- Capital gain is the profit or gain that is earned from the sale of any capital asset. There are two types of capital gain: a) long term capital gain and b) short term capital gain. While calculating capital gain tax, a taxpayer must take careful consideration of the various dates i.e. date of allotment, purchase date, date of possession, date of improvement, etc.
- However, we may see a difference in opinion between taxpayers and Income Tax Authorities while determining the holding period of a property to determine the nature of capital gain i.e. Long term or Short term. In many situations, Income Tax Authority may take date of possession instead of date of allotment while calculating holding period which may lead to change in nature from long term capital gain to short term capital gain. This change will prevent the taxpayers from various benefits:
(a)Cost of Indexation
(b)Exemption under section 54, 54EC, 54F, 54B. - The above difference is clarified by the decision of the Honourable ITAT (Mumbai bench) in case of Yogesh Mavjibhai Gala vs. PCIT [ITA No. 3373/Mum/2019]. In the above case, the assessee has sold 2 flats vide separate agreements dated 17.07.2013 and 21.05.2013. A letter of allotment in respect of the aforesaid property was issued on 20.02.2010 by the builder. The assessee computed long term capital gain taking date of allotment as base. Against the sale of the aforesaid flats, the assessee purchased a new residential property and claimed deduction u/s. 54. However, the PCIT was not satisfied with the claim of deduction u/s. 54 by the assessee and revised the assessment order u/s. 263 of the Act, due to the following observations:
(a) 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.
(b) 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) and not on the basis of the allotment letter, dated 20.02.2010 that was issued to him by the builder.
(c) The assessee had sold the 2 Flats while they were still under construction.
(d) 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.
(e) 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. - The Honourable ITAT stated 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 7th floor) had been completed. It was held that “we may herein observe that the view taken by the A.O 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, on the date of framing of the assessment was supported by the order of the jurisdictional Tribunal i.e ITAT, Mumbai Bench „F‟, Mumbai in ACIT, 18(3), Mumbai Vs. Smt. Vandana Rana Roy [ITA No. 6173/Mum/2011, dated 07/11/2012]. In the said case, the Tribunal had observed that the “date of allotment” was to be reckoned 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] 175 ITD 552 (Mum), the jurisdictional Tribunal has 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.” Accordingly, the tribunal set aside the order passed by the PCIT u/s. 263.
- According to the CBDT in its circular No.471 dated 15th October, 1986 had clarified this position by holding that when an assessee purchases a flat to be constructed by Delhi Development Authority (“D.D.A.” for short) for which allotment letter is issued, the date of such allotment would be relevant date for the purpose of capital gain tax as a date of acquisition. It was noted that such allotment is final unless it is cancelled or the allottee withdraw from the scheme and such allotment would be cancelled only under exceptional circumstances. It was noted that the allottee gets title to the property on the issue of allotment letter and the payment of installments was only a follow-up action and taking the delivery of possession is only a formality. In the circular dated 16th December, 1993 the board has considered that in cases of allotment of flats or houses by co-operative societies or other institutions whose schemes of allotment and consideration are similar to those of D.D.A. may also be treated as cases of construction for the purposes of sections 54 and 54F of the Income-tax Act.
- It can thus be seen that the entire issue was clarified by the CBDT in its above mentioned two circulars dated 15th October, 1986 and 16th December, 1993. In terms of such clarifications, the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property.
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