Cancellation of flat booking held Long Term Capital Gain and deduction u/s 54 allowed

Cancellation of flat booking held Long Term Capital Gain and deduction u/s 54 allowed. ‘Property’, is a term of widest import and signifying every possible interest which a person can hold or enjoy

ABCAUS Case Law Citation:
ABCAUS 2899 (2019) (05) ITAT

Important Case Laws Cited/relied upon by the parties
CIT vs. Tata Services Ltd. [122 ITR 594]
CIT vs. Vijay Flexible Container [186 ITR 693]
PCIT vs. Vembu Vaidyanathan
Smt. Shobha Jain vs. CIT [75 223 (Ald.)
Ahmed GM. Ariff v. CWT [1970] 76 ITR 471 (SC)

The appeal was filed by the assessee before the ITAT against the order of Commissioner of Income-tax (Appeals) in confirming the order u/s 143(3) of the Income-tax Act, 1961 (the Act) passed by the Assessing Officer (AO) treating the compensation received by assessee for relinquishment of his rights in a property as interest against Long Term Capital Gain (LTCG) claimed by the assessee being earned on surrender of rights in a property acquired and held for more than 3 years.

The assessee had filed his return of income which was selected for scrutiny. In the return of income, the assessee had shown the Capital Gain on sale of Flat and also claimed exemption under section 54 of the Act on the ground that sale proceed were invested in purchase of another residential Flat.

The assessee claimed that he had booked a Flat with the builder. The assessee cancelled the booking of said Flat after the gap of three years and received compensation additional amount from the Builderover and above the payment made by him.

The assessee treated the booking of said flat as capital asset and after claiming benefit of indexation on the investment the assessee claimed capital gain and also claimed exemption under section 54 on account of investment in purchase of new residential flat.

During the assessment, the Assessing Officer issued show-cause notice to the assessee and asked to substantiate as to how the cancellation of booking of flat is treated as Long Term Capital Gain (LTCG) and how the deduction is claimed under section 54 of the Act and why the amount may not be taxed as interest income under the head “Income from Other Sources”, as the assessing officer took his view that the flat was never transferred in the name of assessee.

The assessee filed his reply and relying upon the decision of Hon’ble High Court, the assessee also made alternative claim that he was eligible for exemption under section 54 of the Act even if the right of any property (cancelled property) is not considered as residential property, he was eligible for exemption under section 54F.

The reply of assessee was not accepted by Assessing Officer. The Assessing Officer concluded that there was no transfer of any asset nor there was a purchase or sale. As per letter of cancellation filed by assessee only provisional booking was made which was cancelled vide the cancellation letter.

Thus, the AO opined that the compensation paid by Builder was nothing but an interest as flat was never purchased or sold, there was no transfer of capital asset.

The claim of exemption under section 54 was also not accepted holding that the whole modus operandi is only an arrangement of lending money to Builder and consideration received is nothing but an interest.

Accordingly, the Assessing Officer treated the compensation as “Income from Other Sources”.

On appeal before the CIT(A), the action of Assessing Officer was upheld. The CIT(A) while upholding that order of Assessing Officer concluded that no conveyance deed was executed nor the possession of flat was taken. It was only a provisional booking as per cancellation letter. The CIT(A) opined that the Builder had mentioned that he had agreed to give the assessee sum over and above the amount paid by the assessee as a compensation.

Aggrieved against the order of the CIT(A) the assessee had filed the present appeal before ITAT.

The Tribunal observed that Section 2(14) of the Act defines the word ‘capital asset’ mean ‘property of any kind held by an assessee’ whether or not connected with business or profession. The word ‘transfer’ in relation to a capital asset is defined under section 2(47) which include the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein. The Hon’ble High Court opined that the word ‘property’, is a term of widest import and signifying every possible interest which a person can clearly hold or enjoy, it has been held so by the Hon’ble Supreme Court.

The Hon’ble High Court also noted that on the question as to whether letter of allotment creates proper and effective right over the capital asset sought to be acquired, the Jurisdictional High Court had held that the entire issue was clarified by the CBDT by circulars. In terms of such clarifications, the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property. There was nothing on record to suggest that the allotment in construction scheme promised by the builder was materially different from the terms of allotment and construction by Development Board.

Further, it was also noted that the Hon’ble Bombay High Court considered the question of holding the amount of the compensation received by the assessee from builder as ‘capital gains’ and answered it in favour of the assessee.

Considering the decision of jurisdictional High Court, the Tribunal opined that the assessee on booking acquired a right in the flat. The asset/interest in asset/ flat was surrendered, after the assessee retained right in the asset for more than 36 month, therefore, the assessee was qualified for claiming LTCG on cancellation/surrender of such asset and the compensation so received was qualified for LTCG.

Accordingly, the appeal of the assessee was allowed.

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