Encroached property cannot be considered capital property

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MUMBAI: Tax must be paid even on illegally encroached property as it would be considered “income from other sources”, although it is not considered “fixed property”, according to a court ruling.

A Mumbai bench of the Income Tax Appeals Tribunal (ITAT) has ruled that property unlawfully encroached upon by an assessee cannot be considered as ‘fixed property’ under Section 2(14) of the Income Tax Act and, therefore, the gains resulting from the transfer of such property cannot be assessed as capital gains, but as income from other sources.

In the case, the assessee, a certain Bhagwan T Fatnani, had no legal right to the disputed property in Ulhasnagar near the megalopolis, and the land was illegally encroached upon by the assessee for the year of assessment 2008-09.

The tribunal, comprising Judicial Member Joginder Singh and Accounting Member D Karunakara Rao, ruled in a recent judgment that since the assessee had no legal right or title to the property, there was no question of owning fixed assets. and, therefore, there was no question of any sale or transfer of fixed assets to claim the capital gains.

The Income Tax Department was represented by its Commissioner Vijay Kumar Bora in the case.

The assessee was neither the legal owner of the property nor had any document showing any right or title to the illegally encroached land which was intended for an elementary school in the city.

The assessee pleaded that the word used is property of any kind. The bench rejected the evaluator’s proposal and held that the intent of the legislation was all legally acquired property otherwise anyone could become the owner of India Gate in Mumbai or Red Fort in New Delhi by showing these properties in their balance sheet and will claim capital gains.

The court castigated Fatnani for selling illegally acquired school land and compared whether the Red Fort and India Gate could be sold on paper.

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