Surplus consideration received on ‘Surrender of Booking Rights’ tantamount to ‘Capital Gains’

Mukesh Sohanraj Vardhan Vs. ITO (Mumbai ITAT)

The ITAT Mumbai has put to rest an important controversy in the case of Mukesh Sohanraj Vardhan vs Income Tax Officer Mumbai decided on 28 August 2020 by holding that the extra consideration received on cancellation of Booking of Flats constitutes a ‘Capital Receipt’ and cannot be taxed as ‘Income from other sources’. The Tribunal held that even when part payment has been made, a right was acquired which is a ‘capital asset’, even though the transaction was not completed. On the surrender of this valuable right, the surplus was to be treated as ‘Capital Gains’.

The brief facts of the case are that the assessee/appellant filed his return of income for the assessment year 2012-13. During the year under consideration it was transpired that the appellant had paid a sum of  Rs.30,00,000/- in 2005 as earnest money/consideration to a Builder under an allotment letter stating therein the terms and conditions for sale of the said flat to the appellant. Thereafter, the appellant surrendered his aforesaid flat for a total consideration of Rs.48,75,000/-during the assessment year under consideration. He invested a higher sum to another Builder for purchase of a costlier & better apartment and claimed exemption u/s 54 of the Act, after availing indexation benefit towards the cost of the demised flat.

The Assessing Officer did not treat this income as ‘Capital Gains’ but treating the same as ”Income from Other Sources” and thus denied the exemption u/s 54 of the Income Tax Act.  The Assessing Officer held that the gain which the appellant received from the builder on cancellation of deal has resulted in benefit of compensation of Rs.18,75,000/- and the same is nothing but ‘income from other sources’ and completed the assessment accordingly.

The Ld. CIT(A) also confirmed the order of the Assessing Officer holding that the incomplete, unregistered “letter of allotment” cannot be treated as an “allotment letter” for deciding ownership of capital assets. Further, it was also held that the documentary evidence does not establish ownership of capital assets and hence the question of assessment of capital gains does not arise. Accordingly he inferred that the AO had rightly brought to tax the incremental receipt as ‘income from other sources’.

In the ITAT, on behalf of the appellant it was pleaded that full payment was made through cheques and during the year under consideration, the appellant had cancelled the booking of the aforesaid flat vide cancellation letter dated 12.09.2011. Against the cancellation of booking of the flat, the appellant received consideration of Rs.48.75 lakhs from the builder and since the period of holding of the appellant’s rights in the said flat exceeded 36 months, the assessee treated the gain on surrender of the rights in the said flat as long term capital gains. Further, it is argued d that the appellant had purchased a residential flat for a higher value and had accordingly claimed exemption u/s 54/54F of the Act and therefore, no capital gain was chargeable to tax.

It was also argued that provisions of section 2(14) of the Act, “capital asset” means “a property of any kind” held by the assessee and the term “property” includes any rights in a property and therefore, the right to obtain conveyance of the immovable property is clearly a capital asset as contemplated u/s 2(14) of the Act. Further, it was also argued that the exemption from capital gains u/s 54/54F of the Act can be claimed if long term capital gains accrued on transfer of a specified long term capital asset is invested in a residential flat within the specified period.  It was vehemently argued that denial of the exemption is unwarranted and legally unsustainable in view of the decisions in CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom), Geeta Rasik Shah v. ACIT – ITA No. 4202/Mum/2015, Order dated 01.09.2016, (Mum Trib.), Subhas Chandra Parmanandka v. ITO – ITA No. 1614/Kol/2010, Order dated 16.01.2014, Kolkata – Trib) & ACIT v. Ashwin S. Bhalekar (ITA No. 6822/Mum/2016).

In the case of ACIT v. Ashwin S. Bhalekar (ITA No. 6822/Mum/2016), the CIT (A), while allowing the appeal of the assessee held  that by paying the advance for the flats and obtaining allotment letter on 26.6.2008 they have acquired the right to the property and right to property is capital asset and when it is transferred and if any surrender amount is received it has to be assessed under capital gain as the same tantamount to  extinguishment of rights u/s 2(47)(ii) of the Act. The CIT (A) relied on CBDT Circular No. 471 dated 15.10.1986 where it is held that property acquired by allotment letter was considered as capital asset for the purpose of exemption from capital gains. The CIT(A) relied on Delhi High Court decision in the case of CIT vs Ram Gopal [2015] 55 Taxmann.com 536 (Delhi) which involved a similar controversy. The ld CIT(A) held that  surrendering of allotment of flat has to be considered as a right in property which is a capital asset and any capital gain arising from that capital asset would be ‘capital gains’ and if appellant purchases new flat then appellant is eligible for exemption u/s 54.

The ITAT confirmed the stand of the Ld CIT(A) and rejected the appeal of the Revenue & held thus:

“ The facts clearly show that the extinguishment of assessee’s right in Flat No. 1703, 1704 and 1705 proposed building known as “shubh Residency” allotted vide  allotment letter dated 20.06.2008 is actually extinguishment of any right in relation to capital asset in view of the provisions of section 47 of the Act and falls in the definition of transfer and hence, result in capital gain chargeable under section 45 of the Act. It is a fact that assessee held this right for more than 3 years for a reason that this flats were subject to allotment vide allotment letter dated 20.06.2008 and assessee received compensation of ₹ 1.10 crores and in lieu of that acquired flat No. 301 and 305 in the same project vide agreement dated 28.02.2012, which period is more than three years. The assessee has made payment of ₹ 1.10 crores on various dates mentioned above and this is eligible for the claim of deduction under section 54 of the Act also. We find that the CIT(A) has rightly deleted addition made by the AO in regard to disallowance of the claim of the assessee disallowing deduction of long term capital gain under section 54 of the Act on the premise that the compensation received is income from other sources. We noted that the CIT(A) has rightly allowed the claim of the assessee and we confirm the same.”

The ITAT in the present case, following the dictum laid in the earlier decision of ACIT v. Ashwin S. Bhalekar (Supra) allowed the appeal of the assessee/appellant. Thus, it has been settled that surplus or excess consideration received on ‘Surrender of Booking Rights’ tantamount to ‘Capital Gains’.