Use date of allotment to calculate capital gains

While there have been conflicting judgments, most conclude that the assessee owns the property from the date of issuance of allotment letter

Capital gains on transfer of property has always been a reason for dispute between taxpayers and authorities. While the Income Tax Act (I-T Act) mentions that the period of holding determines the amount of tax payable, it does not specify from when the period of holding starts. Does it start from the date of allotment or from the day the sale deed is signed or when a property is registered?

The starting date for the holding period also continues to be a matter of litigation because of different rulings from high courts and Income Tax (I-T) tribunals. The most common view, however, is that the date of allotment should be considered for determining the holding period rather than the date of possession.

But the allotment date can come in question, depending on the terms and conditions mentioned in the allotment letter. The seller needs to ensure that the terms of payments and the conditions laid down for sale can help him defend his position in front of tax authorities. Calculating capital gains On transfer of property, the seller has to pay capital gains tax. If the asset is held for not more than 36 months, one has to pay short-term capital gains (STCG) tax. In this case, the profits are clubbed with the income and the seller has to pay tax according to the applicable slab. If the seller has held the property for more than 36 months, he needs to pay long-term capital gains (LTCG) tax. For this, he has to use the cost inflation index and pay 20 per cent tax on gains

calculated. In the Finance Act, 2017, the holding period of immovable property has been reduced from 36 months to 24 months for it to be considered as a long-term capital asset. Determining holding period The Mumbai Tribunal has recently ruled that holding period should be computed from the date of issue of allotment letter by the developer. If the investor sells the property 36 months after receiving the allotment letter, it will be considered as a long term capital asset. The seller would then need to pay LTCG tax on it, which would reduce his tax outgo. This judgement follows the decision of high courts in the case of Commissioner of Income Tax (CIT) vs K Ramakrishnan and CIT vs SR Jeyashankar.

A real case can help to understand this better. A property owner sold an office space in Mumbai. The property was allotted to the seller in April 2005. He had signed the sale agreement in December 2007 and registered the property in April 2008. He sold the property in March 2011.

According to the seller, the property was held for more than 36 months based on the date of allotment. He, therefore, needs to pay LTCG tax. But the tax department disputed this. The assessing officer said that the holding period should be from the date of registration. According to the officer, the holding period was less than 36 months, and the seller needs to pay STCG.

Aggrieved by the order of the department, the seller first filed an appeal with the CIT and after an unfavourable order moved the Income Tax Appellate Tribunal. The seller argued that the holding period should be computed from the date of allotment of the property under Section 2(42A) of the I-T Act. He produced various judgments that had followed the same principle to support his case.

He also argued that even if the tax authorities don’t consider the allotment date, they should consider the date on which the sale agreement was signed.

He contended that this was in line with Section 47 of The Registration Act, 1908, and supported by the Supreme Court’s previous judgement. Accordingly, considering the date of execution of sale agreement, the holding period would exceed 36 months, and hence, the resultant gain should be considered as LTCG.

The I-T department, on the other hand, said that the Supreme Court has held that transfer of property will be effective only on registration of conveyance deed with the Sub Registrar, which is the competent authority to register documents for transfer of immovable property. This is in line with Section 54 of the Transfer of Property Act. The department also argued that the absolute legal ownership of the property should be determined taking a view on the Transfer of Property Act along with Section 2(47) of the I-T Act for computing tax on the sale of an immovable property.

The tribunal said that Section 2(42A) of the I-Tax Act defines short term capital asset as an asset held by an individual for not more than 36 months immediately preceding the date of its transfer. The intention of the law in using the word “held” against words such as “acquired” or “purchased” or “owned” indicates that the absolute legal ownership of the asset is not a principle factor in the determination of holding period. The time from when the individual starts holding the asset is the real determining factor.

The tribunal referred to various high court judgments which concluded that it is not necessary that the individual should be the owner of the asset with a registered deed of conveyance conferring the title on him. Also, the assessee has a right to the property since the date of issuance of allotment letter. Hence, execution of sale deed at a subsequent date is irrelevant, and the transfer of ownership of a property in the hands of an owner is not the criterion for determining holding period of the property. What should you go by? Like other high court judgments, recently Mumbai ITAT also gave an order — Anita Kanjani, Mumbai, vs ACIT 23(1) dated February 13, 2017 — in favour of the taxpayer. It helps the assessee to support the position that for determining the period of holding, date of allotment should be considered.

Even CBDT had issued a circular in the past, where it clarified that the period of holding of the property booked by an assessee under selffinance scheme of Delhi Development Authority will be counted from the date of issuance of allotment letter.

While there are enough judgments that say that holding period starts from the date of issuance of allotment letter, litigation from the tax authorities cannot be ruled out because of a few conflicting orders.