CA Sandeep Kanoi
Background –Developer engaged in the business of Property invites buyers for purchase / bookings of property at much earlier stage than construction thereof. Accordingly, the intended buyers book the property rights and advance payment for booking is made. Further, payments are made to the developer as and when demanded and also with the progress in the construction. Possession of the property is made available to the intended buyers after 3-4 years of the booking and may be sometime even longer period. In between many times intended buyers transfer their rights to other parties. Similarly, many buyers transfer the property after they have obtained possession from the developer. The issue normally arises in the context of transfer of rights in the property under construction as well as transfer of property after taking the possession thereof as regard the point whether gain on transfer is short term or long term. In other words, question normally arises as regards date of acquisition of rights in the property. In this context it is stated that at the stage booking is made by the intending buyer with the developer many times even the specifications / description of project are not available and confirmation as regards the property rights is given by the developer after a lapse of time. In this regard one view can be that the intended buyer has acquired the rights as soon as he has given the initial advance though specification in regard to project / property are not available. The other view can be that the right would come into existence when the developer confirms the bookings and issue necessary allotment letter to the intended buyers after the project has been properly described. It is stated that the date of acquisition of the rights would depend upon facts of each case and the documents executed / provided by the developer to the intended buyers. In case of initial advance if there is no commitment or allotment by the developer, same may not amount of acquisition of rights in the property. Property rights may generally be acquired by the intended buyer only when an allotment letter specifying the project etc. has been issued.
In case the intended buyer transfer his rights in the property during the period when construction is in progress and he has not obtained possession of the property, the right of the buyer would be in the nature of capital assets and accordingly, gain arising on such transfer would be in the nature of long term or short terms gain depending upon the period of holding.
In case of transfer of property after possession has been obtained by the buyer from the developer on construction of the project, a question normally arises whether the period prior to taking of possession of the property, during which period it was only the right available to the buyer, is to be reckoned for the purpose of determining whether the capital gain is short term or long term or not. In this regard contention is normally raised that rights in the property is a capital asset of different nature than the property. Therefore, period prior to taking of possession is not to be considered. It is, however, stated that the buyer gets possession of the property in continuation of his holding of right in the property. It cannot be said that in terms of Section 2(47) of the Act assessee has transferred his rights in the property held earlier to acquire the actual property. It is not a case of sale or exchange. Buyer continues to hold the capital asset. Only its form changes on getting actual possession of the property. Therefore, it cannot be said that period of holding would be counted only from the date of getting the possession. Accordingly, the earlier period is also to be counted for the purpose of determination of nature of the capital gain, whether short term or long term.
You have approached us to give opinion on the question related to capital Gain on Sale of Flat, which was booked under construction and sold after receiving the possession of the same. You have submitted us the following documents:-
|351||21.06.2007||887400||Flat on 2nd Floor|
|456||06.09.2007||295800||Flat on 2nd Floor|
|487||30.09.2007||295800||Flat on 2nd Floor|
|606||12.12.2007||500000||Flat on 2nd Floor|
|625||31.12.2007||500000||Flat on 2nd Floor|
|626||31.12.2007||53800||Flat on 2nd Floor|
|634||31.12.2007||500000||Flat on 2nd Floor|
|690||11.03.2008||261600||Flat on 2nd Floor|
|691||11.03.2008||500000||Flat on 2nd Floor|
|770||21.06.2008||210800||Flat on 2nd Floor|
|1171||24.03.2011||210800||Flat on 2nd Floor|
|1172||24.03.2011||160000||Flat on 2nd Floor (Society Deposit)|
3. Allotment Letter from Builder dated 21.06.2007.
4. Photocopy of Sale Agreement with Builder dated 31.12.2009 which got registered on 01.02.2010 showing stamp duty Payment of Rs. 2,02,650/- and Registration Charges of Rs. 31,500/-.
5. Sales Agreement dated 07th July 2011 which registered also on 07.07.2011 for Rs. 1,00,80,000/-
6. Reply from Builder in respect of our request for possession dated 25.03.2011 which seems to be possession letter too although explicitly it’s not a possession letter.
FACTS OF THE CASE
|Date||Nature of Payment||Rupees|
QUESTIONS ASKED BY THE ASSESSEE :-
1. Whether the Right to own the Property is a Capital Asset?
Bombay High Court has explained definition of capital asset as defined u/s 2(14) of the I T Act in the case of CIT vs Tata Teleservice Ltd 122 ITR 594 and has held as follows :-
What is a capital asset is defined in section 2(14) of the I.T. Act, 1961. Under that provision, a capital asset means property of any kind held by an assessee, whether or not connected with his business or profession. The other sub-clauses which deal with what property is not included in the definition of capital asset are not relevant. Under section 2(47), a transfer in relation to a capital asset is defined as including the sale, exchange or relinquishment of the asset or the astonishment of any right therein or the compulsory acquisition thereof under any law. The word “property”, used in section 2(14) of the I.T. Act, is a word of the widest amplitude and the definition has re-emphasised this by use of the words “of any kind” Thus, any right which can be called property will be included in the definition of “capital asset”. A contract for sale of land is capable of specific performance. It is also assignable. (See Hochat Kizhakke Madathil Venkateswara Aiyar v. Kallor Illath Raman Nambudhri, AIR 1917 Mad 358). Therefore, in our view, a right to obtain conveyance of immovable property, was clearly “property” as contemplated by section 2(14) of the I.T. Act, 1961.
Other case law on the same issue favoring the above views of Bombay High Court are as follows:-
In our case as allotment letter issued by the builder dated 21.06.2007 gives us the right to obtain conveyance on the said flat so it become an assets under section 2 (14) of the Income Tax Act, 1961.
2. Whether Gain on sale of Flat will be short Term or Long Term?
An asset which is held for 36 months is a long term asset.
Whether it is held for 36 months?
Once the right to purchase ( i.e obtain conveyance ) proved to be an asset, it is to be seen when was this right vested in the purchase.
Hon’ble Andhra Pradesh High Court in the case of M. Syamala Rao v. CIT  234 ITR 140 held that registration of a document related back to the day on which the agreement of sale was executed, hence, when the builder executed the agreement of sale on 7-8-1993, the assessee was to be deemed to be owner of property from that date and, accordingly, the capital gain was to be worked out.
In our opinion, the date of allotment is the date when the right of conveyance get vested. So, if there is difference of 36 months in this date and date of sale , then it can be considered that the said asset was a long term asset and gain on sale of such asset was “Long Term Capital Gains “.
In our case, the allotment date was 31.06.2007 and as such on the date of sale, this right was held for more than 36 months so gain on sale of Flat will be Long term Only.
3. How Indexation is to be done?
The issue gets settled by Mumbai Tribunals’ decision in case of Smt. Lata G. Rohra v. Deputy Commissioner of Income-tax, C.C. 39, Mumbai  21 SOT 541 (Mum.) where is the facts of the case were as under :-
The assessee vide unregistered agreement with a developer purchased a flat in 1993 which was constructed in the year 1997 and registered in the year 1998. During the relevant year, the assessee sold said flat and after claiming the indexed cost at Rs. 18.74 lakhs showed long-term capital gain at Rs. 39.42 lakhs. The Assessing Officer worked out indexed cost of acquisition on the basis of purchase price from 1993 and completed the assessment. However, the Commissioner was of the view that the assessee had not filed any evidence with respect to various payment made towards the purchase price and the indexed cost of acquisition worked out on the basis of financial year 1993 was incorrect and, hence, the assessment order was erroneous and prejudicial to the interest of revenue. Accordingly, he initiated revision proceedings under section 263.
The Commissioner, however, set aside the order of Assessing Officer and directed the Assessing Officer to compute the correct long-term capital gain by adopting the indexed cost of acquisition on the basis of the date on which the property was held after registration of the conveyance deed. In instant appeal, the assessee contended that she was deemed to be owner for property from 7-8-1993 and, accordingly, the capital gain was to be worked out from that date as per Explanation (iii) to section 48, and since the asset had been held for the first time in 1993, cost inflation index of that year was to be applied on the total purchase consideration payable by the assessee as per agreement regardless of the dates of the actual amount paid by her.
As per section 2(14), read with section 2(14)(vi), the rights in flat, acquired by the assessee on execution of purchase agreement on 7-8-1993, came within the purview of the term ‘capital asset’. From the perusal of language used in Explanation (iii) to section 48, which provides for manner of computation of indexed cost of acquisition, it is apparently clear that it refers only to date of cost of acquisition of the asset and not actual payments made by the assessee. Hence, there was no merit in the contention of the revenue that the benefit of indexation should be given on the basis of dates of actual payments made by the assessee. Thus, on merits, the issue was covered in favour of assessee. However, regarding jurisdiction for invoking the provisions of section 263, it was found that the assessee filed necessary details before the Assessing Officer and the Assessing Officer had passed assessment order after taking into consideration the same. Hence, merely for the reason that no specific findings had been given in the assessment order, the same could not be said have been passed without application of mind. In this view of the matter, the order under section 263 passed by the Commissioner was to be set aside. [Para 9] In the result, the appeal filed by the assessee stood allowed. [Para 10]
So in our case we will take the index of the year in which Assessee receives allotment letter of the Flat i.e. 2007-08. In respect of Stamp Duty, Registration Charges, Society Deposits we will take index of the year of payment. If Assessee has incurred any other expenses in respect of Purchase of property in addition to these in respect of those expense also we take index of the year of expense for calculation of Long Term Capital Gain as what tribunal has stated above is cost of acquisition i.e Rs. 42.16 lakh which should be taken to compute the long term capital gains as the word used in Explanation to section 48 mentions “Cost of acquisition and not the actual payments.
Here we would also like to refer Judgment of Delhi ITAT in the case of Praveen Gupta vs ACIT -ITA No. 2558/Del/2010; Asst. Year 2007-08 in which Honourable ITAT has taken indexation on the basis of Payment made by the Assessee but since Assessee is based in Mumbai so for us ITAT Mumbai Judgment is more relevant and at the same time same is more beneficial to us too.
5. Is there a way Assessee can save tax on Gain on Sale of Flat?
Yes, The Provisions of Income Tax Allows the assessee to save capital gains tax on sale of a property, namely Flat in our case. This benefit is provided under Sections 54 and Section 54EC of the Income Tax Act, 1961.
1: Assessee should be Individual/ HUF.
2: The Asset should be Residential Property whether self occupied or not.
3: The Property Should be classified as a Long term Capital Asset under Income tax Act, 1961.
4: The Assessee purchases a new residential house within a period of one year before or two years after the date of transfer/sale of the asset or he constructs a residential house within a period of three years after the date of transfer/sale of the asset.
5: In Case, if the assessee is not able to utilize the amount of capital gains for acquisition of new asset before the due date of furnishing the return of income and thereafter the assessee can deposit the same in and account with any specified bank or institution under capital Gains Accounts Scheme framed by the central government and all payment related to new assets will be made from this account.
6: The Cost of the new purchased asset or constructed aseet should be equal to or exceed the amount of indexed capital gains earned on the sale of the property.
Where the amount of Capital gains is greater than the cost of the new asset, the difference between the amount of capital gains and the cost of the new asset will be chargable as “ Long Term Capital Gains” of the previous year in which the asset is sold.
Conditions to Be Satisfied after availing the exemption under Section 54:
1: The Assessee should not sell the new asset within 3 years from the date of its purchase or construction.
If he does that the cost of the new asset will be reduced by the amount of capital gains exempted from tax earlier and the difference between the sale price of the new asset and such reduced cost will be “ Short Term Capital Gains” and treated as the income of the previous year in which the new asset is sold.
Condition to be satisfied to claim exemption Section 54EC of the Income Tax Act, 1961 – Section 54EC provides that where the capital gains arises from the transfer of the “ Long Term Capital Asset”, it will be exempted if the assessee has invested the capital gains in the Long Term Specified Asset subject to the following conditions:
1: Capital Gains should arise from the transfer of the long term capital asset.
2: The Assessee should invest the capital gains amount within a period of six months after the date of transfer/sale in the long term specified asset. The investment in any financial year is not allowed to exceed Rs. 50,00,000/-
Long term Specified Asset is defined to include any bond redeemable after three years issued on or after 01.04.2007, by the National Highway Authority of India(NHAI), or by the Rural Electrification Corporation Limited(RECL),
3; The Cost of the Long Term Specified Asset is not less than the capital gain in respect of the original asset. If The cost of the Long Term Specified Asset is less than the capital gains, then only proportionate capital gains will be exempt to the extent it is invested.
Conditions to be satisfied after availing the exemption under Section 54EC:
1: The Assessee has to retain the Bonds for a minimum period of three years from the date of acquisition.
2: The Assessee should not transfer or convert into money or should not take a loan against pledge or security of the Bonds that he has invested in, to avail exemption under section 54EC, during this three years.
3: If he does that the amount of exempted capital gains on transfer of original asset will be deemed to be “Long Term Capital Gains”
Of the previous year in which such long term specified asset is transferred or converted into money.
Of the Previous year in which the loan or advance is taken against security of such long term specified asset. It should be noted that irrespective of the quantum of loan or advance taken, the entire exempted amount of capital gains will be brought to tax.
Where the cost of long term specified asset is also eligible for deduction under section 80C, the said deduction will not be allowed, if he takes the exemption under section 54EC.
2. Whether Gain on sale of Flat will be short Term or Long Term? Long Term in our Case
3. If the Gain is long term how the indexed cost will be calculated?
So in our case we will take the index of the year in which Assessee receives allotment letter of the Flat i.e. 2007-08. In respect of Stamp Duty, Registration Charges, Society Deposits we will take index of the year of payment. If Assessee has incurred any other expenses in respect of Purchase of property in addition to these in respect of those expense also we take index of the year of expense for calculation of Long Term Capital Gain
4. Is there a way Assessee can save tax on Gain on Sale of Flat?
The Provisions of Income Tax Allows the assessee to save capital gains tax on sale of a property, namely flat in our case. This benefit is provided under Sections 54 and Section 54EC of the Income Tax Act, 1961.
(Republished with Amendments)