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Section 54- Even provisional letter of flat allotment is capital asset

The facts in that case were that the assessee had booked a flat, and was recipient of a provisional allotment letter. The Court held importantly that even booking rights or rights to purchase the apartment or to obtain its letter was also capital asset

Brief Facts

1. The assessee reported sales of two capital assets in the form of half shares in a residential property in Marine Drive, Mumbai and half share in a Kashmere Gate, property. The assessee claimed that a sum of Rs. 73,27,000/- was used to acquire another property within a period stipulated in Section 54. It also claimed, inter alia, that a sum of Rs 25,14,700/- was spent towards cost of improvement.

2. The Assessing Officer rejected the assessee’s contention and held that in the absence of an agreement to sell, the rights acquired by the provisional booking of the property did not meet with the requirements spelt out under Section 54, i.e. acquisition of new capital asset. The AO also held that the improved cost was not deductible.

Question / Issue

Whether the amounts spent by the assessee were towards acquisition of a capital asset, during the relevant year, and that the amount spent towards improvements was deductible particularly in view that only provisional letter of allotment has been issued to the assessee and there is no agreement to sell.

Revenue contention

The AO’s position with respect to acquisition of a new capital asset was correct. And ITAT’s reliance on CIT vs. R.L. Sood (2000) 245 ITR 727 and the ruling in Suraj Lamps and Industries Pvt. Ltd. vs. State of Haryana and Anr. 340 ITR 1, has arisen the issue of acquisition of capital assets as follow:

“7. . We have heard rival contentions and perused the material available on record. Reliance placed on the case law by ld. DR does not support the cause of the revenue. Hon’ble Delhi High Court judgment in the case of R.L. Sood (supra), wherein the investment in flat irrespective of the delivery of possession by builder has been held to be investment in purchase or construction of new flat is applicable to assessee’s case. In view of CBDT Circulars (supra), clarifying the proposition, also ground no. 1 taken by the revenue is dismissed.”

It is urged that the ITAT fell into error since the cost of improvement was incorrectly allowed.

High Court held that

This Court, in the decision reported as Sh. Gulshan Malik vs. Commissioner of Income Tax (ITA No.55/2014, decided on 14.03.2014) had the occasion to, inter alia, consider what amounted to acquisition of a capital asset – though in the context of a claim that capital gains had accrued due to the sale of the property. The facts in that case were that the assessee had booked a flat, and was recipient of a provisional allotment letter. The Court held importantly that even booking rights or rights to purchase the apartment or to obtain its letter was also capital asset and has categorised the same as under :

“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.”

In the light of the definitions of “capital asset” under Section 2(14) and “transfer” under Section 2(47) as discussed in Gulshan (supra), this Court has no doubt that the assessee’s contentions were merited.

So far as the second issue is concerned, i.e. whether improved cost was deducted, this Court has no manner of doubt that the Revenue does not dispute the acquisition of second property at Model Town. Given that the Revenue does not dispute that the second transaction of purchase took place, it has to necessarily follow that the cost of improvement was deductible. No substantial question of law arises on that score too.

Hence, revenue appeal is dismissed.

Analysed by CA Rahul Sureka

Categories: Income Tax

View Comments (1)

  • I had sale my house in Aug,2011. My long term capital worked out to Rs 1.07crores. I had booked new flat on 11th July,2011 which was under construction by paying 2lacs as earnest money. Allotment letter Dt 11th July,2011 was issued to me by builder.The total cost of new flat was Rs 1.05 Crores.Sale deed agreement was signed with builder in Dec,2014 i.e Registration of agreement. Balance amount i had paid in instalment till March,15 and got possession of flat in August,15.As per income tax AO i am not entitle for Capital gain benefit as i had paid only 2lacs as initial payment and got allotment letter. Rest i had paid in instalment.Secondly i have done registration of flat in Dec,2015.As per AO Allotment letter would represent only right to purchase a flat. As per AO i will be entitle to own property only after registration of property & stamp duty paid by me and not by mere allotment letter. I had appealled aginst AO order. As on today my case is with Commissioner of IT Appeals. He will favour me if similar case has gone in favour of assesse in IT Tribunal or in Appelent body or high court or supreme court. Requesting you to help me in quoting cases similar to my case gone in favour of Assesse like me.

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