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Revenue cannot treat LTCG as STCG on the ground that assessee deliberately waited for lapse of 36 months

The objection of the revenue that the assessee intentionally waited for mechanical lapse of 36 months and deliberately put the date on agreement as 18-11-2009 to avoid the payment of tax is not tenable.

Micheal Jude Fernandes Vs. ACIT (ITAT Mumbai)

Revenue has not disputed the date of execution of agreement to sale dated 16-11-2006, executed by builder in favor of the assessee. The revenue has two fold objections. Number one that the assessee acquired the right in the property only on registration of the agreement on 6-10-2007 and not on 16-11-2006. Secondly, while executing the agreement to sale in favor of buyer, the assessee has intentionally waited till 18-11-2009, though the stamp duty was paid on 6-11-2009. The learned Commissioner (Appeals) also concluded that assessee has intentionally and deliberately waited for mechanical lapse of 36 months and deliberately put the date on agreement as 18-11-2009 to avoid the payment of tax.

The objection of the revenue that the assessee intentionally waited for mechanical lapse of 36 months and deliberately put the date on agreement as 18-11-2009 to avoid the payment of tax is not tenable. Every individual has a right to deal his asset as per his own choice and convenience and the revenue cannot dictate any particular way unless otherwise the transaction is prohibited by law. Thus, in our considered view the assessee acquired the capital asset on 16-11-2006 and transferred it on 18-11-2009. Hence, qualified for Long term Capital Gain (LTCG).

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by assessee under section 253 of the Income Tax Act (the Act) is directed against the order of learned Commissioner (Appeals)-27, Mumbai dated 28-2-2014 for assessment year 2010-11. The assessee has raised the following grounds of appeal :–

–1. Additions by treating the Long Term Capital Gain of Rs. 2,34,55,080.

(a) Commissioner – Appeals erred in confirming the additions of Rs. 2,34,55,080 by treating the Long Term Capital Gain as Short Term Capital Gain on sale of residential property.

(b) Appellant prays that above additions of Rs. 2,34,55,080 be deleted.

2. The appellant craves to add, amend or alter any of the above ground of appeal on or before the appeal hearing.

2. Brief facts of the case are that the assessee filed return of income for relevant assessment year on 28-3-2011 declaring total income of Rs. 6,06,61,470. The assessment was completed under section 143(3) of the Act on 15-3-2013. In the computation of income, the assessee computed the Long Term Capital Gain (LTCG) on sale of right in properties. However, the assessing officer (AO) treated the LTCG as Short Term Capital Gain (STCG) and not allowed the deduction under section 54EC and 54F of the Act. On appeal before the learned Commissioner (Appeals), the action of assessing officer was confirmed. Aggrieved, further the assessee has filed this appeal before us.

3. We have heard the learned Authorized Representative (Authorized Representative) of the assessee and learned Departmental Representative (Departmental Representative) for the Revenue and perused the material available on record. The learned Authorized Representative of the assessee argued that assessee booked two flats on 12-5-2014. The agreement to sale in respect of flats between builder and the assessee was executed on made on 16-11-2006. The agreement to sale was registered with Sub-Registrar on 6-10-2007. The Occupancy Certificate from the builder was received on 22-6-2009. No Objection Certificate (NOC) for transfer of the flat was given by the builder to the assessee on 18-10-2009. The assessee sold these flats to Mr. & Mrs. Soni by registered agreement to sale dated 18-11-2009. The agreement to sale was registered on 19-11-2009. Consequent upon the agreement to sale by assessee with Mr. & Mrs. Soni, the possession of flats were directly handed over by builder to the purchaser on 19-12-2009. The learned Authorized Representative of the assessee further argued that assessee paid the advance to the builder on 12-5-2004 i.e., the date of booking and the same should be considered as date of acquisition of the properties. The assessee offered LTCG of Rs. 96,83,131 after taking benefit of section 54EC & 54F of the Act. The assessee later on sought to revise the Capital Gain by including the benefit of indexation. Thus, the LTCG was revised to Rs. 79,41,752. However, the assessing officer hold that the assessee purchased only right in the said property and the agreement to sale does not create any right in favor of assessee, the assessee became legal owner of property for the first time when Occupancy Certificate was issued. According to assessing officer, the date of acquisition of the said flat was to be considered the date of Occupancy Certificate and accordingly the gain arising out of sale of flat was treated as STCG instead of LTCG, the learned Commissioner (Appeals) confirmed the action of assessing officer holding that assessee himself claimed on 6-11-2006 as date of acquisition from the builder. The NOC was availed on 18-9-2009. The learned Commissioner (Appeals) also concluded that assessee has intentionally and deliberately waited for mechanical lapse of 36 months and deliberately put the agreement dated 16-11-2009 to avoid the payment of tax to substantiate his argument, the learned Authorized Representative of the assessee further relied upon the section 2(47) of the Act which deals with the definition of transaction.

4. On the other hand the learned Departmental Representative for the revenue supported the orders of authorities below. It was argued that the assessee acquired right in the property is only on the date of registration of the agreement and not from the date of booking. The agreement was registered on 16-11-2006. In support of his submission the learned Departmental Representative for the revenue relied upon the decision of Honorable Delhi High Court in Gulshan Malik v. CIT (ITA No. 55/2014), date 14-3-2014). In the rejoinder arguments the learned and Authorized Representative of the assessee submitted that the decision relied revenue is more favorable to assessee.

5. We have considered the rival contention of the parties and the decision relied by revenue. The assessing officer while framing assessment order asked the assessee to submit the various details in respect of long-term capital gain and the deduction claimed under section 54EC and 54F. The assessee furnished the required details and contended that the assessee acquired two flats on 12-5-2005, on the date the assessee purchased flat and claimed that that benefit of indexation should be given on the basis of date of acquisition of capital assets and not on the basis of actual payments. The assessing officer issued notice to the builder under section 133(6) to submit the complete details of payment received against the sale of flats, copy of agreement, status of building at the time of sale and the completion certificate. In response to the notice under section 133(6) the builder, vide its reply dated 12-2-2013 submitted that at the time of sale, the construction of said building was in progress and approximately completed to the extent of 32%. The builder further submitted that the agreement for two flats was executed on 16-11-2006, which was registered in the office of Sub-Registrar on 6-10-2007 in the name of assessee and his wife. The builder further informed that occupation certificate of building was received on 22-10-2009. The said flats were sold by assessee and his wife to Mrs. and Mr. Suresh Chandra Soni vide agreement to Sale executed on 18-11-2009 and registered on 19-11-2009. The builder also submitted that the NOC was given for the sale of the flats. On the basis of information submitted by assessee and the builder the assessing officer concluded that the assessee was holding only right in the said property, the assessee sold the said rights before completion of the building by way of tripartite agreement with builder and purchases. The assessee could claim the cost of acquisition of the flat to be the date of first agreement and with the builder. Thus, the assessee has sold only right in the property in question. The assessee received the occupation certificate only on 22-10-2009 and became owner only on receipt of occupation certificate. Therefore, the date of acquisition of flat for assessee is 22-10-2009. The assessee executed agreement to sale in favor of purchase on 18-11-2009; however the stamping on the said agreement is of 6-11-2009. The Assessing officer concluded that the transaction of sale of said flight was factually done on 6-11-2009. The assessee has purposely put the date of acquisition of the said agreement as 18-11-2009, with a view to make the Long-term Capital Gain. With these observations the assessing officer treated the Capital Gain as ‘Short-Term Capital Gain’ and disallowed exemption under section 54EC and 54F.

6. We have seen that the revenue has not disputed the date of execution of agreement to sale dated 16-11-2006, executed by builder in favor of the assessee. The revenue has two fold objections. Number one that the assessee acquired the right in the property only on registration of the agreement on 6-10-2007 and not on 16-11-2006. Secondly, while executing the agreement to sale in favor of buyer, the assessee has intentionally waited till 18-11-2009, though the stamp duty was paid on 6-11-2009. The learned Commissioner (Appeals) also concluded that assessee has intentionally and deliberately waited for mechanical lapse of 36 months and deliberately put the date on agreement as 18-11-2009 to avoid the payment of tax. The Honorable Delhi Court in Gulshan Malik v. CIT (supra) which is relied by learned Departmental Representative for the revenue is more favorable to the assessee. In the said case the Honorable Court considered the question “ whether the date of allocation for allotment of the apartment or the date of buyer’s agreement ought to be considered the date of acquisition of the capital asset.” The Honorable High Court answered the said question with the following observation.

“4. The question that arises for consideration is whether any right accrued to the assessee by way of the application for allotment that can be considered a capital asset; this would determine whether the date of application for allotment of the apartment or the date of the buyer’s agreement ought to be considered the date of acquisition of the capital asset that was sold on 2-11-2007 as well as whether the capital gain is taxable as long-term or short-term capital gains.

5. The appellants submit that by way of application dated 31-7-2004 for allotment and payment of the booking amount, the appellant had acquired the “right to purchase the property”/booking rights, which were extinguished by execution of the agreement to sell dated 2-11-2007 in favour of Smt. Srilekha Nayak, thus making his booking rights a long-term capital asset, held for a period of 39 months and 2 days. Alternatively, the appellant submits placing reliance on CIT v. Ved Parkash and Sons (HUF), (1994) 207 ITR 148 that rights in the apartment were acquired on the date of receipt of allotment letter i.e., 6-8-2004, by which the apartment was provisionally allotted to him, which rights were sold on 2-11-2007 thus making his right in the apartment a long-term capital asset. The two grounds for this submission are first, that section 2(47) of the Act, which defines “transfer” in relation to a capital asset, is a wide and inclusive definition that encompasses even transfer of a right in property, thus including within its ambit, transfer of booking rights, second, that a combined reading of sections 2(14) and 2(47) of the Act show that transfer of a capital asset is not restricted to transfer of ownership in immovable property alone. The learned counsel for the Revenue, on the other hand, relies on the order of the learned ITAT member who held that booking rights accrued in the assessee only once the buyer’s agreement of 4-11-2004 was signed, thus making the profits from sale taxable as short-term capital gains.

6. It would be appropriate to extract sections 2(14), 2(42A), 2(47) here in relevant part. Section 2 of the Act reads :–

“2. In this Act, unless the context otherwise requires,–(14) “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include–xxx (42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :–

–xxx

(47) “transfer”, in relation to a capital asset, includes,–

(i) the sale, exchange or relinquishment of the asset ; or

(ii) the extinguishment of any rights therein ; or

(iii) the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond ;

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation 1.–xxx

Explanation 2.–For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India….”

7. It is clear that a “capital asset” under the Act is property of “any kind” that is “held” by the assessee. Necessarily, a capital asset must be transferable. Thus, to understand what kind of property can be considered a capital asset, it would be apposite to refer to the definition of transfer in section 2(47) of the Act. Section 2(47)(v) and(vi), and Explanation 2 make it adequately clear that possession, enjoyment of immovable property, as well as an interest in any asset are all transferable “capital assets”. The reference to acquisition “by way of any agreement or any arrangement or in any other manner whatsoever” establishes that it is not conveyance of property or the doctrine of part performance (enacted through section 53A of the Transfer of Property Act) which result in enforceable rights, for the purposes of the Income Tax. The scheme of the Act puts it beyond doubt that even rights or interests in a property are kinds of property that are transferable capital assets. Thus, there is no doubt that booking rights or rights to purchase the apartment or rights to obtain title to the apartment are also capital assets that can be transferable. However, even while this Court agrees with the submissions of the appellant, it is pertinent to note that this question does not arise in these facts. Neither the CIT-(A) nor the ITAT have held that a capital asset can only be title to/ownership of the apartment. The order of the CIT-A locates the source of the booking rights i.e., date of acquisition of capital asset as the buyer’s agreement dated 4-11-2004, which finding is subsequently confirmed by the ITAT by additionally relying on the receipts at the time of confirmation of allotment. Thus, in these facts, the question of whether the booking rights are a transferable capital asset is not contentious. The judgment in Ved Parkash (supra) is also consequently of no assistance in this matter since the reasoning therein turns on whether “capital asset” refers only to title to property as opposed to other rights/interests in the property.

8. This being the case, the only question that arises for consideration is whether the booking rights to the apartment accrued to the assessee on the date of application for allotment/confirmation of allotment or on the date of execution of the agreement to sell i.e., the buyer’s agreement. This Court is of the opinion that a right or interest in an immovable property can accrue only by way of an agreement embodying consensus ad idem. The nature of the right sought to be transferred here is the right to purchase the apartment and obtain title, termed “booking rights”. Only that agreement which intends to convey these rights according to both parties can be considered as the source of accrual of rights to the assessee. The confirmation letter dated 6-8-2004 (Annexure 3) specifically states first, that no right to provisional/final allotment accrues until the Buyer’s Agreement is signed and returned to the builders and second, that no right to claim title/ ownership results from the confirmation letter itself. Thus, it is clear that the Builders do not intend to convey any right of provisional/final allotment or any right to claim title/ ownership under the confirmation letter. There being no intention to convey rights in this document, it would be impermissible for this Court to find that the right to obtain title/ “booking rights” emanated from the confirmation letter. These rights may only be located in the Buyer’s agreement, and thus, the date of acquisition of the capital asset must be considered the date of signing of said agreement i.e., 4-11-2004.”

7. In view of the above factual discussion and the decision of Honorable Delhi Court the date of execution of agreement to sale of flat (16-11-2006) should be treated as date of acquisition of capital asset. The assessee sold the capital asset by agreement dated 18-11-2009, to Mr. & Mrs. Soni, again in the decision of Honorable Delhi Court came in rescue to the assessee as the or interest in immovable property can accrue by way of agreement embodying consensus ad idem. The objection of the revenue that the assessee intentionally waited for mechanical lapse of 36 months and deliberately put the date on agreement as 18-11-2009 to avoid the payment of tax is not tenable. Every individual has a right to deal his asset as per his own choice and convenience and the revenue cannot dictate any particular way unless otherwise the transaction is prohibited by law. Thus, in our considered view the assessee acquired the capital asset on 16-11-2006 and transferred it on 18-11-2009. Hence, qualified for Long term Capital Gain (LTCG). We may make it clear that the assessee would be entitled for the benefit of indexation from 16-11-2006 only for the purpose of calculation the LTCG. The assessing officer is further directed to allow the deduction/benefit of Rs. 50,00,000 under section 54EC and 54F after verification of facts. Thus the grounds of appeal raised by assessee are allowed.

8. In the result appeal filed by assessee is allowed.

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