PERSONAL TAX: For LTCG claim, date of allotment is considered

Over the last decade, it has become common practice to book an under-construction property and sell it within six months to one year of receiving possession. Where this entire journey from booking to selling the flat usually takes more than three years, the seller claims the flat as a long-term capital asset sold and the gains as long-term capital gains (LTCG).

However, this has been a common point of argument with the taxman, who in most cases puts up a stand that as the asset sold (the ready flat) has been held by the taxpayer for less than three years; the taxpayer is liable to pay short-term capital gains tax (STCG) on resulting gains. And further, the taxman denies the exemption claimed for investing the money in another residential property, on the ground that exemption is not allowed against short-term capital gains (STCG). The argument between the taxpayer and the taxman, thus, rests on the question whether the flat becomes an asset right from the date of booking or from the date on which the agreement is executed and registered.

A taxpayer had filed his return of income for assessment year 2009-10 and claimed LTCG arising out of sale of a residential unit. During the course of assessment, the tax officer examined this claim and came to the conclusion that the gain arising out of the sale of the house was a STCG. The taxpayer argued that the date of acquisition of the residential unit should be considered as the data on which the allotment letter was issued by the builder, that is, December 31, 2004. The tax officer was not convinced and was of the view that the transfer of asset in favour of the taxpayer would be complete only on the date of agreement, which was executed on May 17, 2008.

Before the appellate authorities, the taxpayer submitted that the CBDT vide its circular dated October 15, 1986, in relation to flats sold by Delhi Development Authority (DDA), had clarified that when an individual purchases a flat to be constructed by DDA for which allotment letter is issued; the date of such allotment would be relevant date for the purpose of capital gains tax as date of acquisition. Further, such allotment is final unless it is cancelled or the allottee withdraws from the scheme. Thus, the allottee gets title to the property on the issue of allotment letter and the payment of instalments was only a follow-up action and taking the delivery of possession is only a formality. Again, in December 1993, the CBDT in another circular clarified that in cases of allotment of flats or houses by co-operative societies or other institutions whose schemes of allotment and consideration are similar to those of DDA, similar view for the date of acquisition should be taken as per the 1986 circular.

Both levels of appellate authorities, including the tribunal, on the basis of the above circulars, decided the case in favor of the taxpayer. It was held that the holding period for the flat should be counted from the date of allotment letter and hence the flat was a long-term capital asset.

The taxman preferred an appeal before the Bombay High Court with the question that whether the tribunal was justified in treating the capital gains as long-term, as mere allotment letter does not lead to creation of proper and effective right over the capital asset, whereas execution of an agreement spells out all the exact terms and conditions of the acquisition. The Honorable High Court, however, was not convinced with the arguments put forth and dismissed the appeal filed by the taxman.

This decision serves a good precedent for the long-drawn argument on this question.