428.  Capital gains from long-term capital asset – Investment in a flat under the self-financing scheme of the Delhi Development Authority – Whether to be treated as construction for the purposes of capital gains

1. Sections 54 and 54F provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house.  In the case of purchase of a house, the benefit is available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of a house, the benefit is available if the investment is made within three years from the date of the transfer.

2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme (SFS) of the D.D.A. amounts to purchase or is construction by the D.D.A. on behalf of the allottee.  Under the SFS of the D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction.  The allotment is final unless it is cancelled or the allottee withdraws from the scheme.  The allotment is cancelled only under exceptional circumstances.  The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality.  If there is a failure on the part of the D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.

3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the, D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale.  Under the scheme the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.

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Circular : No. 471 [F. No. 207/27/85-IT(A-II)], dated 15-10-1986.

JUDICIAL ANALYSIS

EXPLAINED IN – In CIT v. Mrs. Hilla J.B. Wadia [1993] 69 Taxman 114 (Bom.), it was observed that the Board had stated in Circular No. 471, dated 15-10-1986 that when an allotment letter is issued to an allottee under this scheme on payment of the first instalment of the cost of construction, the allotment is final unless it is cancelled.  The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking delivery of possession is only a formality.  The Board has directed that such an allotment of flat under this scheme should be treated as cost of construction for the purpose of capital gains.

EXPLAINED IN – The above two circulars (dated 15-10-1986 and 16-12-1993) were explained in Mrs. Seetha Subramanian v. ACIT [1996] 59 ITD 94 (Mad. – Trib.) with the following observations :

“. . . The assessee also relied upon certain circulars issued by the CBDT. One of the circulars was [Circular No. 471, dated 15th October, 1986. This was issued by the CBDT clarifying the posi­tion that where an assessee acquires a flat by an allotment under the self-financing scheme of the Delhi Development Authority, the allotment itself is sufficient compliance for getting the benefit under section 54F, even though the assessee has not paid all the instalments due under the said scheme. Later by another Circular No. 672, dated 16th December, 1993, the CBDT has issued clarifi­cation extending the same benefits for acquisition of houses or flats on allotment under similar schemes. Therefore it was con­tended that the intention of the Legislature was to invest in the acquisition of a residential house and completion of construction or occupation is not required. We find force in the argument of the learned counsel for the assessee. The said intention is very clear from the two circulars issued by the CBDT, where it was held that an assessee is entitled to the benefit of sections 54 and 54F, if an assessee gets an allotment under the self-financing scheme and pays the first instalment of the cost of the construction. From that it is clear that in order to get the benefit under section 54F the assessee need not complete the construction of the house and occupy the same. . . .” (p. 98)

APPLIED IN – In Smt. Shashi Varma v. CIT [1997] 224 ITR 106 (MP), the above circular was relied on, and the Court observed :

“This clinches the matter and it was not proper for the Tribunal to have ignored the circular because it has a persuasive value and it was in the nature of granting relief. Therefore, the Tribunal should have considered the circular sympathetically and granted the relief. . . “(p. 108)

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Category : Income Tax (25158)
Type : Circulars (7511) Notifications/Circulars (30303)

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