Sale of property was LTCG as assessee held it from the date of advance payment

Sale of property was long term capital gain as assessee held it from the date of advance payment and balance payment was only a follow up action

ABCAUS Case Law Citation
ABCAUS 3502 (2021) (05) ITAT

Important case law relied referred
CIT vs A Suresh Rao 223 Taxmann 228 (Kar)
Principal CIT vs. Vembu Vaidyanathan (2019) 413 ITR 248 (Bom.)
CIT vs. Tata Services Limited (1980) 122 ITR 594 (Bom)
Madhu Kaul vs. CIT & Anr. [(2014) 363 ITR 54 (P&H)]

In the instant case, the assessee had challenged the order passed by the Commissioner of Income Tax (CIT) u/s 263 of the Income Tax Act, 1961 (the Act) denying the benefit of exemption u/s 54 by treating the surplus on sale of property as Short Term Capital Gain (STCG) instead of Long Term Capital Gain (LTCG).

The return of income of the appellant assessee was selected for income tax scrutiny and assessment was completed u/s 143(3) of the Act. Subsequently, the CIT invoked revisional jurisdictional and issued notice u/s 263 of Act.

According to the CIT, the assessment order was erroneous and prejudicial to the interest of the revenue mainly for the reason that the assessee had claimed cost of indexation benefit wrongly as the property sold was held for less than 36 months. Therefore, the assessee was not entitled to claim for deduction u/s 54 of the Act.

The assessee had sold a residential unit consisting of ground floor, first floor and second floor. The residential unit originally consisted of ground and first floor. The first floor was purchased by the assessee and his wife way back and they constructed second floor during the financial later.

The ground floor was retained with the original owner. Later, vide registered sale deed, the assessee and his wife purchased the ground floor also.

The CIT rejected the objections raised by the assessee and passed the impugned order setting aside the assessment with directions to the Assessing Officer to recompute the Capital gains and exemption u/s 54 of the Act.

The CIT, with regard to sale of ground floor, took the date of sale deed and opined that the ground floor was held by the assessee for a period of less than 36 months. Hence, according to the CIT, the income arising out of sale of ground floor would give rise to short term capital gains.

The main contention of the assessee was that he had entered into an oral agreement to purchase the ground floor much before 36 months and payments were made to the vendor right from the date of oral agreement.

The assessee submitted that reckoning the period of holding of ground floor from the date of oral agreement/payment of advance would give rise to long term capital gains.

The Tribunal observed that after the introduction of clauses (v) and (vi) in the definition of the word “transfer” in Section 2(47) brought by Finance Act 1997, the CBDT had issued Circular No. 471 dated 15.10.1986 explaining how capital gains from long-term capital asset is to be calculated in cases where the allottee gets title to the property on the issuance of allotment letter and the payment of instalments though possession is not delivered and registered deed of conveyance is not dispute.

The Tribunal further observed that perusal of definition of short term capital asset shows that the legislature has used the expression ‘held’. In various other allied or similar sections, namely Section 54 / 54F of the Act, the legislature has  preferred to use the expression ‘acquired’ or ‘purchased’. Thus, it is clear that the legislature was conscious while making use of this expression. The expressions like ‘owned’ has not been used for the purpose of determining the nature of asset as short term capital asset or long term capital asset. The intention of the legislature is clear that for the purpose of determining the nature of capital gain, the was concerned with the period during which the asset was held by the assessee for all practical purposes on de facto basis.

The legislature was apparently not concerned with absolute legal ownership of the asset for determining the holding period

The Tribunal noted that the payment schedule to the registered sale deed showed that the assessee had made an advance payment out of total sale consideration. Therefore, advance payments would be beyond 3 years from the date of sale of original asset.

The Tribunal opined that the assessee on payment of first advance was conferred with a right in property (i.e. the ground floor) which was also assignable. Therefore, payment of balance amount   and delivery of possession are consequential acts that related back to and arise from the rights conferred on the payment of advance.

The Tribunal noted the judgment of the various High Courts on the subject and noted that it was held that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him.

Also, it was held that the word “property” used in section 2(14) of the Act is a word of widest amplitude and this was reemphasized this by use of the words “of any kind”. The contract for sale of land is capable of specific performance and is also assignable. Therefore, a right to obtain conveyance of immovable was liable for capital gains.

In another case, it was held that held that the  assessee  gets  title  of  property  on  the  basis  of  allotment letter and payment of instalment was only a follow up action and  taking  delivery  of  possession  is  only  a  formality.

Accordingly, the Tribunal held that the assessee had the right  to the impugned property on the date of payment of advance, and payment of balance amounts was only a follow up action and taking delivery of possession was only a formality.   Therefore, reckoning the period from the date of advance, the sale of ground floor gave raise to long term capital gains and not short term capital gains as held by the CIT.

Thus, allowed the ground of appeal was allowed in favour of the assessee.

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