Can Date of Sale Agreement Be Taken As The Date of Purchase of Right in A Flat?

One of my friends had booked a flat with a builder in Dec 2004 for Rs. 48 Lacs & received the allotment letter from the builder in Jan 05. By June 06, he had made a payment of almost Rs. 25 Lacs to the builder in Installment as per work in progress & in July 06 took a loan from ICICI Bank & paid the full amount for the Flat to the builder. The stamp duty was paid in July 06 & the flat registration was done in July 06.In July 2008, my friend sold the flat which was still under construction for Rs. 130 Lacs. The pocession of the flat was not received by my friend when he sold the flat (Right on the Flat). Is he applicable for LTCG??? Bharat Jivani , MumbaiAn asset which is held for 36 months is long term asset. So, in your friends case , two issues needs to be decided

  1. Whether the right on the flat was an asset ?
  2. Whether it was held for 36 months?
  3. As the payments have been done on different dates , from what date indexation is allowable?

Right to own the property, whether asset?The guidance comes from the highest legal authority i.e Bombay High Court which has jurisdiction over Mumbai and other places. In case of CIT vs Tata Teleservice Ltd 122 ITR 594 , it explained the scope of definition of capital asset as defined u/s 2(14) of the I T Act in following wordsWhat is a capital asset is defined in section 2(14) of the I.T. Act, 1961. Under that provision, a capital asset means property of any kind held by an assessee, whether or not connected with his business or profession. The other sub-clauses which deal with what property is not included in the definition of capital asset are not relevant. Under section 2(47), a transfer in relation to a capital asset is defined as including the sale, exchange or relinquishment of the asset or the astonishment of any right therein or the compulsory acquisition thereof under any law. The word "property", used in section 2(14) of the I.T. Act, is a word of the widest amplitude and the definition has re-emphasised this by use of the words "of any kind" Thus, any right which can be called property will be included in the definition of "capital asset". A contract for sale of land is capable of specific performance. It is also assignable. (See Hochat Kizhakke Madathil Venkateswara Aiyar v. Kallor Illath Raman Nambudhri, AIR 1917 Mad 358). Therefore, in our view, a right to obtain conveyance of immovable property, was clearly "property" as contemplated by section 2(14) of the I.T. Act, 1961.Other case law on the same issue favouring your friend's case are

  1. CIT v. Sterling Investment Corpn. Ltd. [1980] 123 ITR 441 (Bom.).
  2. ITO v. Smt. Kashmiraben M. Parikh [1993] 66 Taxman 31 (Ahd.) (Mag.).
  3. Tribunal order in ITA No. 3923 (Mum.) of 2002 for assessment year 1995-96 in the case of Mrs. Manju Agarwal v. Asstt. CIT, Mumbai ‘C’ Bench order dated 16-9-2004.
  4. Jitendra Mohan v. ITO [2007] 11 SOT 594 (Delhi).

Therefore, in your friends case, the facts of the case is required to be properly appreciated . If the booking agreement and allotment terms and conditions of the builder gave a right to obtain conveyance on the said flat , the property after fulfilling certain conditions , that itself becomes "an asset " under I T Act. Whether it is held for 36 months?Once the right to purchase ( i.e obtain conveyance ) proved to be an asset, it is to be seen when was this right vested in the purchase. Hon’ble Andhra Pradesh High Court in the case of M. Syamala Rao v. CIT [1998] 234 ITR 140 held that registration of a document related back to the day on which the agreement of sale was executed, hence, when the builder executed the agreement of sale on 7-8-1993, the assessee was to be deemed to be owner of property from that date and, accordingly, the capital gain was to be worked out.In my opinion, the date of allotment is the date when the right of conveyance get vested. So, if there is difference of 36 months in this date and date of sale , then it can be considered that the said asset was a long term asset and gain on sale of such asset was "Long Term Capital Gains ". In your friends case , the allotment date was Jan 2005 and as such on the date of sale , this right was held for more than 36 months. How Indexation is to be done?The issue gets settled by Mumbai Tribunals' decision in case of Smt. Lata G. Rohra v. Deputy Commissioner of Income-tax, C.C. 39, Mumbai [2008] 21 SOT 541 (Mum.) where is the facts of teh case was as under

the assessee filed return of income for the impugned assessment year on 30-9-2004 declaring total income at Rs. 18,06,385 comprising of income from house property, long-term capital gain, income from other sources, share of profit from the firm. The assessment was completed under section 143(3) of the Act on 27-7-2006 wherein the returned income was accepted. The ld. CIT noted that assessee had sold the flat during the year under consideration, whereon, after claiming the indexed cost at Rs. 18,74,571, the long-term capital gain had been shown at Rs. 3,94,229. The ld. CIT also noted that the manner of working of indexed cost of acquisition which is as under :—

Particulars

Date

Value

Indexation Factor

Indexed Price

Purchase Price

7-8-1993

Rs. 9,39,000

463/244

Rs.17,81,791

Stamp duty

9-7-1996

Rs. 52,620

463/305

Rs. 79,879

Registration

13-11-1998

Rs. 9,780

463/351

Rs. 12,901

Rs. 10,01,400

Rs. 18,74,571

It was also noted that the said property was registered in the name of the assessee in 1998 and the year of construction thereof was mentioned as 1997. It was also noted that assessee had not filed any evidences with respect to various payments made tthat the indexed cost of acquisition worked out on the basis of financial year 1993, the year of agreement was incorrect, hence, the assessment order was erroneous and prejudicial to the interests of the revenue. Accordingly, he issued show-cause notice under section 263 on 27-10-2006 asking the assessee to explain as to why the assessment order should not be modified to brought to tax the actual capital gain.

The Hon'ble Mumbai Tribunal held as under

"We have considered the submissions made by both sides, material on record and orders of authorities below. As per section 2(14) read with section 2(14)(vi) of the Act, the rights in flat, acquired by the assessee on execution of purchase agreement on 7-8-1993, come within the purview of the term ‘capital asset’. From the perusal of language used in Explanation (iii) to section 48 of the Act, which provides for manner of computation of indexed cost of acquisition, it is apparently clear that it refers only to cost of acquisition and not actual payments made by the assessee, hence, there is no merit in the alternate contention of the revenue that the benefit of indexation should be given on the basis of dates of actual payments made by the assessee.

We are further of the opinion that the asset is held by the assessee from 7-8-1993 because when the assessee sold the house property, it did not sell the same without any legal rights of the assessee as an owner thereof, and unless the rights of ownership are transferred, there cannot be any sale and, therefore, there is no merit in the contention of the assessee regarding right being intangible asset and house property being a physical asset. We also find that the issue of indexation, in such circumstances, is directly covered in favour of the assessee by the decision of the Tribunal in the case of Charanbir Singh Jolly (supra), hence, respectfully following the same, we hold that the assessment order is correct in law. Thus, on merits, the issue is covered in favour of assessee, however, regarding jurisdiction for invoking the provisions of section 263, we would like to add that the assessee filed necessary details before the Assessing Officer and the Assessing Officer has passed assessment order after taking into consideration the same, hence, merely for the reason that no specific findings have been given in the assessment order, the same cannot be said have been passed without application of mind. In this view of the matter, we cancel the order under section 263 passed by the ld. CIT.

10. In the result, appeal filed by the assessee stands allowed."

So, what tribunal has stated is that in your friends , case the cost of acquisition i.e 48 :Lakhs should be taken to compute the long term capital gains as the word used in Explanation to section 48 mentions "Cost of acquisition: and not the actual payments.

Caveat: Do your homework and take help of good C.A and also mentally be prepared that (there may be 1 % chance) there will be legal battle with the department.