Duration of cap gains must be based on date of allotment

It is very important to find out the date of purchase of the property because it is this date which will determine the nature of Capital Gain namely whether the Gain is a Long-term Capital Gain or a Short-term Capital Gain. 

Thus, whenever property transactions are undertaken, the investor in particular should be very careful to find out the nature of Capital Gain namely Short-term or a Long-term and only thereafter take a decision of selling the property or holding the same for some more time.  The decision to sell a property on a particular date will have great bearing on the income-tax liability of the investor. 

In this connection, it would be worthwhile to refer to a very interesting decision of the Punjab and Haryana High Court in the case of Vinod Kumar Jain v CIT and Others 344 ITR 501.  In this case the brief facts were that the assessee filed its return for the assessment year 1989-90 wherein a note had been given by him that capital gains on account of sale of residential flat in New Delhi were exempt from tax. 

The Assessing Officer asked for the details and reasons from the assessee for claiming exemption.  It was also sought as to when the possession of the flat that had been sold on January 6, 1989, had been handed over to him. 

The assessee furnished the desired information and documents including the copy of allotment letter besides stating that he was entitled to exemption as per the provisions of section 2(29A) of the Act.  The assessee had claimed that he purchased another flat at New Delhi on January 31, 1989, for Rs. 3,80,000, and as such the capital gains were exempted from tax.  It was pointed out by the Assessing Officer that the assessee was allotted a flat No. 73 on March 12, 1986, in category-II under the Wazirpur Phase-III-Residential Scheme of the DDA. 

The cost of the flat was Rs. 1,49,060 which was sold by him on January 6, 1989, for a sum of Rs. 2,25,000 and as such, there was a capital gain of Rs. 75,940. 

The Assessing Officer observed that the assessee had claimed exemption under the provisions of section 2(29A) of the Act which deals with the matters of long-term capital gains but he could not have the benefit of the said provisions as his case fell under the category of short-term capital gain and was governed by the provisions of section 2(42A).  It was on this basis the Assessing Officer did not exempt the long-term capital gain and disallowed the deduction claimed by the appellant-assessee.  

The assesssee thereafter filed an appeal against the assessment order of the Assessing Officer before the Commissioner of Income-tax (Appeals) and raised all pleas stating that the assessee applied for registration under the aforesaid scheme on March 7, 1981, and pursuant to the registration, flat was allotted on February 27, 1982. 

It was submitted further that as per the allotment letter, the first instalment was to be paid on March 30, 1982, and all installments were paid up to March 31, 1987.  The possession of the flat was taken by the appellant-assessee which was sold on January 6, 1989, by means of special power of attorney. 

It was further sought to be contended before the appellant authority that the assessee was allotted the flat on February 27, 1982, and on the date the allotment letter was issued, he became absolute owner of the property, and as per the Circular of the Board of Direct Taxes, bearing No. 471, dated October 15, 1986 which provides that if the sale is made through special power of attorney the same was permissible and as such the sale of the flat under reference made after a period of 36 months, was a long-term capital gain and exempted from tax under section 2(29A) of the Act.  It was further urged before the Commissioner of Income-tax (Appeals) that the Assessing Officer had incorporated the wrong provisions and given reference of the second allotment letter dated May 15, 1986. 

The Commissioner of Income-tax (Appeals) partly accepted the appeal, vide order dated September 7, 1992, and also took a view that the flat was allotted on May 15, 1986, and as such the same remained with the assessee for less than 36 months and was, thus, not exempted as per the provisions of the Act. 

Even before the Commissioner of Income-tax (Appeals) the assessee lost the appeal.  Now when the assessee came up before next appeal to the Income-tax Appellate Tribunal, there also the assessee lost in appeal. 

Being unable to get relief before the Assessing Officer as well as before the Commissioner of Income-tax (Appeals) and also before the Income-tax Appellate Tribunal the assessee came up in appeal before the Honourable judges of the Punjab and Haryana High Court. 

While dealing with the issue the Honourable judges opined that the sole point for consideration in this case was whether the capital gain arising on allotment of flat under the scheme of the DDA on February 27, 1982, of which actual flat number and delivery of possession took place on May 15, 1986, and the flat having been sold on January 6, 1989, was a long-term capital gain ; and, consequently, whether the assessee was entitled to set off the same under section 54 of the Act.  

During the course of argument before the Honourable judges, the assessee relied on another judgment of the High Court in the case of CIT v. Ved Parkash and Sons (HUF) (1994) 207 ITR 148 and Circular No. 471, dated October 15, 1986 (1986) 162 ITR (St.) 41, to contend that the allottee gets title to the property with the issuance of allotment letter and payment of instalments is only a follow up action and taking of the delivery of possession is only a formality and no right as such accrues.  According to the assessee, the transaction stood completed on February 27, 1982, and the flat having been sold on January 6, 1989, the same amounted to long-term capital gains and benefit of section 54 was available to the assessee.  The counsel further relied upon the provisions of section 2(42A) of the Act to contend that it was holding of the property and not the ownership of the property that was to be seen for determination of the question regarding long-term capital gains and since the assessee had held the flat for approximately seven years, he was entitled to adjustment of long-term capital gains under section 54 of the Act in respect of the property purchased by him.

Finally while deciding the appeal the Honourable judges of the High Court laid special emphasis on the circular of the Central Board of Direct Taxes and came to the conclusion that the allotee gets title to the property on issuance of an allotment letter and that the payment of instalments is only a consequential action upon which the delivery of possession flows and that in the instant case as the assessee was allotted flat on February 27, 1982, on payment of instalments by issuance of an allotment letter and that the assessee had been making payment in terms of this allotment letter, it will be treated that the right in the property vested even prior to 15th May, 1986,  that is the day on which the specific number of the flat was allocated to the assessee and possession delivered. 

The judges further specifically opined that the right of the assessee prior to the date of possession namely 15th May, 1986, was a right in the property and, therefore, in such a situation, it cannot be held that prior to this date, the assessee was not holding the flat. 

Thus, in the instant case it was held that the capital gain arising to the assessee would be long-term capital gain taking into consideration the date of allotment and not the delivery of the possession. 

This judgment will definitely be of great advantage to tax payers selling a property with different dates of allotment and different date of possession of the property.

The author is tax & investment consultant at New Delhi for last over 40 years. He is also Director of M/s R.N. Lakhotia & Associates & The Strategy Group.