he had  only a limited right in the said  property  which was subject to certain encumbrances   and therefore Nazar Ali would not be said to  have  any  absolute  ownership  under  the  general  law  or  even u/s 27(3) of the IT  Act.  Thus Shri Nazar Ali did  not have any right to  transfer  any  valid  title  even  executing  a  registered  deed.  As has  already  been  stated  the  land  in  dispute  contains  two  plots, one  plot  has  been  given  by  the  State  Government  to  Nazar  Ali and  another  plot  obtained  by  the  appellant  through encroachment, The AO found that in both the cases the appellant cannot  be  said  to  be  the  legal  owner  of  the  plots  as  there  is  no legal recognition to such possession of land.  From the findings of the  AO  and  facts  on  record  I  therefore  find  that  the  land  in question  though  in  possession  of  the  appellant  does  not  belong to  the  appellant  as  there  was  no clear  title.  In the case  of  CIT  vs Podar  Cement  P.  Ltd  226  ITR  625  (SC)  the  Hon’ble  Apex  Court had  held    that  one  of  the  most  important  rights  of  an  owner  is the  right  to  exclude  others.    The  property  right  is  essentially  a guarantee  of  the  exclusion  of  other  persons  from  the  use  or handling  of  the  thing.    To  acquire  possession  of  a  thing  it  is necessary to exercise such physical control over the thing as the thing is capable of  and to evince the intention to exclude others. It would thus be seen that  where the possession of  a property  is acquired with a right  to exercise such necessary control over the property  acquired  which  it  is  capable  of,  it  is  the  intention  to exclude others which evinces an element of ownership.

In  view  of  the  above  position  I  am  inclined  to  accept  the finding of the AO which has been broadly discussed hereinabove. I  also  agree  with  the  AO  that  the  facts  and  the  position  of  the  cases would reveal that  there is no asset in the possession of theappellant  as  of  date  and  there  is  no  factual  or  legal  transfer  of any  asset  as  claimed  by  the  appellant.  Significantly  in  this regard,  the  appellant  itself  admitted  that  the  property  in question  was  written  off  in  the  books  of  accounts  in  the  year 1979-80  thereby  confirming  the  non  existence  of  assets  in  the hands   of the appellant.  On this fact itself the appellant’s case is distinguishable  from the  cases  relied   on   by the  appellant. Even  coming  to the  argument  that  the amount  involved is in  any case a  capital  receipt  not  exigible  to  tax  is  also  not  tenable  because for  the  consideration  being  termed  as  a  capital  receipt  there must  be  either  a  tangible  or  intangible  asset  which  in  both  the cases  should    exist.    It  is  also  a  fact  that  the  IT  Act  does  not stipulate  anywhere  that  the  income  or  receipt  sought  to  be brought to tax should be legal or genuinely sourced.  The AO  has rightly stated that all what the Act envisages is that if the person earns  taxable  income  the  same  should  be  taxed  as  per  the charging  provisions    of  the  Act.    The  only  factual    position  as pointed  out  is  that  the  assessee  has  physically  received  Rs 2,28,00,000/-  and  as  the  same  is  not  a  capital  receipt  against any    asset  belonging  to  the    appellant,  is  to  be  taxed  in  the hands  of  the  appellant.    Sec.  14  specifies  different  heads  of income  and  the  last  thereof  is  income  from  other  sources  which is  residuary  in  nature.    Since  the  appellant’s  receipt does  not  fit in any  other  heads the AO has rightly taxed  the  same under the  head  “Income  from  other  sources”.    Accordingly,  addition  and taxation  of  Rs  2,28,00,000/-  made  by  the  AO  is  upheld.    This ground is dismissed.”

14.  Aggrieved  the  assessee  is  on  appeal  before  us  and  raised  the following grounds:

“1.  On  the  facts  and  in  the  circumstances  of  the  case  and  in law,  the  CIT(A)  erred  in  upholding  the  action  of  the  ITO  in taking  an  amount  of  Rs.   2,28,00,000/-  received  by  the appellant on sale of property at Ujjain.

2.  The Ld. CIT(A) erred in holding that there is no transfer of a capital asset in the case of the appellant.

3  The  Ld.  CIT(A)  erred  in  holding  that  there  is  no  part performance  of  the  contract  u/s.  53A  of  the  Transfer  of Property Act, 1882.

4. The  Ld.  CIT(A)   erred  in  observing  that  the  land  in  question though  in possession of the  appellant does not belong  to the appellant  as  there  was  no  clear  title  and  that  there  is  no asset in  the possession of the appellant as of date  and  there is no  factual  or  legal  transfer  of  any  asset  as  claimed  by the appellant.

5. The  Ld.  CIT(A)  erred  in  holding  that  since  the  appellant’s receipt  does  not  fall  under  a  specific  head,  it  has  to essentially  be  brought  to  tax  under  the  residuary  head ‘Income from Other sources’.

6. The  Ld.  CIT(A)  erred  in  rejecting  the  alternative  contention that  the  receipt  was  not  of  income  nature  and  was  a  capital receipt on  the  ground that there must be either a  tangible or intangible  asset  for  a  receipt  to  be  termed  as  a  capital receipt.

7. On the facts and in the circumstances of the case and  in law, the  CIT(A)  erred  in  upholding  the  action  of  the  ITO  in disallowing an amount of Rs.  10,46,836/- u/s. 14A.

8. Without prejudice to the  above  grounds of  appeal, and in the alternative,  the  CIT(A)  erred  in  not  giving  any  findings  in respect of following grounds of appeal. Without prejudice to the  above  grounds of  appeal, and in the alternative,  the  appellant  prays  that  if  at  all  any  expenses are attributable to earning dividend income, then.

(a) Mumbai  office  expenses  attributable  towards  the ginning  and  pressing  activities  ought  not  to  be attributed towards earning dividend income.

(b) Out  of  the  Mumbai  office  expenses  of  Rs.   38,11,820/- expenses aggregating to Rs.  1,10,561/- as shown in para 1.5  of  the Statement of  facts which  have already  been disallowed  while  computing the business  income ought not  to  be  considered  for  apportionment  towards dividend income.

9. On the facts and in the circumstances of the case and  in law, the  CIT(A)  erred  in  upholding  the  action  of  the  ITO  in disallowing  an amount of  Rs.  9,045/-  in  respect of  Employees’ contribution to Provident Fund u/s. 2(24)(x) r.w.s. 36(1)(va).”

15. The  assessee had purchased the land in 1962 from Seth Nazar Ali. This land was lease hold land  given to Seth Nazar Ali by government of Madhya Pradesh for establishing a factory. As he did not  establish a factory the property was taken over by Additional Collector, Ujjain and no compensation was paid to the assessee. The property comprised of 2 plots of land of 27 Bighas and 14 Bighas respectively.  The plot of land of 27 Big has was acquired on the ground that the  assessee not put to use as stipulated by the Government. The other plot  of 14 Big has was acquired on the ground that the  assessee was merely a  trespasser. The assessee had disputed the acquisition of said land and the same was pending in the Civil Court. The Civil Court in the suit for 14 Big has had decided the issue in favor of the assessee and the other suit in respect of 27 Big has has been decided against the assessee. Both government and the assessee preferred an appeal before the High Court of  Madhya Pradesh. The Court has passed an interim order directing the parties to maintain status quo and even till date it would appear that the two suits are pending before the High Court. In the meanwhile, the assessee had entered into an agreement assigning his rights to third party for a consideration of Rs. 2,28,00,000/-. The issue is whether the amount received by  the Assessee constitutes capital receipt.

16. We find that a similar issue had come up before the co-ordinate Bench in ITA No. 905/M/86  for  A.Y. 1981-82 vide order date 28.12.1993. In that case, then the property was acquired by the Additional Collector, Ujjain, the  assessee had claimed capital loss. In this connection the Tribunal held as under:

“We have heard the rival submissions in the light of material placed before us and precedents relied upon. The assessee purchased the property from the heirs of late Seth Nazarali in terms of a registered conveyance executed on 10^th Sept., 1962. The property comprised of two plots of land of 27 bighas and 14 bighas respectively and the building is constructed thereon.

The plot ad measuring 27 bighas was acquired by the M.P.Govt under the Land Revenue code vide the order of the Additional Collector dated 30th Jan., 1980. The acquisition was made as because originally the land was given by the Gwalior State to Seth Nazarali for running a cloth factory and there was a stipulation that in the eventuality the cloth factory being stopped, the land shall be reverted to the Government.

The land ad measuring 14 big has and building thereon was acquired under the Land Revenue Code vide the order of the Thasildar (Nazul) dated 22nd March, 1980 on the ground that the company was a mere trespasser.

The possession of the land was taken over before 31st March, 1980 and no compensation was awarded to the assessee. The assessee preferred an appeal to the District Court against the order of the Additional Collector and filed a petition in the High Court against the order of the Thasildar. It made a prayer for re-acquiring the land and building or for grant of compensation.

While computing the total income, the assessee computed long term capital loss in respect of the aforesaid Ujjain property at Rs.5,42,098/-. Subsequently, vide letter dated 16th Jan, 1984 it substituted the fair market value of the said property as on 1st Jan1964 for the original cost and the capital loss in respect of the aforesaid property was re-computed at Rs.15,60,000/- and after setting off the long term capital gain on sale of other assets amounting to Rs.2,04,156/- and an amount of Rs.13,55,844/- was carried forward under Sec.74(1)(ii) of the Act.

The Assessing Officer disallowed the long term capital loss in respect of the aforesaid property on the ground that the assessee did not accept the order of the District collector/Tahsildar in respect of the acquisition of the said property and has filed an appeal there against. The ld. C.I.T.(Appeals) disallowed the capital loss in respect of the aforesaid property on the ground that title of late Seth Nazarali was not absolute and he could not confer a valid title even by executing a registered deed. Further, it has been stated by the Ld. CIT (A) that the question of computing capital gain or capital loss would depend on the outcome of the legal proceedings, pending before the Court.

In the case of Dollar Company (supra), the Hon’ble Madras High court has held that the right to compensation arose in the year in which the transaction of acquisition took place and what happened subsequently is only a quantification thereof. In the case of Topandas Kundanmal (supra) the Hon’ble Gujarat High court has held that if the nature of the receipt of the compensation amount is found to be in the nature of capital gains, the right to such income would accrue in the year in which the transfer is effected as laid down in Sec.45 of the Act. In the case of Ismallia Co-operative Housing Society Ltd. (supra), the Hon’ble Bombay High court has held that having regard to the consent terms, it must be held that the assessee had a right or interest in the plot of land. That right or interest ceased when the said plot was acquired in 1954 long before the commencement of the previous year relevant to the assessment year 1971- 72. The assessee obtained the right to get compensation and the amount of the compensation was determined when the consent decree was entered into in 1970. The transfer of the capital asset took place long before the previous year in question. Hence, the compensation amount was not liable to capital gains tax for the assessment year 1971-72.

We have noticed that in the cases cited by Shri Dastur, government acquired the property for public purpose and the question was in relation to the exact year of the accrual of income but the facts of the present case are different. The very title of the assessee is in dispute. In relation to plot admeasuring 27 bighas, the land was acquired on the ground that the property in question was granted to Seth Nazarali with specific condition that the property will be used for running of ginning or cloth mill and in the eventuality of violation of conditions laid down in the lease deed, the property shall be reverted to the government. Regarding plot of land admeasuring 14 bighas the property was acquired as the assessee was treated as a mere trespasser.

On these premises, the question arises whether the assessee had any right in such land and whether the extinguishment of such rights give rise to capital loss. We are reminded the famous dictum of law; ‘nemo debet qua non habet’. The idea inculcated in the dictum is nobody can confer better right than he himself has. We find that the land was granted on lease with a specific condition. The ownership of Seth Nazarali was not absolute. It was subject to certain encumbrances. Ownership is a right over a determinate thing, indefinite in point of user, unrestricted in point of disposition and unlimited in point of duration. The right of Seth Nazarali was restricted in point of disposition. The grant was for a specific purpose. It is abundantly clear from the records that the government found that purpose for which the grant was made got frustrated. Consequently, the land was acquired. Similarly, in regard to 14 bighas, the assessee was found to be a trespasser. The law does not recognize the rights of a trespasser. Ordinarily, it is said that the possession is the nine point of ownership. The possessor has got right over the property and his right cannot be challenged by any one except the true owner. Undoubtedly, for some time, the assessee was the possessor of the land and building. But from the facts culled out from the records, it cannot be concluded that the possessory rights of the assessee bear any legal recognition. Unless such rights are protected by law to associate the word ‘right’ with the said type of possession will be a misnomer, since right is a legally protected interest.

Coming to the context of ‘right’, we find that it is laid down in a well known dictum; ‘vbi jus ibi remedium’. This means wherever there is right, there is remedy and by resorting to the court of appropriate jurisdiction grievance can be redressed. A trespasser has got no remedy before any court of law.

Sec.45 of the Act provides for the computation of capital gains, it uses the word “transfer” of a capital asset in order to result in capital gains. Further, in Sec.2(47), it has defined “transfer”, in relation to a capital asset, to include “the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law”. Firstly, it has specifically included “extinguishment of any rights” or “compulsory acquisition” of the asset within the definition of transfer for the purposes of Sec.45 to 55; and secondly, it has made the definition an “inclusive” definition. This definition gives an artificially extended meaning to the term by including within its scope and ambit two kinds of transactions which would not ordinarily constitute “transfer” in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any right in it. The net is thus cast very wide and not only any profits or gains arising from every act by which property may pass from one person to another but also that arising specially from the sale, exchange or relinquishment of a capital asset or the extinguishment of any rights therein or the compulsory acquisition thereof was subjected to tax under Sec.45. The capital gains tax is attracted u/s.45 by “transfer” and nor merely by extinguishment of rights however brought about. Whatever the mode by which the transfer was brought about, the existence of the asset during the process of transfer is, sine……. Unless the asset existed, in fact, there could not be a transfer of it. The extinguishment of a right or count of its or their transfer in order to attract the provisions of Section 45.

When we examine the facts from this angle, we find it difficult to say that any transfer as alleged took place giving rise to capital gain or capital loss. We, however, do not express any opinion on this aspect, since the matter is subjudice. In our opinion, the approach of the Ld. CIT(A) was most pragmatic. The question of computing capital gain or capital loss would depend on the outcome of the legal proceedings. In view of this, we are unable to accept the prayer made by Shri Dastur. We uphold the order of the Ld. CIT (Appeals).

In the result, appeal of the assessee stands dismissed”

Respectfully  following  the decision of  the co- ordinate  Bench on the same issue, it  is not possible for us to decide on the issue whether the assessee has assigned any interest in immovable property, because we are not certain whether he has any right in the immovable property. Further if there is a capital loss arising from acquisition of the property by the Government in  an earlier year, there cannot be a capital gains on transfer of the same property in a subsequent year. The character of the compensation received can b  determined only when the assessee’s rights in the immovable property are determined.

17. In the circumstances, respectfully following the decision of the co  ordinate Bench, we set aside  the issue to the  files of the AO, to redo the assessment afresh, on the basis of the outcome of the litigation regarding the ownership of the property. This ground raised by the assessee is all owed for statistical purposes.

18. Ground No. 2 raised in this appeal is against the confirmation of dis allowance u/s. 14A at Rs. 10,46,836/-.

19. The facts are that the assessee had not incurred any expenditure for earning exempt income. In the return of income, the  assessee had not disallowed  any  expenditure  u/s. 14A. During  the course of assessment proceedings, the assessee was asked to furnish detail of expenses incurred for earning exempt income and why the same should not be disallowed u/s. 14A.

20. The assessee vide letter  date 13.10.2006 gave detailed submissions explaining that no expenses were incurred to earn the dividend income and no notional expenses ought to be attributed to earning dividend income. The assessee also submitted a statement showing breakup of expenses for the Mumbai office and the Wardha factor.

21.  In  para  4  of  the  assessment  order  passed  u/s.  143(3),  the dis allowance  under  Sec.  14A  has  been  computed  at  Rs.   10.46,836/- being  proportionate  expenditure  on  earning  dividend  income, estimated as follows:

22. Further in the assessment order, out of the Mumbai office expenses of `. 38,11,820/-, the following amounts have already been disallowed while computing the business income.

The above addition of Rs. 10,46,836 has also been made while computing book profit u/s. 115JB.

23.  The Ld. CIT(A) held as follows:

“I  have  gone  through  the  facts  of  the  case,  submission made and also the assessment  order.   It  is  a fact  that in  the A.Y. 2001-02,  in  appellant’s  case  the  Tribunal  has  deleted  the additions  made  by  the  AO  u/s.  14A  of  the  I.T.  Act.    However,  I cannot agree with the appellant that the facts and circumstances and  the  method  of  addition  is  the  same    this  year  also.    In  the .A.Y.  2001-02,  the  AO  made  an  adhoc disallowance  of  5%  of  the total  expenditures.    However,  in  this  year  the  AO  has  given  a finding that the appellant derived  income from different sources, but common books of accounts are maintained and therefore the expenses have to be  apportioned between the different heads of income.  This principle has been upheld by the S.C. in the case of Waterfall  Estates  Ltd.  (219  ITR  563).    While  proceeding  to disallow  part of the  e4xpenditure  u/s. 14A of  the  I.T.  Act,  the AO has  also  relied  on  the  decision  reported  in  89  ITD  14  (Cal)  and also  in  the  case  of  Southern  Petrochemical  Industries  (3  SOT 157)  Chennai.    As  the  AO  has  given  a  finding  that  the  appellant has derived income from different sources, but common books of accounts  are  maintained  thereof,  not  furnishing  details  of  such expenditure  pertaining  to  tax  free  dividend  income.    I  find  this year AO is justified in disallowing an amount of Rs.  10,46,836/- u/s. 14A on a proportionate  basis.  This ground is dismissed.”

24. Aggrieved, assessee is in appeal before us.

25. We have heard the rival submissions and perused the relevant material on record. It is noted that  the question of making res integra dis allowance u/s. 14A is no more in view of the judgment of the Hon’ble Bombay High Court in Godrej & Boyce Ltd. Mfg. Co. Vs DCIT (2010) 238 ITR 81(Bom)  holding that the provisions of Sec. 14A are applicable in circumstances as are prevailing presently  and  the dis allowance has to be worked out by the AO on some ‘reasonable basis’ and not  Rule 8D. Under  such  circumstances, we set aside  the impugned  order and  restore the matter to the file of the AO for deciding the quantum of dis allowance, as  per the afore-noted judgment, after allowing a reasonable opportunity of being  heard to the assessee.

26. Ground No. 3  raised in this  appeal is against the dis allowance of Rs. 9,045/- being  employees’ contribution to Provident Fund  u/s. 2(24)(x) r.w.s. 36(1)(va).

27. Before the Ld. CIT(A) the assessee submitted that the AO did not appreciate the fact that as mentioned in Annexure 3 of  the Tax  Audit report the amount of Rs. 9,045/-had been tendered by the assessee and cleared by the bank on 13.1.2004 i.e. well before the due date but was returned by the bank on 21.1.2004 because of a totaling error pursuant to which the assessee paid the amount on 24.1.2004 within 3 days and accordingly the said amount should not have been disallowed by the AO. The assessee also stated in the alternative that the said amount ought to have been allowed as a deduction since it has been paid during the relevant previous year.

28.  The Ld. CIT(A) held as follows:

“I have gone  through  the facts  of the case  and  submission made  and  I  have  noted that  there was  a  delay of depositing the P.F.  contribution  by  the  appellant. The  provision  of  Sec. 36(1)(va) r.w.s.  2(24)(x) is very specific and if  any assessee fails to deposit employee’s  contribution to P.F.  within the due date,no deduction is allowable. In view of the above provision, I find the AO  is  justified  in  disallowing Rs.  9,045/-  u/s.  36(1)(va)  r.w.s. 2(24)(x) of the I.T. Act.  This ground is dismissed.”

29. The Supreme Court in the case of  CIT Vs Alom Extrusions Ltd (319 ITR 306) and the decision of  the Delhi High Court in the case of CIT v AIMIL Ltd (229 CTR 418) wherein it has been held that payment of employees’ contribution made before the due date for filing of the return cannot be disallowed u/s 43B. Therefore, we remit the issue to the file of the AO to decide in the light of the Supreme Court decision (supra).

28. In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced on this 20 day of May, 2011