Buying a property (home/plot/flat) is one of the most important decisions that you will ever make. It involves a lot of money and is a serious money and emotional decision.
When you sell a capital asset, the difference between the purchase price of the asset and the amount you sell it for is a capital gain or a capital loss. Capital gains and losses are classified as long-term or short-term.
When an under-construction property is acquired, it is always a subject matter of controversy between the taxpayer and the tax department while determining the holding period of the property to compute capital gain.
The duration or the time period for which you held purchased property with you is technically termed in financial and taxing language as holding period. It is one of the key defining factors to decide as the gain or profit which you made from the sale of the property from the taxing point of view is short term or long term. Earlier the maximum period for long-term holding of the property was 3 years but after the recent announcement made by the Union Finance Minister Arun Jaitley on February 1, 2017 the period of long-term holding of the property was reduced to 2 years.
Capital gains on transfer of property has always been a reason for dispute between the taxpayers and IT authorities. While the Income Tax Act mentions that the period of holding determines the amount of tax payable, it does not clearly specify from when the period of holding actually starts.
Because of these certain ambiguities related to the calculation of holding period for an under-construction property, there have been several court judgements in different cases. The biggest question that pops up while calculating holding period — whether it has to be calculated from the date on which the property was booked or its possession date.
Point of Argument
The case in which holding period is considered as date of possession, there arises no point to argue. However, the argument arises when the holding period is considered as date of allotment. This involves considering judgements as pointed below, for better clarity and there are conflicting views related to the same:-
PCIT Vs. Vembu Vaidyanathan (Bombay High Court) – The assessee argued that the residential unit in question was acquired on the date on which the allotment letter was issued by the builder which was on 31st December, 2004. The Assessing Officer however contended that the transfer of the asset in favour of the assessee would be complete only on the date of agreement which was executed on 17th May, 2008.
Entire issue was clarified by the CBDT in its two circulars dated 15th October, 1986 and 16th December, 1993. In terms of such clarifications, the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property.
In that view of the matter, CIT appeals of the Tribunal correctly held that the assessee had acquired the property in question on 31st December, 2004 on which the allotment letter was issued.
Then, the Bombay High Court, held in January 2019 that the date of allotment would be treated as the date of acquisition. The ITAT reiterated the same principles.
ACIT Vs Keyur Hemant Shah (ITAT Mumbai) – In the present case, Mumbai-based Keyur Hemant Shah had sold on April 4, 2012 a duplex apartment with 4 car parkings in a Cooperative Society in Mumbai for Rs.12 crore, the assessee’s share being 50% in the same. After adjusting the indexed cost of acquisition, LTCG worked out to be Rs 288.73 lakh, and after claiming deduction u/s 54F for Rs109.40 lakh against the same, the assessee (Shah) offered the balance LTCG of Rs 179.33 lakh to tax. The income tax officer, however, said that the very flat was purchased by Shah via a Registered Agreement for Sale on March 25, 2010 and his holding period was less than 36 months (before FY 2017-18 / AY 2018-19) from this date. That led the AO to treat the resultant gains as short term (STCG).
Shah, however, defended the same by submitting that the said flat was purchased via the allotment letter dated February 26, 2008 and substantial payment of Rs 185.50 lakh was already made by July 24, 2008. Thus, the holding period, as counted from the date of allotment letter, was more than 36 months and, therefore, the resultant gains should be considered as long-term capital gains.
Keeping all these things in view, the Mumbai bench of ITAT observed that the date of allotment will be treated as the date of acquisition.
Vinod Kumar Jain Vs CIT 344 ITR 501 (P & H) – In this judgement, the Punjab and Haryana High Court held that for flats allotted by the Delhi Development Authority (DDA), the holding period should be counted from the date of allotment letter. The Central Board of Direct Taxes (CBDT) also issued a circular (No. 471, dated 15th October 1986), where it has clarified that for flats under self-financing schemes of the DDA, the holding period shall begin from date of the allotment letter.
Jaimal K Shah, Mumbai Vs Department Of Income Tax – On 19th April, 2012, the Bombay Tribunal has held that an under-construction flat booked with a builder, under a letter of allotment or an agreement to sale, only represents the right to acquire a flat and if such right is sold after a holding period of more than 24 months, it becomes a long-term capital asset.
Praveen Gupta vs ACIT – In this case the assessee had bought the flat from DLF in installment basis which was under construction at the time of allotment and payments were made in installment.
The Learned ITAT Delhi Bench in a Landmark judgement has held that the asset or right in asset is created when the builder issued an allotment letter to the assessee specifying the actual unit no of the property and any payments made before allotment is to be provided indexation from the date of allotment and any payment made after is to be provided benefit of indexation from the date the payment is made.
Madhu Kaul Vs. CIT – In this case, Punjab & Haryana High Court held that identification of the flat or physical delivery of possession is irrelevant as right to hold properly stands crystalised upon allotment. The allotment of a particular flat and delivery of its possession would relate back to the allotment. The payment of balance installments, identification of a particular flat and delivery of possession are consequential acts, that relate back to and arise from the rights conferred by the allotment letter.
M/S Imperia Structures Limited vs Anil Patni – In this case, SC held that builder-buyer agreement must be considered as flat allotment date, not when project got, Real Estate Regulatory Authority (‘RERA’) registered.
Yogesh Mavjibhai Gala vs. PCIT – In the above case, the assessee has sold 2 flats vide separate agreements dated 17.07.2013 and 21.05.2013. A letter of allotment in respect of the aforesaid property was issued on 20.02.2010 by the builder. The assessee computed long term capital gain taking date of allotment as base. Against the sale of the aforesaid flats, the assessee purchased a new residential property and claimed deduction u/s. 54. However, the PCIT was not satisfied with the claim of deduction u/s. 54 by the assessee and revised the assessment order u/s. 263 of the Act, due to the following observations:
The Honourable ITAT stated that the assessee had filed a ‘Completion certificate’, dated 12/01/2011 issued by the Architects, wherein they had stated that the 7th Floor Slab (the flats were situated on the 7th floor) had been completed. It was held that “we may herein observe that the view taken by the A.O that the date of allotment of the flats i.e 20/02/2010 was to be taken as the basis for calculating the period of the holding by the assessee, on the date of framing of the assessment was supported by the order of the jurisdictional Tribunal i.e ITAT, Mumbai Bench „F‟, Mumbai in ACIT, 18(3), Mumbai Vs. Smt. Vandana Rana Roy [ITA No. 6173/Mum/2011, dated 07/11/2012]. In the said case, the Tribunal had observed that the “date of allotment” was to be reckoned as the date for computing the holding period for the purpose of capital gains. Also, in the case of Richa Bagrodia Vs. Dy. CIT  175 ITD 552 (Mum), the jurisdictional Tribunal has held that in case of sale of flat it is the date of allotment of the flat and not the date of giving of possession of flat which has to be considered for computing the holding period of 36 months.” Accordingly, the tribunal set aside the order passed by the PCIT u/s. 263.
Judgements in relation to this matter, have conclusion considering either the date of allotment or the date of possession as holding date. But for an investor, it is always beneficial when date of allotment is considered as holding date because of benefits like cost of indexation, exemption u/s 54, etc. Argument will go on forever with respect to sale of under-construction property but for availing tax saving benefits, an investor buying property should always consider these while making a decision:-
i. In case an individual is planning to sell the under-construction property he/she has, then must ensure to sell that off before to take possession, and after taking into consideration that period is two years and above.
ii. In case an individual is looking forward to save tax on long-term capital gains, then make sure to invest in some other residential property.