Indexation benefit on installments paid allowed from flat date allotment

Nitin Parkash Vs DCIT (ITAT Mumbai)

Conclusion: Assessee was entitled to the benefit of indexation on the total cost of acquisition from the year of allotment of flat dehors the fact that assessee had paid installments over a period of time subsequent to the date of allotment.

Held: The issue before consideration was whether the benefit of indexation on the installments paid for the flat should be allowed from the date of allotment of flat i.e. the F.Y. 2004-05 or assessee was eligible for the benefit of indexation on payment of installments in the year of actual payment. Assessee had computed indexation on cost of acquisition, on entire cost including installments paid in subsequent assessment years from the year of allotment i.e. F.Y.2004-05 at Rs.3,01,22,700/-, whereas AO had given the benefit of indexation from the year of actual payment of installment. As per AO, indexed cost of acquisition was Rs.2,55,28,616/-. Thus, AO made addition of Rs.45,94,084/- [ Rs.3,01,22,700 – Rs.2,55,28,616] on account of long term capital gains. It was held that following the decision in the case of Divine Holdings Pvt. Ltd., ITA No.6423/Mum/2008, assessee was entitled to the benefit of indexation on the total cost of acquisition from the year of allotment of flat dehors the fact that assessee had paid installments over a period of time subsequent to the date of allotment.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The appeal of the assessee in ITA No.817/mum/2015 is directed against the order of Commissioner of Income Tax (Appeals)-2, Thane [in short ‘the CIT(A)] dated 01/01/2015 for the Assessment Year 2011-12. This appeal is in the second round before the Tribunal. Earlier this appeal of the assessee was decided by the Tribunal vide order dated 19/03/2018. Thereafter, the assessee filed Miscellaneous Application, vide MA No.271/Mum/2018 seeking rectification in the order of Tribunal, stating that ground No.2 of the appeal was decided without considering the decisions cited by the assessee and placed on record in the paper book. The Tribunal vide order dated 03/10/2018 partially recalled the order dated 19/03/2018 in ITA No.817/Mum/2015 by observing as under:

“9. Therefore, while keeping in view the principles laid down by the Hon’ble Supreme Court in the aforementioned two judgements, we are of the view that there is „mistake apparent from record’, therefore, we recall our decision on ground no. 2 of the appeal in order dated 19.03.18 and direct the Registry to fix the matter for re-hearing on ground no. 2 and as such this ground of appeal will be heard afresh on merits.

10. Before parting we make it clear that we have not expressed any opinion in one way or the other and not stated anything on merits of the matter. Therefore the regular Bench of the Tribunal will hear ground no. 2 and will decide on its own merits without being influenced by any observation made in the above order. Order accordingly.”

Hence, the appeal is before us to decide ground No.2 of the appeal only.

2. The ground No.2 of appeal reads as under:

“2. The CIT(A) erred in upholding the action of the Assessing Officer in allowing indexation on basis of the year of payments of installments which ought to have been on the basis of the letter of allotment dated 23.12.2004 given by the builder which also specifies the “cost of acquisition”.

The appellant contends that on the facts and in the circumstances of the case and in law, the C1T(A) ought not to have upheld, the action of the Assessing Officer in allowing indexation on the basis of the year of payments of installments made of the cost of acquisition inasmuch as the indexation has to be allowed on the “cost of acquisition” per the letter of allotment given by the builder.”

3. Shri Rajiv Khandelwal appearing on behalf of the assessee narrating the facts submitted, that the assessee had purchased four residential flats in a building i.e. Ashok Towers, Tower-B, Parel ,Mumbai in September, 2004. The assessee paid Rs.9,58,000/- at the time of booking of the flats in June, 2004 and 10% of the total consideration i.e. Rs.19,17,700/- in October, 2004. The balance amount was paid as per the schedule provided by the builder. The registered agreement for sale of flats was executed on 31/12/2008. During the period relevant to the assessment year under appeal, the assessee vide registered agreement dated 13/08/2010 sold the flats. For the purpose of computation of ‘long term capital gain’ the assessee claimed indexation on purchase price of Rs.2,03,36,000/- from the F.Y.2004-05 i.e. the year in which the assessee had booked the flat. The assessee computed indexed cost of acquisition at Rs.3,01,22,700/-. The Assessing Officer rejected assessee’s computation of indexed cost and applied indexation as and when the installments were paid by the assessee i.e. on the basis of year of payment of installments. The ld. Authorized Representative for the assessee submitted that the flat was under construction at the time of allotment and even at the time of sale, the flat was still under construction. As per Explanation to section 2(14) of the Income Tax Act, 1961 [in short ‘the Act’] ‘property’ includes any rights in management or control or any other rights whatsoever. The ld. Authorized Representative for the assessee further referred to Explanation to section 48 of the Act, wherein ‘indexed cost of acquisition’ is defined. The ld. Authorized Representative for the assessee asserted that the expression used is ‘ the first year in which the asset was held by the assessee ‘ or ‘for the year beginning on the first day of April, 1981’, whichever is later. The definition of ‘indexed cost of acquisition’ does not refer to payment made or the date of payment. Therefore, what is relevant is when was the asset first held. The ld. Authorized Representative for the assessee argued that the conjoint reading of the above definitions would make it clear that the assessee had acquired the rights in the flat which was under construction on the date of issuance of allotment letter. Thus, the assessee held the asset when the assessee paid initial amount and booked the flat and got letter of allotment. Therefore, the assessee is entitled to claim the benefit of indexation from the date the assessee held the property i.e. rights in the flat upon receipt of allotment letter. To support his contentions the ld. Authorized Representative for the assessee placed reliance on various decisions including the following decisions:

(i) Lata G. Rohra vs. DCIT, 21 SOT 541(Mum)

(ii) Divine Holdings Pvt. Ltd., ITA No.6423/Mum/2008

(iii) M/s. Pooja Exports , ITA No.2222/Mum/2010

(iv) Mr. Ramprakash Bubna, ITA No. 6578/Mum/2010

4. On the other hand, Shri Tharian Oommen representing the Department vehemently defended the impugned order. The ld. Departmental Representative submitted that the letter of allotment cannot be considered as title of ownership of flat. No legal right of ownership vest in the assessee /allottee till registered agreement is executed. In the present case, the registered agreement was executed on 31/12/2008, therefore, that is the date of actual transfer of flat. The Assessing Officer has rightly granted the benefit of indexation on installments in the year of payments. The ld. Departmental Representative prayed for dismissing this ground of appeal of assessee.

5. We have heard the submissions made by rival sides on the limited issue of indexation on the cost of acquisition raised in ground NO.2 of the appeal. The short issue before us is, whether the benefit of indexation on the installments paid for the flat should be allowed from the date of allotment of flat i.e. the F.Y. 2004-05 or the assessee is eligible for the benefit of indexation on payment of installments in the year of actual payment. The assessee has paid total cost of Rs.1,93,77,150/-. The schedule of payment of the initial cost and the installment is as under:-

There is no dispute regarding the date of payment of installments and the fact that the flats sold by the assessee during the period relevant to the assessment year under appeal is a Long Term Capital asset. The dispute is only with regard to computation of indexation. The assessee has computed indexation on cost of acquisition, on entire cost including installments paid in subsequent assessment years from the year of allotment i.e. F.Y.2004-05 at Rs.3,01,22,700/-, whereas the Assessing Officer has given the benefit of indexation from the year of actual payment of installment. As per the Assessing Officer indexed cost of acquisition is Rs.2,55,28,616/-. Thus, the Assessing Officer made addition of Rs.45,94,084/- [ Rs.3,01,22,700 – Rs.2,55,28,616] on account of long term capital gains.

6. We find that in similar set of facts, in the case of Lata G. Rohra vs. DCIT(Supra) the Co-ordinate Bench upheld the method of computing indexed cost of acquisition from the year of allotment of flat. In the said case, the assessee therein had paid installments over a period of time. The assessee claimed indexation on the entire consideration from the first year of allotment/payment of installment. The Assessing Officer accepted assessee’s method of computation. The CIT in exercise of his revisional powers rejected assessee’s manner of computation of indexation and computed indexation on the basis of actual year of payment. The Tribunal upholding assessee’s manner of computation of indexation held:

“10. We have considered the submissions made by both sides, material on record and orders of authorities below.  As per section 2(14) read with section 2(14)(iv) of the Act,  the rights in flat, acquired by the assessee on execution of purchase agreement on 7-8­1993, come within the purview of the term ‘capital asset’. From the perusal of language used in Explanation (iii) to section 48 of the Act, which provides for manner of computation of indexed cost of acquisition, it is apparently clear that it refers only to cost of acquisition and not actual payments made by the assessee, hence, there is no merit in the alternate contention of the revenue that the benefit of indexation  should be given on the basis of dates of actual payments made by the assessee. We are further of the opinion that the asset is held by the assessee from 7-8-1993 because when the assessee sold the house property, it did not sell the same without any legal rights of the assessee as an owner thereof, and unless the rights of ownership are transferred, there cannot be any sale and, therefore, there is no merit in the contention of the assessee regarding right being intangible asset and house property being a physical asset. We also find that the issue of indexation, in such circumstances, is directly covered in favour of the assessee by the decision of the Tribunal in the case of Charanbir Singh Jolly (supra), hence, respectfully following the same, we hold that the assessment order is correct in law. Thus, on merits, the issue is covered in favour of assessee, however, regarding jurisdiction for invoking the provisions of section 263, we would like to add that the assessee filed necessary details before the Assessing Officer and the Assessing Officer has passed assessment order after taking into consideration the same, hence, merely for the reason that no specific findings have been given in the assessment order, the same cannot be said have been passed without application of mind. In this view of the matter, we cancel the order under section 263 passed by the ld. CIT.”

[Emphasized by us]

7. The Co-ordinate Bench in the case of Divine Holdings Pvt. Ltd. (supra) in somewhat on similar facts after considering various decisions held that the assessee is entitled to indexation benefit from the flats on the basis of actual payment. For the completeness, the relevant findings of the Tribunal are reproduced hereunder:-

“12. We have considered the rival submissions made by both the parties, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the agreement for purchase of the flat is dated 30-01-1992 which Is evident from the copy of the agreement placed at paper book page 50 to 82. There is also no dispute to the fact that the price, of the flat as per the agreement was Rs.1,73,75,000/- over and above the premium of Rs.1,34,75,000/- which is payable to the Govt. of Maharashtra as per page, 8 of the said agreement (paper book page 57). According to the AO, the indexation should be on the basis of the actual payment, whereas, according to the assessee, the indexation is to be on the basis of the date of agreement. We find the Co­ordinate Bench of the Tribunal in the case of Smt. Lata G. Rohra (supra) has held that under the provisions of sec. 48 benefit of indexation should be given on the basis of date of cost of acquisition of asset and not on the basis of dates of actual payments made. Similarly, the Ahmedabad Bench of the Tribunal in the case of Smt Kashmiraben M. Parikh (supra) has held as under :

“……. The right in any immovable property which has already been constructed or is yet to be constructed is a capital asset which admittedly was acquired by her in November, 1978. The mere fact that possession of the flat was received in February,1981 would not lead to the conclusion that the assessee became entitled to such rights in the flat only in the month of February, 1981 when possession was taken. The possession was taken by her pursuant to the booking made in November, 1978 and in accordance with the agreement executed in the month of March,1979. It is thus obvious that the assessee acquired right in the said property more than three years before its transfer made on 1 November, 1983. The capital gains derived by the assessee has, therefore, rightly been treated by the CIT(A) as a long-term capital gain.”

12.1. Similarly, the Lucknow Bench of the Tribunal in the case of Sharad Thandani (supra) has held that legal possession in the form of agreement of allotment of flat and not actual physical possession is relevant for deciding whether capital gain is long-term or short-term.

12.2 Similarly, we find the Hon’ble Bombay High Court in the case of Vimal Lalchand Mutha (supra) has held as under:

“Held that the assessee had entered Into an agreement for the purchase of a flat in November 1977, and had executed a formal agreement in December,1978. She transferred her right, title and interest in the flat by an agreement to C in April, 1983. The Tribunal was, therefore, right in holding that the rights under the said two agreements of November. 1977/December,1978, had been held for more than 36 months and that the gains arising from the transfer of her rights under the agreement in April, 1983, constituted long term capital gains. No question of law arose from the order of the Tribunal.

12.3 We find the Hon’ble Punjab & Haryana High Court in the case of Ved Prakash & Sons (supra) has held as under : (Short notes)

“A perusal of section 2(42A) of the Income-tax Act, 1961, as it stood at the relevant time makes it clear that a capital asset would be deemed to be a short-term capital asset in case such a capital asset Is held by the assessee for not more than 24 months immediately preceding the date of its transfer. Emphasis is upon the words “held by an assesses” The word “owner” has designedly not been used by the Legislature, The word “hold”, according to the dictionary, means to possess, be the owner, holder or tenant of (property, stock, land………………. ) Thus, a person can be said to be holding the property as an owner, as a lessee, as a mortgagee or on account of part performance of an agreement, etc.

The assessee entered into an agreement for purchase of a flat in New Delhi on May 29, 1970. Pursuant to the agreement he was put In possession of the flat on the same date. According to the stipulation, the assessee was to pay the amount due in installments and the final amount was paid on February 10, 1973. The assessee sold the property on February 10, 1973, and claimed that the gains arising from the transfer were long-term capital gains. His claim was accepted by the Tribunal.

Held, that the Tribunal was right in law in holding that the capital gain was a long-term capital gain.”

In view of the decisions cited above, we are of the considered opinion that the assessee is entitled to indexation benefit on the NCPA flat from the date of agreement and not on the basis of actual payment. The order of the CIT(A) on this issue is accordingly set aside and the ground raised by the assessee in ground no.4 Is allowed.”

8. In the case of Pooja Exports the Co-ordinate Bench following the ratio laid down in the case of Lata G. Rohra vs. DCIT(supra) and various other decisions concluded that the benefit of indexation will be from the date of acquisition notwithstanding the fact that cost of immovable property acquired was paid over a period of time i.e. subsequent to the date of acquisition. Similar view has been expressed by Co-ordinate Bench in the case of ACIT vs. Mr. Ramprakash Bubna (supra).

9. No contrary decision was brought to our notice by the Revenue.

10. Thus, in the light of the aforesaid decisions we hold that the assessee is entitled to the benefit of indexation on the total cost of acquisition from the year of allotment of flat dehors the fact that the assessee has paid installments over a period of time subsequent to the date of allotment. Thus, assessee succeeds on ground No.2 of the appeal.

ITA NO.1540/MUM/2018-A.Y.2011-12:

11. This appeal by the assessee is directed against the order of CIT(A) -2, Pune dated 05/12/2017 for the Assessment Year 2011-12 confirming penalty levied u/s. 271(1)(c) of the Act.

12. The ld. Authorized Representative for the assessee submitted that for penalty levied u/s. 271(1)(c) of the Act, the notice issued u/s. 274 r.w.s. 271 of the Act dated 31/12/2013 is vague, hence defective. The notice has been issued in a Performa without striking off the irrelevant limb of section 271(1)(c) of the Act. The ld. Authorized Representative for the assessee submitted that the issue is squarely covered by the decision of Full Bench of Hon’ble Jurisdictional High Court in the case of Mohd. Farhan A. Shaikh vs. DCIT, 125 taxmann.com 253(Bom).

13. Per contra, the ld. Departmental Representative vehemently defended the impugned order and prayed for dismissing the appeal of assessee.

14. Both sides heard, orders of authorities below examined. The assessee has assailed penalty levied u/s. 271(1)(c) of the Act on the ground that the notice issued u/s. 274 r.w.s. 271(supra) is defective. We find that the said notice (at page-30 of the paper book) is ambiguous. The irrelevant clause of section 271(1)(c) of the Act has not been struck off while issuing the notice. The notice mentions both the limbs of section 271(1)(c) of the Act i.e. “concealed the particulars of income” and/or “furnished inaccurate particulars”. The Jurisdictional High Court in the case of Farhan A. Shaikh vs. DCIT(Supra) has held that non-striking of irrelevant matter in the notice render the notice defective and hence, the entire penalty proceedings are vitiated.

15. We further observe that in the assessment order the Assessing Officer has recorded satisfaction for levy of penalty u/s. 271(1)(c) of the Act on the charge of ‘furnishing inaccurate particulars of income’. However, while levying penalty vide order dated 31/03/2016, the Assessing Officer has time and again mentioned both the limbs/charge of section 271(1)(c) of the Act i.e. “inaccurate particulars of income” and “concealment of income”. This expression have been used in the penalty order repeatedly in varied forms. Thus, there was ambiguity in the mind of Assessing Officer about the exact charge under section 271(1)(c) of the Act for which penalty is to be levied. The Hon’ble Apex Court in the case of T. Ashok Pai vs. CIT 292 ITR 11 has held that concealment of income and furnishing inaccurate particulars carry different connotations. Hence, these expressions cannot be used inter changeably. The ambiguity in the penalty order makes it legally unsustainable.

16. In the light of facts and decisions referred above, impugned order is set-aside and the appeal of assessee is allowed.

Order pronounced in the open court on Monday the 22^nd day of August, 2022.