When an under-construction property is acquired, it is always a subject matter of controversy between the taxpayer and the tax department while determining the holding period of the property to compute capital gain.
Good news for taxpayers, especially those involved in sale of property. The Mumbai bench of ITAT (Income Tax Appellate Tribunal) has recently held that the date of allotment of a house – and not the date of registration — will be considered as the date of its acquisition. The ruling, thus, will help taxpayers while computing long-term capital gain on the sale of house property.
It may be noted that as per Section 54F of the Income Tax Act, any long-term capital gain (LTCG) from the sale of residential house property is exempted to the extent such capital gain is invested in another residential house property. (Earlier this exemption was available only for the investment made in one residential house in India. However, the Finance Bill, 2019 proposed to extend the exemption for investment made, by way of purchase or construction, in two residential houses provided the amount of capital gains does not exceed Rs 2 crore.) This exemption, however, is subject to certain conditions, one being that the new property should be purchased or constructed within a period of 2 years and 3 years, respectively, from the date of sale of the original asset. The holding period of a house property, to be regarded as long term, was 3 years before the financial year 2017-18, which has now been reduced to 2 years or 24 months.
In the present case, Mumbai-based Keyur Hemant Shah had sold on April 4, 2012 a duplex apartment with 4 car parkings in a Cooperative Society in Mumbai for Rs12 crore, the assessee’s share being 50% in the same. After adjusting the indexed cost of acquisition, LTCG worked out to be Rs 288.73 lakh, and after claiming deduction u/s 54F for Rs109.40 lakh against the same, the assessee (Shah) offered the balance LTCG of Rs 179.33 lakh to tax. The income tax officer, however, said that the very flat was purchased by Shah via a Registered Agreement for Sale on March 25, 2010 and his holding period was less than 36 months from this date. That led the AO to treat the resultant gains as short term (STCG).
Shah, however, defended the same by submitting that the said flat was purchased via the allotment letter dated February 26, 2008 and substantial payment of Rs 185.50 lakh was already made by July 24, 2008. Thus, the holding period, as counted from the date of allotment letter, was more than 36 months and, therefore, the resultant gains should be considered as long-term capital gains.
Keeping all these things in view, the Mumbai bench of ITAT observed that the date of allotment will be treated as the date of acquisition.
Legal experts say that when an under-construction property is acquired, it is always a subject matter of controversy between the taxpayer and the tax department while determining the holding period of the property to compute capital gain, whether long term or short term. The question revolves around as to when the taxpayer has acquired the capital asset.
“The Tax Department takes the argument that transfer of the asset in favour of the taxpayer completes only when the agreement is registered, whereas the taxpayer argues that acquisition is complete on the date of allotment letter issued by the builder/developer. This issue is settled in the favour of the taxpayer by the Bombay High Court in the case of Vembu Vaidyanathan by holding that a taxpayer had acquired the property on the date on which the allotment letter was issued. The Mumbai Tribunal has rightly followed the earlier decision of the Bombay High Court and held that date of allotment should be treated as the date of acquisition,” says Gopal Bohra, Partner, N.A Shah Associates LLP.
In fact, in January 2019, the Bombay High Court held that for computing capital gains on sale of property, the date of allotment will be considered as the date of acquisition of the property. And the Mumbai ITAT decision reiterates the principles laid down by the Bombay High Court.
“If the allotment letter is not conditional, then entering into an agreement of sale subsequently is a mere improvement of the tax payer’s existing right to acquire a specific property and is part and parcel of the same transaction. The position that seems to be emerging is that for the taxation purpose, the legal ownership may not be critical for computing the period of holding. This decision will help tax payers involved in sale of properties (including under construction properties), especially where an agreement is registered quite later than the date of issue of the allotment letter by the developer/ builder,” says Rishi Kapadia, Partner, Dhruva Advisors.