Capital Gain Tax – Holding Period of The Property

The holding period of the property to compute Capital Gain tax is always a subject matter of controversy between the taxpayer and the department. The holding period determines the nature of capital gain i.e. Long-term or Short-Term.

1.1 The above difference is clarified by the recent decision of the Honourable ITAT (Mumbai bench) in the case of Minaxi Mahesh Pawani v. ITO. It is held that the holding period shall be computed from the date of the allotment letter and not the date of registration of sale agreement.

1.2 In this article an attempt has been made to simplify the facts of the case and the relevant points discussed in Tribunal before giving the decision.

2. BRIEF FACT OF THE CASE: Ms. Minaxi booked a flat on an under-constructed property and the flat was allotted to her vide allotment letter dated 15.02.2010. The agreement was executed on 13.05.2014. As the completion of the project was getting delayed, she sold the under-constructed flat to Mr. Manoj on 28.08.2015 and re-invested the sale proceeds to purchase other residential property.

2.1 Ms. Minaxi claimed exemption of Capital Gain from the sale of the said flat under section 54. The assessing officer disallowed deduction, saying that the assessee sold the right to property conferred by allotment letter, not the property itself, and treated gain from property sale as SHORT TERM CAPITAL GAIN.

2.2 Aggrieved by this, she filed an appeal before the Tribunal. It was held by the Mumbai Branch of ITAT that where the assessee sold right to an under-construction flat conferred by an allotment letter by a builder, the holding period should be computed from the date of allotment letter and not date of registration of agreement of sale between assessee and builder.

3. COMPUTATION OF CAPITAL GAIN TAX BY ASSESSING OFFICER: Ms. Minaxi was allotted a flat vide allotment dated 15.02.2010. The total consideration was Rs. 65,00,100/- out of which a 20% advance of Rs.13,00,000/- was paid upfront by her, duly acknowledged by the builder in the letter of allotment. For the balance payment of Rs 52,00,100/-, the said allotment letter described a schedule based on various milestones to be achieved for completing the construction of the flat. The said letter also specified acceptance by the assessee of all the other charges, taxes, and deposits as extra payments.

3.1 The agreement was executed on 13.05.2014 and in the agreement, the payment of Rs. 69,84,088/- made by the assessee towards the part consideration is acknowledged. The total consideration including all the charges was stated to be Rs. 83,34,155/-. In addition to this consideration, the assessee had agreed and accepted to pay and discharge the amount towards stamp duty, registration charges of Rs.6,76,300/- and other incidental charges towards society formation, etc.

3.2 Subsequently, while the said flat was still under construction, Ms. Minaxi agreed to transfer rights held by her in the said flat for consideration of Rs. 1,55,00,000. The agreement was made and registered with the office of the sub-registrar on 29.08.2015. In this registered sale deed, it was stated that the flat is still under construction and the buyer shall be entitled to take possession of the said flat from the builder.

3.3 Immediately after that Ms. Minaxi invested in buying another flat for a purchase consideration of 1,10,00,000 along with stamp duty and registration charges of Rs.5,80,000/- and claimed exemption under section 54.

4. The assessing officer disallowed the exemption under section 54 and treated the capital gain on the sale of the right to own the property as Short Term Capital Gain. He computed the said STCG as follows:

5. RELEVANT POINTS DISCUSSED The relevant points discussed in the Tribunal (before giving the decision in favor of the assessee) have been brought out in the succeeding Paragraphs.

5.1 The moot point before the Tribunal was to treat the Capital Gain as long-term or short-term vis-à-vis the two dates under consideration that is the date of allotment which would result in long-term capital gain or the date of registration by which the Assessing Officer has computed the gain as short-term gain.

5.2 It is an undisputed fact that a letter of allotment was issued by the builder to the assessee on 15.02.2010 by which a right to own the flat had accrued on the assessee. The right which accrued to the assessee is the booking right, i.e., the right to purchase the flat and obtain the title. The only question that arises for consideration is whether the booking right to the flat accrues to the assessee on the date of allotment of the flat or on the date of execution and registration of the agreement to sell, i.e., the buyer’s agreement.

5.3 The various terms and conditions from the letter of allotment dated 15.02.2010 which have been subsequently recorded elaborately in the agreement to sell registered on 13.05.2014 have been taken note of.

5.4 It is not in dispute that the assessee has not defaulted on the terms and conditions of the letter of allotment. Assessee has made all the payments as required under the letter of allotment which has been duly acknowledged in the subsequent registration of the agreement to sell. Further, the assessee has furnished details of payments made in each of the years.

5.5 In light of the above-stated facts and narrations, one should understand the effect of the letter of allotment issued by the builder to the assessee for the identified flat in the building project.

5.6 The consequence of the issuance of a letter of allotment for the flat signifies a contractual arrangement between the assessee and the builder by which a right in persona is created in favor of the assessee. When such a right is created in favor of the assessee, the builder is restrained from selling the said identified flat to someone else because the assessee in whose favor the right in persona is created, has a legitimate right to enforce specific performance in terms of the said letter of allotment, if the builder, for some reason is not executing and complying with the terms stated therein. Thus, by the letter of allotment, some right to own a property is given by the builder to the assessee.

5.7 A right in personam had been created in favor of the assessee in whose favor the letter of allotment had been issued and who has paid 20% of the total agreed consideration as advance. Further, all other payments for various milestones identified in the said letter have been duly met by the assessee on subsequent dates, and duly acknowledged by the builder.

5.8 Under the present set of facts which have been discussed in detail in the above paragraphs and taking into consideration the judicial precedents referred to above, it is found that the holding period should be computed from the date issue of the allotment letter. Once this is considered, the holding period becomes more than 36 months and consequently the right to own the property transferred by the assessee would be a long-term capital asset in the hands of the assessee and the gain on transfer of the same would be taxable in the hands of the assessee as long-term capital gain.

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

6.0 This decision will help taxpayers involved in the sale of properties (including under construction properties), especially where an agreement is registered quite later than the date of issue of the allotment letter by the developer/ builder,”.

Disclaimer: The article is for educational purposes only.

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