When agreement to purchase is executed between the assessee and the builder, assessee gets all the valuable rights in the units to be constructed, hence, period of holding commences from the date of agreement to purchase and date of possession was irrelevant for deciding whether the gain is long term or short term.
We find that the assessee purchased flat No. 1807, Ashok Towers from M/s. Peninsula Land Ltd. vide agreement of purchase dated 18.12.2006 and sold the same on 11.05.2011. The assessee was given possession of the flat on 19.01.11. Now the question is whether the asset was held for a period of 36 months or less. In our considered view the interest in the property is created the movement the agreement to purchase is entered into in favour of the assessee accompanying with part payment. The date of possession is not material for deciding the period of holding by the assessee for the purpose whether the gain is long term or short term. The learned CIT(A) has passed a reasoned and elaborate order for coming to the conclusion that the assets held by the assessee was long term asset and directed the AO to recompute the long term capital gain by allowing indexation on the cost of acquisition taking the date of purchase as 18.12.2006.
FULL TEXT OF THE ITAT JUDGMENT
This appeal has been filed by the Revenue against the order of the CIT(A)-33, Mumbai dated 17.03.2016 for A.Y. 2012-13.
2. The various grounds raised by the Revenue are as under: –
“1. On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the action of the A.O. in making an addition of Rs. 2,,88,65,116/- treating the capital gain arising as a result of sale of flat No. 1807, Ashok Towers, Mumbai, as short term capital gain.
2. On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the action of the A.O. where it is held by the A.O. that short term capital gain is arising as a result of the sale of flat since the assessee has received physical possession of the property is not held for more than 36 months.
3. On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the action of the A.O. where it is held by the A.O. that the assessee is not eligible to get benefit of exemption u/s. 54 of the Income-tax Act, 1961.
4. On the facts and circumstances of the case and law, the Ld. CIT(A) has erred in not appreciating the action of the A.O. where it is held by the A.O. that the assessee is not eligible to get benefit of exemption u/s. 54 of the Income-tax Act, 1961.
5. On the facts and circumstances of the case and law, the Ld. CIT(A) has erred placing reliance on the CBDT Circulars No. 471, did. 15.10.1986 & No. 672, dtd. 16.12.1993 which is misplaced as the two circulars of CBDT are in respect of construction for the purpose of capital gain and deduction u/s. 54 & 54F of Income-tax Act, 1961.
6. The appellant prays that the order of Ld.CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”
3. The brief facts of the case are that the assessee filed return of income on 28.07.2012 declaring total income of `24,20,660/- which was processed under Section 143(1) of the Income Tax Act (hereinafter “the Act”). Thereafter the case of the assessee was selected for scrutiny under CASS and notice under Section 143(2) was issued on 08.08.2013. During the year the assessee earned income by way of salary, long term capital gain and other sources. The assessee has sold one residential property on 11.05.2011 for a consideration of `3,63,75,000/- and did not offer any capital gain on the said sale. The AO noticed the same and accordingly a query was raised upon the assessee which was duly replied. Thereafter the AO observed from the submissions made by the assessee that the assessee purchased the property from M/s. Peninsula Land Ltd. He issued notice under Section 133(6) to M/s. Peninsula Land Ltd. for furnishing copies of the deed of transfer, possession letter, confirmation of payment claimed by the assessee as sales expenses. After going through the reply received in response to notice under Section 133(6) of the Act, the AO noticed that possession of the property, i.e. 1807 in Tower D of Ashok Towers was given to the assessee on 19.01,2011 and thus the AO concluded that the assessee has received physical possession of the property on 19.01.2011 and sold the same on 11.05.2011. According to the AO the property was held only for a period of four months by the assessee and therefore he came to the conclusion that the gain on the said sale of asset is short term capital gain. The AO, ignored the evidences such as agreement of purchase dated 18.12.2006 and the contention of the assessee that the property was held for more than 36 months as it was purchased vide agreement of purchase dated 18.12.2006 and it was sold on 11.05.2011. Ultimately the AO added a sum of `2,88,65,116/- as short term capital gain on the sale of said property by framing the assessment under Section 143(3) of the Act vide order dated 09.02.2015.
4. Aggrieved by the order of the AO assessee preferred appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee by holding as under: –
“11. I have carefully considered the impugned assessment order, submissions of the appellant, paper book and material available on record. My observations are as under:-
12. The main question to be decided is whether the property being Residential flat no. 1807. Ashok Towers, Mumbai sold by the assessee on 11.05.2011 was acquired by the appellant, for the purpose of transfer of capital assets under the Income tax Act, on taking physical possession of the flat on 19.01.2011, as adopted by the AO or as a result of booking of the flat vide agreement dated 18.12.2006 as contended by the appellant. In case the argument of the AO is accepted, it will be short term capital gain (STCG), alternatively it will be long term capital gain (LTCG).
13. In this regard, I find that while coming to the conclusion that the said transfer is STCG, the AO has noted that the physical possession of the flat was received on 19.01.2011 and the period of three years for the purpose of capital gain starts from the date of taking possession of the flat. According to the AO, vide agreement to purchase dated 18.12.2006, the assessee has just acquired “right to acquire flat” which cannot be equated with “ownership of flat”. The AO has also observed that in the definition of the term short term capital gain the word “held” denotes complete ownership which only comes with possession of the capital asset. In support of this, the AO relied upon the ratio of the judgment in the case of ACIT vs Jaimal K. Shah (2012) 24 com(Mum). With this the AO came to the conclusion that the agreement to purchase does not entitle the assessee to make any legal claim over the capital asset to be owned and later on to be transferred. It is the physical possession of the flat by which right over the capital asset is acquired and hence the holding period is less than 36 months i.e., short term capital gain.
14. However, I do not agree with the AO and his approach to the issue under consideration. When a letter of allotment is issued by a builder to the allottee or agreement to purchase is executed between the allottee and the builder, the allottee gets valuable rights in the units to be constructed and these nights are irrevocable and will continue till the allottee complies with the conditions mentioned in allotment letter including payment of installments by the specified date. The allotment letter/agreement to purchase prevents builder/transferor to sell the same unit to another intended buyer. Hence, period of holding commences from the date of issue of allotment letter/ agreement to purchase as the allottee gets clear rights in the property. In the instant case, as on the date of signing of agreement to purchase, the appellant has already paid Rs.14,63,318/- for the flat. Since, the agreement to purchase are duly signed by both the parties and registered, these are legally enforceable and represent contract creating rights in favour of both parties in terms of Sec. 2(47) of the IT. Act rws 53A of the Transfer of Property Act, 1882. This, agreement to purchase was duly confirmed by the appellant by making various payments subsequently.
15. As per the provisions of Section 2(47)(ii). “Transfer” in relation to capital assets includes the extinguishment of any right therein. The agreement to purchase extinguishes the rights of the builder in the said Units in favour of the appellant and by signing this agreement to purchase, the appellant agreed to by the same and for which payments are regularly made. The enforceability of letter of allotment has been clarified by the CBDT vide Circulars No. 471 dt. 15.10.1986 and No. 672 dt. 16.10.1993. It is held that:
“The allottee gets title to the property on the issue of the allotment letter and the payment of installment is only a follow up action and taking the delivery of possession is only a formality.’ ‘
The Board vide circular no. 672 after referring to Circular No. 471 extended the facility of exemption u/s 54 & 54F in respect of allotment of flat/house. On careful reading of the circulars, it is clear 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 installments 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 their above referred circulars confirmed that payment under letter of allotment issued will be in due compliance to the 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.
16. In coming to the above conclusion, I rely upon the following judgments, which are on the issue under consideration.
1. ITO vs. Smt. Kashmiraben M. Parikh, 44 TTJ 68(Ahd.)
The Hon’ble Tribunal held that since the right in the flat was acquired at the time of booking the right in the property was held for more than three years before its transfer and, therefore, capital gains was in the nature of long term capital gains.
2. ACIT vs. Sanjay Kamath (ITA no 448/IND/2013)(lnd.)
The Hon’ble Tribunal has held that “as per the provisions of Section 2(47)(ii) “transfer” in relation to capital assets include the extinguishment of any right therein. The letter of allotment extinguishes the rights of a builder in the said flat in favour of the assessee in respect of this flat and by signing the letter of allotment, the assessee agreed to buy the same and for which payment was also made according to the latter of allotment.
This allotment letter was duly confirmed by the assessee by making various payment as narrated above. Out of total payment of Rs. 33.15 lakhs, the assessee made payment of Rs. 6.23 lakhs in the month of allotment itself i.e. January, 2005. Subsequent payments were also made as per the terms agreed with the builder. Only after receipt of entire amount, the builder has executed agreement with the assessee on 27.2.2009. The assessee has sold the said flat on 05.03.2009. Since the assessee has acquired all the rights in the flat on 22.01.2005, the period of holding is to be computed with respect to the date of allotment i.e. 22.01.2005. Taking the date of sale as 05.03.2009, the holding period of flat with the assessee was more than 36 months, therefore, there is no infirmity in the order of CIT(A) for allowing assessee’s claim for exemption u/s 54/54F by treating the capital assets so sold as long term capital assets.
In short, the signing the letter of allotment and paying the booking the amount the assessee acquired the rights in the flat. All the rights in the flats are duly acquired when the assessee is given the letter of allotment, which clearly described the prescribed number of the flat so allotted. The holding period is therefore to be computed from date of allotment even if agreement was registered at a later date.
3. Addl. Director of Income tax v. Anindya Dutta (ITA no 613/KOL/2012)
The Hon’ble Tribunal, in this case held that the assessee acquires rights over the property bearing No.1103 & 1104 in Ashoka Tower, Parel, Mumbai on 12.05.2004 on issue of letter of allotment and such right was held by the assessee for a period of more than thirty-six months before it was transferred. It concurred with the decision of the CIT(A) who held the gains to be LTCG. The tribunal also allowed exemption u/s 54.
4. CIT v K. Ramakrishnan, 48 com 55 (Del.)
The Hon’ble High Court has held that it was date of allotment which was relevant for purpose of computing holding period and not the date of conveyance deed.
5. Vinod Kumar Jain v. CIT 344 ITR 501 (P & H)
The Hon’ble Punjab & Haryana High Court allowed the claim of the assessee by holding that the assessee acquired rights under the letter of allotment which were to be treated as capital asset u/s. 2(14) of the Act by relying on the circular no. 471 dt. 15.10.1996 issued by the CBDT. The Court held that the right of the assessee prior to 15.05.1986 under the letter of allotment were rights in the property that were transferred. The Court also relied on the decision in the case of CIT v. Ved Prakash & Sons. (HUF) 207 ITR 148 (P & H) and CIT v. Smt. Beena K. Jain 217 ITR 363 (Bom.). The Court upheld the contention of the assessee that for the purpose of s. 2(14) and s. 2(42A) what was relevant was the holding of the property as signified by the term ‘held’ used in both the provisions and not the ownership of the property which was distinct and different. For the purpose of an asset to be treated as a long term capital asset u/s. 2(29A), it was sufficient that the asset was held for the prescribed period. The Court held that on issue letter of allotment, a property was held by the assessee and therefore the period of holding commenced with the date of issue of such letter of allotment. Importantly, the court held in para 13 that an allottee acquired on allotment a title to the property on issue of an allotment letter and the payment of installment was only a consequential action upon which the delivery of possession followed. The Court also approved the dictionary meaning of the term ‘holds’ to mean the one who had a right to claim the title to a thing. In para 16, the Court has held as under:
“it is concluded that the provisions of sections 2(14), 2(29A) and 2(42A) encompasses within its ambit those cases of capital asset which are held by an assessee. Once that is so, adverting to the facts of the present case, the assessee was allotted flat on 27-21982 on payment of installments by issuance of an allotment letter and he had been making payment in terms thereof but the specific number of the flat was allocated to the assessee and possession delivered on 15-5-1986. The right of the assessee prior to 15-5-1986 was a right in the property. In such a situation, it cannot be held that prior to the said date, the assessee was not holding the flat.”
17. Apart from that I find the reliance of the AO in the case of ACIT 19(2), Mumbai vs. Jaimal K Shah 24 com 91 (Mum.) is misplaced, as facts are distinguishable. In that case the owner of the land had entered into an agreement on 4-10-2001 with the builder for development-cum-sale agreement for the purpose of development of his property. The builder had to construct flats on the land and in consideration of transfer of 45% of land rights had to give 55% share of the built-up area apart from Rs. 61 lakh. The land owner had considered the transfer of the land rights to the extent of 45% in A.Y. 2002-03 and had accordingly, given capital gain with reference thereto. The builder had constructed the premises from 2002 to 2005 and had given possession of flats to the land owner on 24-2-2005. The land owner thereafter sold the flats in April /May, 2006. In these circumstances the issue arose whether the period of holding of flat by the land owner was long-term and short-term.
The assessee in that case claimed that capital gain was in the nature of long term capital gain. The Tribunal, however, held that capital gain was short term capital gain and period of holding of the flats could be counted only from the date on which the possession of the flats had been given by developer to the land owner. With regard to the above decision of the Tribunal, in the facts of the case the issue was not for purchase of a flat from a builder with the intention to acquire the same. Moreover, that decision was in respect of development cum sale agreement which cannot be applied in the instant case of purchase of a flat from a builder with the intention to acquire the same.
Hence, it is concluded that the said decision relied by the AO does not apply to the facts of the present case and hence distinguishable.
18. In the light of the discussion made in the preceding paragraphs, it is concluded that for the purpose of transfer of the residential flat no. 1807, Ashok Towers, Mumbai agreement to purchase dated 18.12.2006 will be the date of acquisition of the property leading to LTCG and not the date of possession i.e., 19.01.2011 which has led to computation of short term capital gain. Hence, the AO is directed to treat the asset as long term capital asset and the gain on the sale of the flat as long term capital gain.
19. In this connection, it is further observed that in order to constitute rights in the capital asset, the assessee may not necessary physically possess that asset for the purpose of computing capital gain. In the instant case, the appellant had acquired the right of ownership over the flat in Ashok Tower as a result of making payment and by executing agreement to purchase dated 18.12.2006 and that right of the appellant is itself a capital asset. The word “held” used in Sec. 2(14) as well as explanation to Sec. 48 clearly depict that the appellant has got clear right in the said capital asset and therefore, the benefit of indexation has to be granted to the appellant on the basis of payments made by him for acquiring the said asset. Thus, the appellant has rightly claimed the indexation benefit from 18.12.2006, once payment was started for the flat at Ashok Tower in consequence to the agreement to purchase executed between the appellant and the builder.
20. In arriving at the above conclusion, I rely on the following decisions:
(i) Praveen Gupta vs ACIT(137TTJ 307) (Del.)
(ii) Nita A. Patel vs ITO (132TTJ 468) (2009) (Mum.)
(iii) Lata G. Rohra vs DCIT (2008) (21 SOT 541) (Mum.) ;
(iv) ACIT vs Credit Rating Information Services of India Ltd. (ITA no. 9396/Mum/2004
(v) Praveen Gupta vs ACIT 2011 -(052)- DTR-0334-TDEL
21. In view of the above, the AO is directed to re-compute the long term capital gain taking the indexation for cost of acquisition as on 18.12.2006 . Hence, grounds of appeal no. 2(a)-(j) and 4 are allowed.”
5. We have heard the rival submissions and perused the relevant material on record. We find that the assessee purchased flat No. 1807, Ashok Towers from M/s. Peninsula Land Ltd. vide agreement of purchase dated 18.12.2006 and sold the same on 11.05.2011. The assessee was given possession of the flat on 19.01.11. Now the question is whether the asset was held for a period of 36 months or less. In our considered view the interest in the property is created the movement the agreement to purchase is entered into in favour of the assessee accompanying with part payment. The date of possession is not material for deciding the period of holding by the assessee for the purpose whether the gain is long term or short term. The learned CIT(A) has passed a reasoned and elaborate order for coming to the conclusion that the assets held by the assessee was long term asset and directed the AO to recompute the long term capital gain by allowing indexation on the cost of acquisition taking the date of purchase as 18.12.2006. The case of the assessee is also covered by a plethora of decisions of various High Courts and decisions of Coordinate Benches which has been referred to by the first appellate authority. We therefore, respectfully following the same dismiss the appeal of the Revenue by upholding the order of learned CIT(A).
Order pronounced in the open court on 13th February, 2018.