Ganesh Purohit, Senior Advocate
Query:
Section 48 of income tax act – capital gains. Where land – in – question was held under adverse possession, its cost of acquisition was nil, and therefore, it was not chargeable to tax under provisions of section 45 on its sale; in such a case expenditure incurred by assessee, in order to defend its possession over land could be construed as cost of acquisition incurred by assessee?
Answer:
Section 48 of the income tax act deals with computation of capital gain, if the cost of acquisition is nil, in that case, the sale price is not chargeable to capital gain as held by Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981]21 CTR (SC) 138 ; [1981]128 ITR 294 (SC)
Section 55 of the income tax act, sans. irrelevant portion reads as under
55. Meaning of “adjusted”, “cost of improvement” and “cost of acquisition”—(1) For the purposes of sections 48 and 49,— ———–
2) For the purposes of sections 48 and 49, “cost of acquisition”,—
(a) in relation to a capital asset, being goodwill of a business or profession, or a trade mark or brand name associated with a business or profession, or any other intangible asset or a right to manufacture, produce or process any article or thing, or right to carry on any business or profession, or tenancy rights, or stage carriage permits, or loom hours, or any other right—
- 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
- in the case falling under sub- clauses (i) to (iv) of sub-section (1) of section 49 and where such asset was acquired by the previous owner (as defined in that section) by purchase, means the amount of the purchase price for such previous owner; and
- in any other case, shall be taken to be nil:
From reading of above section, it is clear that section 55 (2)(a) does not apply to land and immoveable property even after amendment made from 1-4-2021 in the Income Tax Act, 1961. The judgement of apex court in the case of B C Srinivas Setty (supra) is still applicable with full force and therefore the land for which the cost of acquisition is nil is not chargeable to capital gains.
The second part of the question is whether expenditure incurred for defending adverse possession will form the cost of acquisition of the land or not ?
This issue has been answered by the income tax appellate Tribunal, Mumbai bench In the following case:
DEPUTY COMMISSIONER OF INCOME-TAX v. STAR CHEMICALS (BOM) (P) LTD. [2007] 110 TTJ 753 (MUM.)
44. In the case of S.V. Lathia v. CIT (supra), the partnership firm sold the entire business and received a sum of Rs. 2,75,000 ascribed to goodwill. It was an admitted position that the assessee had paid a sum of Rs. 20,000 to P.J. Kumbhani, the then partner in the erstwhile partnership for acquiring share of Kumbhani in the goodwill of the business. Hence the cost of acquisition so far as the share of Kumbhani in goodwill was available. In this view of the matter the Tribunal upheld the assessment of capital gains at Rs. 2,55,000. Relying upon the judgment of Hon’ ble Supreme Court in the case of B.C. Srinivasa Setty (supra) the Hon’ble Bombay High Court held that the Tribunal erred in assessing the entire sale consideration to capital gains tax and only the proportionate sale consideration attributable to Kumbhani’s share that had been acquired on cost of acquisition could be subjected to capital gains tax. The Hon’ble Supreme Court upheld capital gains tax on Rs. 1, 17, 500 only. This judgment affirms the principle laid down in the case of B.C. Srinivasa Setty (supra) relied upon by the assessee. It does not advance the case of the Revenue any further.
47. In the case of Mahabir Prashad & Sons v. CIT (supra), the Hon’ble High Court considered the question as to whether the expenditure incurred by that assessee in defending the pre-emption case is capital expenditure or revenue expenditure. The Hon’ble High Court applied the test laid down by Viscount Cave in British Insulated & Helsby Cables Ltd. v. Atherton (1926) AC 205 (HL) i.e. whether expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset. The expenditure incurred for defending a pre-emotion suit did not create a new capital asset and therefore it was not a capital expenditure. The underlying principle of this judgment is that while defending a suit filed against the ownership claim of an assessee, an assessee only protects what he already has and does not acquire any additional asset or advantage. Hence we find this judgment contrary to the contention of the Revenue that cost of litigation incurred by the assessee in relation to lands in question would constitute cost of acquisition of that immovable property.
51. On consideration of the matter we find this judgment of Hon’ble Calcutta High Court as a clear authority against the argument of the Revenue that expenditure incurred by the assessee in order to defend its possession over the lands should be construed the cost of acquisition incurred by the assessee as respects the lands pertaining to disputed capital gains tax.
It is clear from the above observation of the ITAT that expenditure incurred in defending the suit cannot be treated as cost of acquisition and it cannot be subjected to capital gains. Therefore the answer is clear that the expenditure cannot form the cost of the asset.