Advance payment for acquisition of property – Indexation from year of payment or year of registration of purchase deed?

Rajesh Sunderdas Vaswani Vs DCIT (ITAT Ahmedabad)

Advance payment made for acquisition of property – Indexation from year of payment or year of registration of purchase deed?

The issue  involved in this case is whether the benefit of indexation is available on ‘advance payment’ made for acquisition of property or whether the benefit of indexation is available from the year of registration of purchase deed.

Assessee had made advance payment of Rs. 50 lakhs for acquiring properties in financial year 2008- 09. The above properties were transferred in favour of the assessee by execution of conveyance deed in financial year 2009-10. Assessee claimed the benefit of indexation in respect of aforesaid advance payment from financial year 2008-09. AOr was of the view that “benefit of indexation” with respect to advance payment was available from financial year 2009-10 i.e. from year of execution of conveyance deed since that was the year in which the two immovable propertied can be said to be held by the assessee in view of section 48(iii) of the Act. The AO’s order was upheld by CIT(A)

Before the Tribunal,  assesses submitted that the advance of Rs. 50 lakhs in respect of the   properties was made by way of account payee cheques in financial year 2008-09. Further, the assessee entered into a registered  Agreement to Sell with the seller in financial year 2008-09 itself.

Assessee has placed reliance on the case of ACIT vs. Sanjay Kumath 42 taxmann.com 38 (Indore Bench) wherein ITAT held that period of holding of a flat has to be reckoned from the date of allotment letter as such letter extinguishes all rights of the seller.

Tribunal took note of the decision in Lakshman M.Charanjiva v. ITO [IT Appeal No. 28 (Mum) of 2017, dated 03-10-2018 wherein , the important question that arose for consideration was  that whether the indexation benefit of even the future installments would also be allowable to the assessee from the year in which the asset is first held by the assessee. In the said case it was held that indexation benefit against the cost of acquisition shall be available to the assessee on the basis of index of the year in which the payments were actually made by the assessee. The payment made up-to the date of agreement shall be indexed by applying the index of the Agreement.  Subsequent payments made in different financial years shall be indexed by applying the respective indexes of those years.

Tribunal also noted the decision in Vivekanand vs. ACIT 124 taxman.com 67 Bangalore ITAT, wherein it was held that for computing indexed cost of property date to be reckoned is a date of allotment of property and not date on which possession certificate was issued.

As per Section 48, Explanation (iii),  indexed cost of acquisition has been defined to mean an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee.  The expression used is ‘held’ as against ‘acquired’ or ‘purchased’ as used in other Sections like section 54/54F which shows that legislatures were conscious while making use of this expression.  The expressions like ‘owned’/’acquired’ has not been used for allowing the indexation benefit to the assessee.

Tribunal in this case  held that right in respect of the aforesaid properties was acquired by the assessee in his favour from financial year 2008-09 itself upon payment of advance amounting to Rs. 50 lakhs and entering into a registered   Agreement to Sell.  Owing to such vested right, it was not upon to the seller of the immoveable properties in question to sell the properties to any other third party. Logically, the indexation was to be done by applying the indexes of the respective years in which the payments were actually made by the assessee. Therefore, for all practical purposes  , the assessee held the immovable property from financial year 2008-09 itself.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-11, Ahmedabad in Appeal no. CIT(A)-11/Ahd/CC-1(1)/10218/2019-20, in proceeding u/s. 250 of the Act vide order dated 19/01/2021 passed for the assessment year 2017-18.

2. The assessee has taken the following grounds of appeal:-

“1. The Ld. CIT (A) has erred on facts and in law in upholding the assessment order u/s 143(3) of the Income Tax Act, 1961 passed by the Assessing Officer on 24.12.2019.

2. The Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer computing the total income at Rs. 11,95,96,922/- as against that of Rs. 11,81,77,130/- declared in the return of income filed by the Appellant.

3. The Learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs. 14,19,792/- made by the Assessing Officer for the Disallowance of Long Term Capital Loss of indexation cost advance paid before purchase deed as per para 4 & 5 page no. 2 to 8 of order dated 24.12.2019. addition is made on account of total long term capital loss 3 rd EYE (GF & UL) of Rs. 2,02,94,594/- instead of Rs. 2,17,14,386/- and the difference amounts of Rs. 14,19,792/- which is disallowed.

4. The Ld. AO has charged interest u/s 234A, 234B, 234C & 234D of the Act, as the appellant denies to pay the interest because addition made by the Ld. AO could not be predicated at the time of filling of return.

5. The appellant reserves its right to add, amend, alter or modify any of the grounds stated, hereinabove either before or at the time of hearing. The appellant reserves its right to produce, such other documentary evidence, at the time of appeal proceedings and on the grounds appended herewith. In view of the facts of the case the addition made by Ld. AO is to be deleted.”

3. The short controversy involved in this case is whether the benefit of indexation is available on “advance payment” made for acquisition of property or whether the benefit of indexation is available from the year of registration of purchase deed.

4. The brief facts of the case are that the assessee had made advance payment of Rs. 50 lakhs for acquiring two properties in financial year 2008­09. The above two properties were transferred in favour of the assessee by execution of conveyance deed in financial year 2009-10. The assessee sold both of the aforesaid two properties in financial year 2016-17 and claimed long term capital loss of Rs. 2,17,14,386/- on sale of such aforesaid properties and such long term capital loss was computed by claiming the benefit of indexation in respect of aforesaid advance payment from financial year 2008-09. The Assessing Officer was of the view that “benefit of indexation” with respect to advance payment was available from financial year 2009-10 i.e. from year of execution of conveyance deed since that was the year in which the two immovable propertied can be said to be held by the assessee in view of section 48(iii) of the Act. Accordingly, the Assessing Officer computed long term capital loss of Rs. 2,02,94,594/- as against assessee’s claim of Rs. 2,17,14,389/-. Consequently, the Assessing Officer made the impugned disallowance of Rs. 14,19,792/- (Rs. 2,17,14,386/- – Rs. 2,02,94,594/-). The aforesaid disallowance was confirmed by the ld. CIT(A) in appellate proceedings. The assessee is in appeal before us in respect of the aforesaid disallowance confirmed by the ld. CIT(A).

5. Before us, the counsel for the assesses submitted that the advance of Rs. 50 lakhs in respect of aforesaid two properties was made by way of account payee cheques in financial year 2008-09. Further, the assessee entered into a registered banakhat (Agreement to Sell) with the seller in financial year 2008-09 itself. The counsel for the assessee drew our attention to page 29 of the paper book and submitted that from the copy of the registered banakhat, it is evident that the advance in respect of the aforesaid properties was made in financial year 2008-09 itself on 10-02­2009. The final purchase deed was executed in financial year 2009-10, however, it was submitted by the counsel for the assessee that the right in respect of the aforesaid properties was acquired by the assessee in his favour from financial year 2008-09 itself upon payment of advance amounting to Rs. 50 lakhs and entering into a registered banakhat (i.e. registered Agreement to Sell). In response, the ld. Departmental Representative placed reliance on the observations made by the ld. Assessing Officer and ld. CIT(A) in their respective orders.

6. We have heard the rival contention and perused the material on record. The counsel for the assessee has placed reliance on the case of ACIT vs. Sanjay Kumath 42 taxmann.com 38 (Indore Bench) wherein ITAT held that period of holding of a flat has to be reckoned from the date of allotment letter as such letter extinguishes all rights of the seller. We are in agreement with the arguments for the ld. counsel of the assessee that the assessee has acquired rights in the property when the advance payment in respect of the aforesaid properties was made in financial year 2008-09 and assessee also entered into registered banakhat dated 10-02-2009 in financial year 2008-09 in relation to the aforesaid properties. Owing to such vested right, it was not upon to the seller of the immoveable properties in question to sell the properties to any other third party. Therefore, for all practical purposes in our considered view, the assessee held the immovable property from financial year 2008-09 itself. In the ITO vs. Monish Kaan 109 taxmann.com 56 (Mum Trib), the assessee sold a property for certain consideration on 02-06-2010. The assessee had booked the said property on 16-03-2005 by making an upfront payment of 5% of cost of property towards its acquisition and the balance payment was spread over by way of installment during the years 2005-10. The purchase agreement of said property was executed on 31-12-2009 upon payment of stamp duty/registration charges. The Assessing Officer opined that the period of holding was to be reckoned from 31-12-2009 i.e. from the date when purchase documents were registered in assessee’s favour and therefore the capital gains was to be treated as short term capital gains. In appeal, the CIT(A) directed the Assessing Officer to work out long term capital gains in the hands of the assessee by taking the date of acquisition as on 16-03-2005 instead of short term capital gains. In appeal, the ITAT held that the view taken by the CIT(A) was correct and the ITAT directed the Assessing Officer to work out indexed cost after applying indexes of respective years in which payments were actually made by the assessee. While holding in favour of the assessee, the ITAT made the following observations:-

5.4 Now, the only surviving question that arise for consideration is manner of computation of the gains. It is noted that the assessee has paid upfront payment to the extent of 5% upon allotment and the balance payment has been spread over by way of installment during the year 2005 to 2010. As against the same, the assessee has sought indexation of full cost on the basis of index for 2005, which, in our considered opinion, is not justified. Logically, the indexation was to be done by applying the indexes of the respective years in which the payments were actually made by the assessee which is in line with the decision of this Tribunal rendered in Lakshman M.Charanjiva v. ITO [IT Appeal No. 28 (Mum) of 2017, dated 03-10-2018], which has been authored by one of us, wherein the matter, after due consideration of various judicial pronouncements, has been concluded in the following manner:—

5. We have carefully heard the rival contentions and perused the relevant material on record including cited judicial pronouncements. We find that Ld. CIT(A) has referred to two decisions of this Tribunal. Upon perusal, it is found that in the case of Ramprakash Bubna (supra), the benefit of indexation has been provided from the date of agreement for acquisition of the property whereas the decision rendered by this Tribunal in Vikas P.Bajaj (supra) has primarily drawn strength from the decision of Delhi Tribunal rendered in Praveen Gupta v. ACIT 137 TTJ (Del.) 307. The case of Vikas P.Bajaj as well as Praveen Gupta dealt with a situation in which the assessee himself offered capital gains by indexing the actual payments made in the respective AYs by applying the indexes for those years and therefore, is not directly on the issue under hand since the Tribunal, in both the case laws, has confirmed the workings/computations adopted by the assessee. 6. So far as the statutory provisions as contained in Section 48, Explanation (iii) as extracted in the impugned order is concerned, we find that indexed cost of acquisition has been defined to mean an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee. We find that the expression used is ‘held’ as against ‘acquired’ or ‘purchased’ as used in other Sections like section 54/54F which shows that legislatures were conscious while making use of this expression. The expressions like ‘owned’/’acquired’ has not been used for allowing the indexation benefit to the assessee. However, the important question that arises for consideration, at this juncture, is that whether the indexation benefit of even the future installments would also be allowable to the assessee from the year in which the asset is first held by the assessee. For this, our attention has been drawn to the decision of Hon’ble Gujarat High Court rendered in Nirmal Kumar Seth Vs CIT [17 Taxmann.com 127] wherein Hon’ble court has decided the issue as under:—

6. We have heard both the parties at length and gone through the material available on record.

7. From the record, it appears that the land in question was purchased from the Lucknow Development Authority on instalments basis for which registration was made on 01.12.1982 by paying a sum of Rs. 3000/- only. The remaining payment was made in instalments to Lucknow Development Authority, as per the chart given in the AO’s order. As per the agreement, the right to get the sale deed registered in favour of the assessee was acquired, though subject to the full and final payment. After making the full and final payment, the assessee got the allotment letter in his favour in the year 1985. On getting the allotment letter, the assessee also obtained the valuable right to have a sale deed in his favour. Thus, the assessee has acquired the capital asset.

8. In the instant case, the plot was sold during the assessment year under consideration. The period is more than 3 years. So, we are in agreement with the observations made by the Tribunal that long term capital gain will have to apply in the assessee’s case as per the payment chart.

9. It may be mentioned that the expression “cost of acquisition” is defined in Section 55(2) of the Act. The date of acquisition will have a relevance in determining the cost of acquisition. As per the ratio laid down in the case of CIT v. Srinivasa Rao [1987] 166 ITR 593/31 Taxman 466 (AP) the expression of “cost of acquisition” is exhaustive and the language employed is peremptory. It is not open to the Court to introduce any other facts of meaning to the expression “cost of acquisition”.

10. From the record, it also appears that the actual amount was paid from time to time after the date of issuance of allotment letter, which has to be considered for the purpose of indexation with reference to the date of payments. The Tribunal has rightly asked to compute the long term capital gain as per the payment schedule. There is nothing wrong in the Tribunal’s order, which is based on the well established legal position as well as the CBDT Circular, which have already been mentioned in the impugned order passed by the Tribunal.

11. During the course of argument, we were told that the long term capital gain has already been deposited as per the computation made by the A.O. in the manner claimed by the assessee. When it is so then nothing survives in the appeal.

12. Hence, we decline to interfere with the impugned order passed by the Tribunal, which is hereby sustained along with the reasons mentioned therein.

13. The answer to the substantial questions of law is in favour of the revenue and against the assessee.

Respectfully following the wisdom of higher judicial forum, we hold that the indexation benefit against the cost of acquisition shall be available to the assessee on the basis of index of the year in which the payments were actually made by the assessee. The payment made up-to the date of agreement i.e. 18/10/2007 shall be indexed by applying the index for Financial Year 2007-08. Accordingly, subsequent payments made in different financial years shall be indexed by applying the respective indexes of those years. Ground Number-1 stand dismissed.

Therefore, taking the same view, following the higher judicial wisdom of Hon’ble Allahabad High Court rendered in Nirmal Kumar Seth v. CIT [2012] 17 taxmann.com 127/204 Taxman 109 (Mag.), we direct Ld. AO to work out the indexed cost after applying indexes of the respective years in which the payments has actually been made by the assessee. Accordingly, Ground No.5 stands allowed.”

6.1 Further, in the case of Vivekanand vs. ACIT 124 taxman.com 67 Bangalore ITAT, the ITAT held that for computing indexed cost of property date to be reckoned is a date of allotment of property and not date on which possession certificate was issued. In this case, the assessee declared certain capital gains from sale of property in assessment year 2013-14. During the course of assessment, the assessee submitted that date of allotment of property was on 20-05-1986, for which consideration was paid on 29-05­1986. The Assessing Officer noted that the possession certificate was issued on 23-06-1998 and ultimately the property was sold on 09-05-2012. Based on the date of possession certificate, the Assessing Officer computed cost of inflation index to compute capital gains and accordingly made additions.

The ITAT held that for computing cost of inflation of asset, the date to be reckoned was a date of allotment of property to assessee and not date on which possession certificate was issued to the assessee. In view of the aforesaid decision, we are of the considered view that the benefit of indexation in respect of advance payment of Rs. 50 lakhs would be available to the assessee from financial year 2008-09.

7. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 19-04-2023