By TIOL News Service

MUMBAI, OCT 27, 2018: THE ISSUE IS - Whether for computing capital gain on sale of property, period of holding is not to be taken from date of possession of the flat but it starts when the option is exercised for purchase of flat or from date of booking of flat. YES IS THE VERDICT.

Facts of the case

The assessee HUF had filed return for relevant AY, claiming long term capital gain (LTCG) of Rs. 19,71,149/- as exempt income, earned on sale of property. The assessment was completed for relevant year. Subsequently the AO reopened the case on the ground that the assessee had wrongly shown short term capital gain earned as LTCG. During the relevant year, assessee sold his flat and earned capital gain of Rs. 20,50,000/- which was invested in specified securities u/s 54EA. Assessee had booked a flat in a new building located in Mumbai for a total consideration of Rs. 1,49,20,000/-. The assessee's share in this property is 25% and the other 75% share in the property belongs to Grey Investments Pvt. Ltd For the purpose of booking and allotment of flat the assessee and other co-owner had written a letter on 01.04.2005 to the Developer P.R. Investments stating that they were interested in booking a flat. With this letter, earnest money cheque of Rs. 10,00,000 was also given to the developer. The balance amount was payable by assessee to developer by installment.

The date of acquisition of the property had been taken by the assessee as 01.06.05 and the date of sale as 22.04.2009 and sale consideration amount of Rs. 71,25,000 was assessee's share @ 25% from the total sale consideration of Rs.2,85,00,000, However, there was no registered document for purchase of the property. The AO noted that builder had not commenced the construction at the time when advances were made by the parties and even after getting the plan approved, no agreement was entered into between P.R. Investments and D.M. Ramesh (Director of Grey Investments Pvt. Ltd.) and the assessee. On going through the Development Agreement it was also seen that it had been registered on 26.04.2006 and the occupation certificate was obtained by the developer on 15,10.08 and possession was handed over in December 2008. The AO, therefore, held that the sale consideration received by the assessee was Short Term Capital Gain and taxable. On appeal, CIT(A) upheld the reopening and also addition so made by the AO.

Tribunal held that,

++ assessee had acquired the right in the property on 15.07.2005 when the assessee has exercised its option to purchase the flat on the 3rd floor of the proposed new building as per the terms and conditions mentioned in the Letter of Purchase Option dated 1st April 2005. Letter of Confirmation of purchase of flat dated 15.07.2005 together with Letter of Purchase Option dated 01.05.2005 is an Allotment Letter for sale of residential flat on 3rd Floor in the proposed new building at Juhu. The AO was wrong in holding that the date of acquisition has to be the date of possession of the flat by the owner i.e. December 2008;

++ the payments have been made as per the agreed terms of allotment of the flat. The flat was sold vide Sale Agreement dated 21.04.2009 to Mr. Dilip S. Coulagi and Mrs. Nayana D. Coulagi for a total consideration of Rs. 2,85,00,000 out of which assessee's share is only 25% i.e. Rs.72,25,000/-. No merit was found in the contention of AO that the right in property would have come into existence if the developer would have confirmed the booking and have issued necessary allotment letter to the intended buyers after the project have been properly described. The AO further pointed out that in case of initial advance if there is no commitment or allotment by the developer, same may not amount to acquisition of rights in the property. Property rights may generally be acquired by the intended buyer only when an allotment letter specifying the project etc. has been issued. In this case no allotment letter was issued by the developer to the buyer. The Letter of Confirmation of purchase of flat dated 15.07.2005 together with Letter of Purchase Option dated 01.05.2005 constitute the allotment letter for allotting flat on 3rd floor in the proposed new building giving complete terms and conditions of the allotment such as purchase price, flat details, details of payment of installment, details of payment of stamp duty, registration etc. Both the letters were signed and confirmed by the assessee as well as the Developer/Builder. Hence, the Assessing Officer's observation that there is no commitment or allotment of flat by the developer to the assessee is not correct. Both the letters dated 01.04.2005 and 15.07.2005 are signed and confirmed by the developer and they are for the purpose of allotment of particular flat for a consideration mentioned therein. Hence, the date of acquisition of the right in the property should be taken when the option was exercised for purchase of flat i.e. 15.07.2005;

++ furthermore, CBDT Circular No.471 dated 15/10/1996 has clarified the position in regard to flat booked by an assessee under self finance scheme of DDA. It has been clarified by the CBDT that the period of holding of the property will be counted from the date of issuance of allotment letter by the DDA pursuant to which the installments have been paid by the assessee and construction has been made by DDA. The Circular of CBDT is equally applicable in the case of booking of flats with the builder wherein also the construction is made by the builder pursuant to payments made by the buyers. Irrespective of the fact whether the agreement with the builder may have certain clauses which may not make the buyer owner of the flat as such, the intention of the builder as well as of the buyer in all these cases is that the buyer will make payment to the builder and builder will construct the flat and hand over the same to the buyer. Accordingly, the clarification given by the CBDT is equally applicable to the booking of the flats with the builders and period of holding will be counted from the booking of the flats. The AO was directed to compute period of holding from 15/07/2005, which works out to be more than 36 months, accordingly, assessee is entitled for long term capital gain benefits. In the result appeal of the assessee is allowed.

(See 2018-TIOL-1941-ITAT-MUM)