Can allotment letter date be taken as date of acquisition?

1. An individual has acquired the rights to purchase a flat under letter of allotment (say dated 01.01.2015) from the builder for the consideration and for the terms and conditions stated in the said allotment letter and both the parties had signed the said letters as a mark of their acceptance of the terms and conditions stated therein. Subsequently after the said allotment letter, the agreements for sale (say dated 30.03.2016) were entered with the builder for the flat.

2. The flat acquired by the individual was sold (say on 01.03.2018).

3. The question arises before is whether the date of letter of allotment (23.01.2014) or date of agreement (say 30.03.2015) should be taken as the date of acquisition for computing capital gains? If the date of agreement is taken as date of acquisition then short term capital gains would arise and the individual cannot take any benefit of exemption under the series of section 54 and vice versa.

4.From reading of the definition of ‘Capital Asset’ under section 2(14) of the act, it can be said that, a ‘Capital Asset’ has wider connotation in the Income Tax Act and includes property of any kind whether tangible or intangible and further includes within its scope any interest or right in such a property including the right to acquire a property.

5. For the purpose of calculating capital gains, ownership of the property is not significant. What is of significance is that the property should be held by the transferor as is signified by the term ‘held’ used in s. 2(14) and 2(42A). Owning the property and holding the property are two distinct and different terms. Thus, while analysing whether the given capital asset is a short term capital asset or a long term capital asset, holding the property for the prescribed period of 24 months is sufficient enough to qualify as long term capital asset.

6. When a letter of allotment is issued by a builder to the allotee, the allottee gets valuable rights in the units to be constructed and these rights are final as the same cannot be revoked if the allottee complies with the conditions as mentioned in allotment letter, i.e. payment of instalments by specified date etc. The said letter prevents builder/transferor to sell the same units to another indented buyer. Thus, period of holding should commence from the date of issue of allotment letter, from when the allotee gets the rights in the property.

7. When letter of allotment is issued an interest gets created in the asset under such letter. Such an interest so created is considered to be capable of being transferred as per the said Explanation to S. 2(47) and as such, the interest is construed to be a ‘capital asset’ that can be transferred.

8. The CBDT has clarified The enforceability of letter of allotment vide Circulars No. 471 dt. 15.10.1986 and No. 672 dt. 16.10.1993. It is clarified that an allottee of the flat gets a title to the property on issuance of the allotment letter and the construction by the developer of premises thereafter shall be said to have been carried out at the instance of and on behalf of the allottee. The payment of instalments and receipt of possession of the premises as a consequence can be said to be the result of the follow-up arising out of the Letter of Allotment and are therefore the formalities ensuing from the said Letter of Allotment. The Board in the circulars confirm that payment under letter of allotment issued will be in due compliance of provisions of s. 54 of the Act. All the rights, title and interest derived under the Letter of Allotment or the agreement for allotment invariably gets transferred to the purchaser under the sale deed executed for transfer of the premises.

9. In this view of the matter, the period of holding should be counted from the date of Letter of Allotment. However one needs to take into consideration the recent decisions on the above subject and the facts of the case.

The above view is personal view of the author and should not be taken as a legal opinion.