In this article, I am going to discuss how to calculate period of holding & indexed cost of acquisition. In case property acquired with Allotment letter or with the agreement to sale.
Above mentioned subject looks simple when it read with Sec. 48 of Income Tax Act, when it comes to application we are not able to judge how to calculate period of holding & indexed cost of acquisition.
Merely confusion will arise due the different school of taught.
Majorly we will come across with two different school of taught with respect to above subject, let us understand the same with example:
Ex. Mr. Suman wanted to buy one flat in an apartment, for the same he has entered into contract with builder after payment of Nominal amount on 01.01.2018, on receipt of the payment, builder will send allotment letter with payment schedule (normally payment terms will be based on % of completion) to Mr. Suman, payment schedule contains Ten Half yearly payment, construction of the same is completed & Mr. suman got the position of the flat on 01.01.2023 with sale deed. After that Mr. suman has decided to transfer the said flat on 01.01.2024 to Mr. Ramu.
Now:
Q1. How to calculate period of holding?
From the date of allotment to transfer ie. 01.01.2018 to 01.01.2024
(or)
Date of sale deed to Transfer ie. 01.01.2023 to 01.01.2024
Q2. How to calculate indexed cost of acquisition?
Each payment Year with Respective Years Cost Inflation Index?
2018-19 = Instalment *indexation
2019-20= instalment *indexation
Etc.
(or)
Total cost with allotment letter year “Cost Inflation Index”?
2018-19= Total Cost * Indexation
Q1. How to calculate period of holding?
Ans: Primarily period of holding calculated to test whether underlying assets is a Long term capital assets or short term capital assets, so let us understand the meaning of Short term capital assets.
Short term capital asset means an asset HELD by person not more than 36 months up to the date of transfer.
Extract of 2 (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
From the above we can conclude that period of holding has to be calculated from the asset HELD date
So, law used word HELD, it means Legal title over particular property by way of registration is not required in order to calculate the period of holding, so only Law makers used word “HELD”
So, as per above example after issue of allotment letter Mr. Suman will satisfies the word “HELD” the property in that particular apartment & legal title over the property will come to him over the same on execution of sale deed by builder.
Allotment letter as it will give Right for Mr. suman to get control over property & same is not transferable to others by builder in its own, unless right relinquished by Mr. Suman
Learnings: Period of holding has to be taken from allotment letter. So period of holding will be from 01.01.2018 to 01.01.2024.
Q2. How to calculate indexed cost of acquisition
Ans: As per above example Mr. Suman is paying the amount in 10 Instalments in 6 month’s intervals, For the calculation of indexed cost of acquisition in case instalments payments two schools taught two different concepts of calculations, with their reasoning as per below:
School 1:
As Mr. suman is HELD the property on 01.01.2018, we have to apply indexed cost of acquisition of that year for total cost as Explanation (iii) to Section 48 as same is also used word HELD
Explanation. —For the purposes of section 48:
(iii) “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001, whichever is later;
Example Total cost of flat is 100 lacs, then indexed cost will be
100 lacs * Cost Inflation Index of Transfer year ie year of FY 2023-24
= ————————————————————————————————————
Cost Inflation Index of FY: 2017-18 ( Allotment year)
They suggest above method because Mr. Suman HELD Property at cost of 100lacs and payment for the same is done in 10 instalments, payment is not relevant for the calculation of cost of asset, as same is ascertained at the time of getting allotment letter.
How the payment has to be done is matter of contract between parties in the contract, so same has nothing to do with calculation of cost of acquisition as per Sec 48 of income tax Act.
“The benefit of indexation to Assessee cannot be taken away, merely based on how the payment is done for acquisition of the same ie. Instalments”
School 2:
As Mr. suman is HELD the property on 01.01.2018, Total cost flat is 100 lacs, same is paid by way of 10 half yearly instalments, then indexation has to be done for each year.
Instalment amount * Cost Inflation Index of Transfer year
For instalment 1. = ___________________________________
Cost Inflation Index of FY: 2017-18.
Instalment amount * Cost Inflation Index of Transfer year
For instalment 2. = ___________________________________
Cost Inflation Index of FY: 2018-19.
Instalment amount * Cost Inflation Index of Transfer year
For instalment 3. = ___________________________________
Cost Inflation Index of FY: 2019-20.
ETC….
They suggest this method of calculation because, indexation benefit can be given to the Assessee when there is outflow of money.
The word HELD used in Explanation (iii) to section 48 has to be applied on Pro rate amount of payments not for the deemed cost I.e. 100lacs.
Further Cost Inflation Index used only for the purpose of mitigate the Inflation, so same cannot be applied against the deemed cost of outflow of property, where as outflow will be paid in instalments.
Benefit of Indexation has to be applied on pro rata basis of instalment payment”
Conclusion:
After a thorough analysis of the two schools of thought, we lean towards School 2. The indexation benefit is intended to counteract the effects of inflation when there is a cash outflow. It should not be applied against the deemed total cost, as the outflow occurs in installments.
In conclusion, the indexed cost of acquisition should be determined by adding the pro-rata basis of amounts as per School 2’s approach. This conclusion is drawn from a detailed examination of Section 48, along with relevant sections 2 (29AA) and 2 (42A), as well as legal precedents.
Please note that the views presented here are the opinions of the author and should be considered as such. It is advisable to seek professional guidance when dealing with complex tax matters.
I extend special thanks to Ms. Jyothi L Poojari for her invaluable assistance in preparing this article.
Author Bio
Has this interpretation ever been objected to by IT department and then accepted by them or by the tribunal
Suppose a building was transfered in2023 -24 which had been purchased in2019-20 for Rs 50 lacs as per the deed of sale registered. Out of the consideration, Rs10 lacks paid in 2018 -19as advance, Rs25 lacs in2019 -20(at the time of registration) and the balance ofRs15 lacs in 2022-23.What will be the indexed cost of acquisition of the asset?