S. NARAYANAN, A.M. This appeal by Revenue and Cross Objection of assessee thereto were heard together. They are disposed of by this consolidated order. 2. assessee is individual. relevant previous year ended on 31st March, 1979 assessment was completed on net loss of Rs. 9,075. Included in this was capital gain of Rs. 7,463 This capital gain was brought to tax by ITO on his reading of relevant facts. According to him, assessee had become co-owner of house property at 23, Ansari Road following compromise decree passed in High Court Suir No. 702 of 1967 in case of Feroz Begum & Others vs. Dewan Daulat Rai Kapoor & Others on 30th Jan., 1974, i.e., assessee became co-owner to extent of 29 .16 per cent of 50 per cent share in said property; that amount spent by assessee towards house-tax,construction of 7 ft. high pucca wall and litigation fees tentamounted to cost of acquisition of said interest in property; such cost amounted to Rs. 21,648 (House-tax Rs. 650 plus construction of wall Rs. 998 plus litigation fees Rs. 20,000. As against this assessee and his co-owners of aforesaid 50 per cent share in property got Rs. 12 lakhs on sale of their rights in property on 24th Nov., 1978 to M/s AMCO construction and assessee's share ( 29 .16 per cent therein amounted to Rs. 3,49,926 This left surplus of Rs.3,28,278,which was invested to extent of Rs. 3,20,815 in specified assets (Units with UIT). Hence balance of Rs. 7,463 was assessable as capital gain. assessee appealed. 3. From papers placed before us it would appear that arguments for assessee proceeded on following factual position claimed for assessee before CIT (A). (i) 23, Ansari Road Darya Ganj, New Delhi was single storeyed building standing on 1162 sq. yds. of land ( area of whole plot was 2450 sq. yds.) One Haji Mohd. Yousuf was sole registered owner of property in 1947 having purchased it earlier along with one Mohd. Asking in 1945. (ii) One Radha Kishan Kapoor became tenant of said property some time prior to 1947 though exact date from which he became such tenant is n o t available from records. In 1947, Mohd Yousuf migrated to Pakistan. Thereafter no rent was paid for property by Radha Kishan Kapoor. (iii) Feroza Begum & Mumtaz Begum two grand daughters of Mohd Yousuf claimed that property at 23, Ansari Road had been gifted to them by Mohd. Yousuf by document dt.2nd March, 1963 registered with sub Registrar Delhi on 30-th June, 1963 Meanwhile R.K. Kapoor having died on 20th Oct., 1955, his legal heirs, viz., Daulat Rai Kapoor Balkishan Kapoor and others continued to occupy property. No rent was paid to anyone by either R.K.Kapoor after 1947 or his legal heirs after his death To evict them from property Feroza begum and Mumtaz Begum filed suit in High Court of Delhi (Suit No 702 of 1967) were as under. extent of interest of defendants is also indicated below (a) Smt. Feroza Begum (b) Smt. Mumtaz . Names of Defendants . (a) Dewan Daulat Rai Kapoor 29 .16per cent (b) Shri.Bal Kishan Kapoor 29 .16per cent (c) Shri.Chamman Lal Bhal 12.05per cent (d) Shri.Hari Nath Kapoor 8.75per cent (e) Shri.Har Nath Kapoor 8.75per cent (f) Smt.Shashi Kapoor 5.83per cent (g) Smt. Sham Kapoor 5.84per cent 4. case for defendants in suit proceedings was that they were never tenants of premises, that their father i.e. Radha Kishan Kapoor took premises on rent and after his death on 29 th Oct., 1955 tenancy came to end in law that defendants were residing in premises at that time and continued to do so even after death of Radha Kishan Kapoor, that owner Mohd. Yousuf had abandoned property and gone to Pakistan in 1947 and from that date, adverse possession had been running against Mohd. yousuf and in favour of defendants and did so for more than 12 years i.e. beyond 1959 and hence defendants did not base their claim upon tenancy rights. 5. High Court passed order on 30th Jan., 1974 on compromise application and disposed of suit approving terms and conditions of compromise proposed by parties. In Compromise proposed by parties following were specifically stated (pp 29 to 34 of paper book filed by assessee); (a) plaintiffs brought suit for possession of entire property on basis of ownership of Mohd. Yousuf and on basis of gift having been made by Mohd. Yousuf to two plaintiffs (Feroza Begum and Mumtaz Begum). (b) defendants rested said suit mainly on ground of limitation and adverse possession. (c) To enter into amicable settlement parties have entered into compromise i.e. to confer full absolute and exclusive ownership of respective portions allotted to plaintiffs on one hand and to defendants on other. defendants acknowledged plaintiffs to be full and absolute owners of portion marked out and allotted to them and similarly plaintiffs acknowledged defendants to be absolute owners of portion marked out and allotted to them.. (d) plaintiffs acknowledged defendants to full and absolute owners by adverse possession of property marked out and allotted to them. Under this arrangement plaintiffs get on one hand approximate area of 1225 sq. yards and defendants also got approximate area of 1225 sq. yards. (e) defendants to hand over vacant and peaceful possession of portion marked out as that allotted to plaintiffs by or before 22nd July., 1974 defendants to furnish bank guarantee of Rs. 50,000 to Court within two days of 29 th Jan., 1974 for this purpose. If defendants failed to hand over possession as stipulated amount of Rs. 50,000 would stand forfeited to plaintiffs Clauses Nos.8 per cent 9 of compromise petition read as under 8. plaintiffs hereby agree and declare that besides rights declared and acquired under compromise they have no rights, title or interest or claim vis-a-vis defendants and plaintiffs will not claim or be entitled to any rent damages or other changes in respect of occupation or user of property herein before or up to 29 th July, 1974 from defendants. defendants agree and declare that they also have no other rights, title or interest or claim against plaintiffs besides rights declared and acquired under this compromise. 9.That defendants shall be responsible and liable to pay all past and present municipal taxes, other municipal levies in respect of whole of property. plaintiffs No.1 and 2 shall, however be liable to pay municipal taxes charges dues and other municipal levies, etc. according since 28th July, 1974 onwards or since date of delivery of possession, if it is delivered prior to said date in respect of portion shown in red shade in plan annexed hereto" Another aspect mentioned in compromise petition was that defendant would erect partition pucca 7 ft wall between two portions (allotted to plaintiffs and defendants respectively) before delivery of possession of portion allotted to plaintiffs by or before 28th July, 1974. 6. As result of above order, following division of property took place: (a) Half portion of property (i.e on left side) was allotted to plaintiffs remaining half portion (i.e., on right side) to legal heirs of Radha Kishan Kapoor. (b) respective parties became absolute owners of portions (b) respective parties became absolute owners of portions allotted to them. So far as defendants are concerned their shares inter se, have already been indicated in paragraph 3 supra. 7. CIT (A) noted above factual position main contention before him was that s. 45. was not applicable at all here because there has been no cost of acquisition. assessee became owner by adverse possession He did not have to spend anything on buying his share in property. Attention was invited to decision in CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 29 4 (SC). 8 . CIT (A) found no substance in above argument. According to him that decision would only apply to asset in acquisition of which it is not possible to envisage cost, e.g. goodwill. In instant case, asset was house property. It was, therefore, possible to envisage cost thereof. In this view he rejected assessee's claim that asset in question had no cost of acquisition. According to CIT (A) what was relevant was nature of asset and not manner in which asset is acquired by individual 9 . CIT (A) then went on to consider what would be cost of acquisition for computation of capital gains in this case. He referred in this contention to decision of Delhi High Court in case of Addl. CIT vs. Mohan Lal jain (1983) 140 ITR 200 (Del). In this case Karta of assessee HUF acquired 40 shares in company of value of Rs.40,030. from his own moneys. Later he impressed shares with character of HUF property. assessee HUF sold shares for Rs.61,000 and disclosed surplus of Rs.21,000 as capital gain. ITO held cost of acquisition to be nil and assessed entire sum of Rs.61,000 as capital gain. Tribunal however was of view that cost of acquisition to assessee was Rs. 40,000. matter was referred to Delhi High Court. Court held that cost of acquisition contemplated by s. 48 of Act can be cost of acquisitionof capital asset in someones hands and not necessarily in hands of assessee as section does not use words to assessee after words 'cost of quisition' that therefore, what was spent by Karta would be cost of acquisition of assessee HUF within meaning of s.48 and hence only Rs. 21,000 was assessable as capital gain. 10. CIT (A) considered above decision. He found that above interpretation was in line with provisions contained in s. 49 which also deals with cost with reference to certain modes of acquisition these include assets received under gift or Will or succession or inheritance or devolution. In his view cost of acquisition as far as instant care was concerned was nil. However cost of acquisition to previous owner had to be substituted for computing capital gain in light of Mohan Lal jain & sons (supra). In this regard CIT (A) drew support from decision in CIT vs. N.S.Krishna rao (1983) 33 CTR (MAD) 306 (1983) 144 ITR 347 (Mad). 11. CIT (A) then noted that assessee had become owner of property on account of adverse possession. situation was similar to gift of property After limitation period of 12 years assessee became owner due to adverse possession, i.e., he became owner of property in eye of law. Hence, ITO was not correct in holding that he became owner of property only on 30th Jan., 1974 following compromise decree ordered by High Court. In fact plaintiffs also recognised that assessee along with other defendants had become owners of their portion of property by adverse possession and that expiration of 12 years period of limitation happened before suit was filed records do not show when property was occupied by Radha Kishan Kapoor and when exactly period of 12 years' possession was completed. CIT (A), therefore, restored matter to ITO with following observations: In present case as assessee became owner of property on account of adverse possession and cost of acquisition which has to be taken into account is that of previous owner, i.e., two ladies who had filed suit of eviction and possession. Again it is not clear whether period of 12 years expired before or after date on which said immovable property was received as gift by above two ladies from Hazi Mohd.Yousuf. In case period of 12 years expired prior to date on which said immovable property was gifted by Hazi Mohd. Yousuf, then said Hazi Mohd. Yousuf will be previous owner of property and cost of acquisition to said Hazi Mohd. Yousuf will be cost paid by him when said property was purchased by him in 1945 provisions contained in s. 55 further lay down that where capital asset for purpose of ss. 48&49 becomes property of assessee before 1st Jan., 1964, then, cost of acquisition of asset to assessee will be cost of acquisition or fair market value as on 1st Jan., 1964 at option of acquisition which has to be taken into account will be that cost of acquisition of previous owner. Obviously in present case from facts as stated above, it can be seen that property was acquired by previous owner prior to 1st Jan., 1964. In such case, assessee will have to give option to substitute fair market value as on 1st Jan., 1964 or cost of acquisition. Obviously assessee will exercise option to substitute cost of acquisition as fair market value as on 1st Jan., 1964 or cost of acquisition. To above extent, computation and capital gains as arrived at by ITO is incorrect. ITO has taken cost of acquisition only to extent of house tax amounting to Rs. 660, cost of partition wall amounting to Rs. 998 and legal expenditure incurred amounting in Rs. 20,000 as cost of acquisition. In present case, cost of acquisition will be fair market value as on 1st Jan., 1964 with addition of further liability as per compromise decree, i.e., house tax, cost of partition wall and expenditure incurred on litigation. In absence of any valuation report regarding fair market value of said property as on 1st Jan., 1964, it is not admissible to compute capital gains chargeable to tax. In view of above assessment is set aside with direction to ITO to allow assessee to exercise option for substituting fair market value as on 1st Jan., 1964 as cost of acquisition and compute capital gain accordingly. As held earlier, provisions of s. 45 regarding levy of capital gains is fully applicable to case of appellant for reasons as given above. amount of capital gains has to be computed on basis of directions as given above. As assessment has been set aside other minor ground of appeal regarding claim for carry forward of past losses and assessment of Rs.3,324 under dividend income stated to be not received by appellant has not been gone into. ITO will also look into above grounds as well while completing assessment 'de novo'. Both assessee and Revenue have objected to this order. ITA No. 149 4 of 85. ITA No. 149 4 of 85. 12. In this appeal by Revenue basic stand of Department is that assessee became owner of property only on 30th Jan.,1974 Departmental Representative Smt. Kapila submitted that it was compromise decree of High Court that gave title to assessee and he became legal owner on 30th Jan., 1974 Hence fair market value of property as on 1st Jan., 1974 was irrelevant CIT (A) misdirected himself in directing ITO to allow assessee option of taking fair market value as on 1st Jan., 1964 as cost of acquisition Secondly Departmental Representative also strongly assails finding of CIT (A) that cost of acquisition here was cost of acquisition to previous owner submition is that cost of acquisition was only Rs. 21.648 as held by ITO and nothing more. assessee had no rights at all in property. He was residing there without sanction of law. By spending Rs.21,648 he obtained perfectly valid title to property and only this could be cost of acquisition. 13. Departmental Representative also disputes factum of adverse possession. She points out that facts on record show that M. Yousuf left for Pakistan in 1947.R.K.Kapoor was admittedly tenant of premises there.He died in 1955 Hence he had held adverse possession. Even assuming it was adverse possession within strict meaning of term in law, period was only 8 years. After death of R.K. Kapoor his legal heirs, including assessee here had no right to stay in premises. They were not tenants of M. Yousuf or of his legal representatives or legal heirs. In fact M. Yousuf had gifted property to his grand daughters in 1963. Gift Deed itself had been registered in 1963 and in 1967 grand daughters filed suit for ejectment and possession. Hence, even legal heirs of R.K. Kapoor could not argue that they had acquired title by adverse possession. No doubt, in compromise decree it was agreed between parties that defendants had acquired title by adverse possession and limitation but Department was entitled to go behind facade and uncover real position in law. According to Departmental Representative, on facts on record ITO's order was unassailable. 1 4 . Shri Ramanand aiyar authorised representative of assessee supported order of CIT (A) but subject to objections taken by assessee in cross objection. We shall notice those objections presently According to Shri Aiyar rights of R.K. Kapoor as tenant extended to his legal heirs also. R.K. Kapoor died in 1955 since after 1947 property had been abandoned by M.Yousuf adverse possession had already started. Even assuming adverse possession from death of R.K. Kapoor from 29 th Oct., 1955 so far as assessee is concerned suit was filed by grand- daughter of M. Yousuf only in Oct., 1967 i.e., after period of 12 years. Secondly litigation was certainly not collusive one. plaintiffs themselves had agreed and accepted that assessee and his co owners had acquired title by adverse possession and limitation It was for Department now to produce sufficient material to show that apparent was not real. Department apart from high sounding arguments raising lot of suspicion, indulging in much rhetoric had no real material in support of his case. Hence CIT (A)'s order on this aspect cannot be assailed Alternatively, it is submitted if it was case of Department t that property was acquired by assessee in 1974 as result of order of High Court, then market value as on that date should be adopted CO.No.228/85 15. In this cross objection by assessee objection is taken to setting aside of assessment by CIT (A); it is submitted that CIT (A) had before him report on market value of property as on 29 th Oct., 1967 estimating value of whole property at Rs.15,56,000 in which assessee's share was 29 .16per cent contention for assessee is that CIT (A) should have himself arrived at finding on value of property and not sent it back for enquiry. 16. second objection is that CIT (A) erred in holding that there was cost of acquisition to assessee assessee's case is that there could be no cost of acquisition in instant case, property having been acquired by adverse possession. third objection is that assuming but not admitting that there was cost of acquisition such cost has to be determined at market value as on 21st July, 1974 when property was partly surrendered by way of possession to opposite party Without prejudice to this claim, assessee's further claim is that market value as on 29 th Oct., 1987 should have been treated as cost of acquisition. 1 7 . We have heard parties on cross objection also We have considered position. We are wholly in agreement with order of CIT (A) when he says that asset involved here is one regarding which it cannot be said that there is no cost of acquisition Following M.L. Jain & Sons (supra) we agree with CIT (A) that cost to previous owner shall be cost of acquisition of assessee. CIT (A) has directed enquiry by ITO in this regard and we think he is justified in doing so 18. We find no merit in Department's contention that title did not come to assessee by adverse possession parties concerned i.e., plaintiffs as well as defendants in Suit No.702/67 have proceeded on common basis that title of assessee and his co-owneres is based on adverse possession and limitation. It is for Department to bring on record sufficient material to show that this was indeed collusive arrangement and declaration and that real position is quite different. All that Departmental Representative has been able to raise is some suspicion and some doubts. Such suspicion and doubts are not sufficient in matter, we would, therefore, confirm approach of CIT (A) and his finding in this regard as correct,. 19. Nor do we find any merit in cross objection date 29 th Oct., 1967 has no particular significance as regards cost Suit No. 702/67 was no doubt filed on 25th Oct., 1967- but we find that CIT (A) has directed ITO to proceed on basis of assessee getting title through adverse possession and thus he has directed ITO to find out fair market value as on 1st Jan., 1964 We confirm this approach as well. If indeed valuation report had been filed before CIT (A) it may be filed before ITO also for consideration by assessing officer in light of CIT (A)'s finding that property was acquired by previous owner prior to 1st Jan., 1974. 20. In result both appeal and cross objection are dismissed *** INCOME TAX OFFICER v. BALKISHAN KAPOOR