“Date of Allotment” of Flat is to be considered as the date for computing the holding period for the purpose of capital gains and not “Date of Possession” in Income Tax

Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain comes under the category ‘income’, and one will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term. An asset that is held for more than 36 months is a long-term capital asset. 

However, the Income Tax Act, 1961 provides certain exemptions w.r.t such gain. Exemption under section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties. The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores.

The taxpayer has to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.

Deduction under Section 54 will not be available for transfer for a short term capital asset. Therefore, it is important to determine whether the asset sold is a long term asset or a short term asset. Computing the period of holding is essential in such cases. In Yogesh Mavjibhai Gala vs Pr.Commissioner of Income Tax the issue under appeal with the ITAT was whether such period of holding is to be computed from date of allotment or from date of possession?

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Facts of the Case:-

• Original assessment in the case of the assessee was framed by the AO, vide his order passed under Sec. 143(3) of Income Tax Act, 1961.
• Subsequently, the PCIT issued a Show cause notice (SCN) to the assessee therein calling upon him to explain as to why the assessment order passed by the AO under Sec. 143(3), may not be revised under Section 263.
• It was observed by the PCIT that the assessee had during the year under consideration sold two flats, vide two separate agreements dated 17/07/2013 (registered on 19/07/2013) and 21/05/2013 (registered on 24/05/2013).
• A letter of allotment in respect of the aforesaid property was issued to the assessee on 20/02/2010 by the builder i.e M/s Oberoi Realty Limited.
• However, the assessee had executed the agreements for purchase of the aforesaid flats, vide 2 separate agreements dated 05/07/2003 (registered on 08/07/2013) and 04/05/2013 (registered on 08/05/2013).
• Against the sale of the aforesaid flats the assessee had purchased a new residential property, vide two separate agreements dated 05/12/2014 (registered on 05/12/2014) and 05/12/2014 (registered on 05/12/2014).

• As regards the new property, it was noticed by the PCIT that both the purchase agreements were in joint names of the assessee and his wife and his two sons.
• As per the computation of income filed by the assessee, it was observed by the PCIT that the assessee had considered the period of holding of the property that was sold by him, on the basis of the allotment letter dated 20/02/2010 that was issued by the builder, and thus treating the same as a long term capital asset, raised a claim for deduction under Sec. 54
• It was further noticed by him that the allotment letter, did not vest any right to acquire the property with the asssessee, and only created an interest to acquire the same on the terms and conditions as would be laid down in the agreement to purchase.
• Also, it was observed by the PCIT that the assessee had sold the 2 Flats, vide registered agreements dated 08.07.2013 and 19.07.2013, respectively, while they were still under construction.
• Observing, that the property sold by the assessee was still under construction and possession of the same was yet not handed over to him till the date of their sale, the PCIT held a conviction that the same could not be treated as a long term capital asset under Sec.54.

• It was further observed by the PCIT, that as the assessee had neither received the possession of the aforesaid flats which were under construction, nor used the same for his residence for a period of 3 years, therefore, on the said count also he was not eligible for claim of deduction under Sec. 54 of the Act.
• Thus, the PCIT being of the view that the AO had failed to make necessary verifications as regards the entitlement of the assessee for claim of deduction under Sec. 54, called upon the assessee to explain as to why the assessment order passed under Sec. 143(3), may not be revised.
• After necessary deliberations on the reply filed by the assessee, the PCIT did not find favour with his claim for deduction under Sec. 54 of the Act.
• Observing, that the assessee had sold a residential house which was under construction, the PCIT was of the view that he would not be entitled for claim of deduction under Sec. 54.
• On the basis of his aforesaid observations, the PCIT being of the view that the order passed by the AO under Sec 143(3), was erroneous and prejudicial to the interest of the revenue, directed the AO to decide the issue afresh after making necessary verifications in view of the directions given in the revisional order.
• The assessee being aggrieved with the order passed by the PCIT under Sec. 263, appealed before the Income Tax Appellate Tribunal (ITAT)

Proceedings of ITAT

Why was PCIT of the view that the assessee was not vested with any right to acquire the property on the basis of the letter of allotment?

• The PCIT held a conviction that the assessee had became the owner of the 2 flats, only on the basis of the respective agreements for purchase i.e dated 05.07.2013 (registered on 08.07.2013) and dated 04.05.2013 (registered on 08.05.2013).
• According to the PCIT, the claim of the assessee of being the owner of the property on the basis of the letter of allotment, dated 20.02.2010 was incorrect.
• PCIT was of the view that the letter of allotment, did not vest any right with the assessee to acquire the aforesaid property, but only created an interest to acquire the same, and that too as per the terms and conditions as would be laid down in the purchase agreement.
• It was observed by the PCIT that the letter of allotment merely mentioned the allotment of a particular property without specifying any details of obligations upon fulfilment of which the property was to be acquired and also the rights in lieu of the same.

• PCIT in order to emphasize her claim referred to the following facts as were visible from the letter of allotment:-
• the builder had the right to terminate the allotment at its sole discretion
• neither the assessee was entitled to occupy nor the builder was liable to hand over the occupation of the property unless and until the assessee had made all the payments in accordance with the allotment letter
• the assessee had agreed with the builder that he would not sell, transfer, deal with or otherwise dispose off in any manner whatsoever, the aforesaid property until 04.11.2011
• in the event of any sale/transfer of the aforesaid premises after the scheduled date, the assessee shall register the agreement to be executed with the builder under the provisions of the Maharashtra Ownership Flats (Regulation of the promotion of Construction, Sale, Management and Transfer Act, 1963) prior to the sale/transfer of the said property
• in the event of any sale/transfer of the aforesaid property after 04.11.2011 by the assessee, the builder would be entitled to the right of first refusal in respect of the same.
• Accordingly, the PCIT held that the assessee on the basis of the letter of allotment was not vested with any right to sell the property on his own, for the reason, that he was not the owner of the same.
• In the absence of a registered agreement no right to acquire the property was also vested with the assessee in the year of allotment.

• Therefore, assessee’s claim of LTCG was misconceived and the assessee was thus not eligible for deduction under Sec. 54 of the Act.
• According to the order passed by the PCIT under Sec. 263, the assessee was held to be not eligible for claim of deduction under Sec. 54 of the Act, for the following reasons:-
• the ownership of the property (2 flats) got vested with the assessee only on the basis of the respective agreements for purchase i.e dated 05.07.2013 (registered on 08.07.2013) and dated 04.05.2013 (registered on 08.05.2013), and not on the basis of the allotment letter, dated 20.02.2010 that was issued to him by the builder and
• the assessee had not yet obtained the “Occupancy Certificate” (OC) from the competent authority for the aforesaid property (2 flats), and the construction of the same was not yet completed, therefore, the house sold not being in a habitable condition was thus not eligible for deduction under Sec. 54 of the Act.

Observations of ITAT on the contention of the PCIT that the construction was not complete

• ITAT was not in agreement with the observations of the PCIT that the 2 flats were yet not complete at the time of their sale is concerned and were thus not eligible for deduction under Sec. 54 of the Act
• ITAT found that the assessee had filed a ‘Completion certificate’, dated 12/01/2011 issued by the Architects, wherein they had stated that the 7th Floor Slab (the flats were situated on the 7^th floor) had been completed.
• Apart from that, the assessee had filed with the AO the copies of the agreements to purchase i.e dated 05.07.2013 (registered on 08.07.2013) and dated 04.05.2013 (registered on 08.05.2013), and agreements to sell i.e dated 17/07/2013 (registered on 19/07/2013) and 21/05/2013 (registered on 24/05/2013) of the aforesaid 2 flats, which clearly referred to purchase and sale of the residential flats.
• Finding no basis to agree with the view taken by the PCIT that the residential flats sold by the assessee were not in a habitable condition and therefore, the assessee was disentitled for claim of deduction under Sec. 54, ITAT rejected the same.

Observations of ITAT on Contention of PCIT that the ownership of the 2 flats, got vested with the assessee on the basis of the respective purchase agreements and not on the basis of the allotment letter and the same not being a long term capital asset, was not eligible for deduction under Sec. 54.

• Assessee had calculated the period of holding of the aforesaid property on the basis of the allotment letter, dated 20.02.2010 which was accepted by the AO.
• On the contrary, the PCIT was of the view that as the assesee got vested with the ownership of the 2 flats, only on the basis of the respective agreements for purchase i.e dated 05.07.2013 (registered on 08.07.2013) and dated 04.05.2013 (registered on 08.05.2013), and not on the basis of the allotment letter, dated 20.02.2010, therefore, the period of holding was to be calculated on the basis of the said agreements to sell executed by the assessee during the year under consideration itself.

• Accordingly, the PCIT in exercise of his revisional jurisdiction under Sec. 263, therein set aside the assessment order passed by the AO under Sec. 143(3)
• ITAT observed that the view taken by the AO that the date of allotment of the flats i.e 20/02/2010 was to be taken as the basis for calculating the period of the holding by the assessee, was supported by the order of the jurisdictional Tribunal i.e ITAT, Mumbai Bench in ACIT Mumbai Vs. Smt. Vandana Rana Roy.
• In the said case, the Tribunal had observed that the “date of allotment” was to be considered as the date for computing the holding period for the purpose of capital gains.
• Also, in the case of Richa Bagrodia Vs. Dy. CIT [2019] (Mum), the jurisdictional Tribunal held that in case of sale of flat it is the date of allotment of the flat and not the date of giving of possession of flat which has to be considered for computing the holding period of 36 months.
• High Court of Punjab & Haryana in the case of Madhu Kaul Vs. CIT & Anr. [2014] (P&H), had also held that the mere fact that possession of the flat was delivered later, does not detract from the fact that the allottee was conferred a right to hold property on issuance of an allotment letter. It was further observed, that payment of balance instalments, identification of a particular flat and delivery of possession are consequential acts that relate back to and arise from rights conferred by allotment letter.
• On the basis of the aforesaid observations, ITAT was of the strong conviction that the view taken by the AO that the period of holding of the aforesaid property was to be calculated on the basis of the allotment letter, was a plausible view that was found to be in conformity with the view taken by the jurisdictional Tribunal and also that of the non-jurisdictional High Court, on the date on which the assessment was framed by him.
• Accordingly, ITAT was of the view, that the aforesaid opinion arrived by the AO, could not have knocked off by the PCIT in exercise of her revisional jurisdiction under Sec. 263 of the Act.

ITAT set aside the order passed by the PCIT and restored the assessment order passed by the AO. Holding period for purpose of capital gains is thus to be considered from date of allotment of flat and not from the date of possession of flat.

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