A game of dates – Should date of agreement be preferred over date of possession for capital gains?
BHARAT AGARWAL
Advocate
KHUSHIRAM JADHWANI
CA
Introduction
1. Tax Laws have increasingly become notorious due to complexities. The complexities get confounded due to varied interpretations of law by different Courts at different levels on similar set of facts.
One such complexity has arisen in relation to contracts of purchase of immovable properties as stated under section 54 of the Transfer of Property Act. A transaction for sale of immovable property contains several obligations on parties enshrined in contracts. These contracts are specifically enforceable under section 10 of the Specific Relief Act, 1963 because vested interest is created under section 19 of the Transfer of Property Act, 1882.
The controversy that arises is whether the holding period for the purpose of calculation of capital gain is to be calculated:
| (a) | from the date when such contract is entered into or; | |
| (b) | from the date of receiving possession of the immovable property subsequently. |
Relevant Court rulings
2. Different Courts have answered the above question differently, thereby resulting in a judicial controversy. Judgment of the Punjab & Haryana High Court in the case of Vinod Kumar Jain v. CIT [2010] 195 Taxman 174, when read with the judgment of Mumbai ITAT's decision in the case of Asstt. CIT v. Jaimal K. Shah [2012] 137 ITD 376/24 taxmann.com 91 leads to apparent difference between the two forums and jurisdictions.
P&H High Court in case of Vinod Kumar Jain (supra) has ruled that the right to acquire property through "agreement for sale" under section 54 of Transfer of Property Act is an actionable claim which is capable of being transferred. Thus, it is a capital asset under section 2(14) as per the provisions of the Income-tax Act, 1961. The period of holding is to be reckoned from the date of first agreement while calculating capital gain on sale of such property.
However, contrary view has been taken by the Mumbai ITAT in the case of Jaimal Shah (supra). It held that the capital asset being "right to acquire property" sinks into the capital asset being "immovable property" upon possession thereof. Therefore, the date of acquisition for purpose of calculating capital gain tax is to be calculated from the date of such possession and not from earlier date. Consequently, if such property is sold within 3 years of possession it shall be treated as short-term capital gain. This decision relied upon earlier decision of the Mumbai High Court in the case of CIT v. Dr. D.A. Irani [2000] 111 Taxman 600. Accordingly, the ITAT has either distinguished or disproved of the other past precedences which have ruled otherwise.
Examples
3. The above controversy can be better explained with the help of following illustration:
| Suppose: | |
| Total consideration | : 100 lakhs |
| Date of receipt of allotment letter | : 1-4-2000. |
| Amount paid on allotment | : Rs. 20 lakhs. |
| Date of possession of flat | : 2-4-2003. |
| Amount paid on possession | : Rs. 80 lakhs. |
| Date of sale | : 1-4-2005. |
| Sale consideration | : Rs. 150 lacs. |
| Gain on sale of flat | : Rs. 50 lakhs. Rs. (150-100) |
As per the decision of the P&H High Court and other Courts the tax on the capital gain can be calculated as per following options:
3.1 Option (1) : Treating the gain of Rs. 50 lakhs as long-term capital gain based on the judgment of P & H High Court in the case ofVinod Kumar Jain and other past precedences:
The date of acquisition shall be taken as 1-4-2000 and the date of sale as 1-4-2005. Therefore, the gain shall be taxable as long term capital gain. Indexation benefit shall be available on Rs. 20 lakhs from 1-4-2000 and on balance Rs. 80 lakhs from 2-4-2003. Therefore, the tax on capital gain of Rs. 50 lakhs shall be calculated as shown in the table below:
| Particulars | Rs. In lacs | Indexation Financial Year | Cost inflation index | Amount Rs. in lakhs |
| Sale Consideration | 2005-06 | 497 | 150 | |
| Less : Selling expenses | 0 | |||
| Acquisition details : | ||||
| Cost of land (I) | 20 | 2000-01 | 406 | 24.48 |
| Cost of land (II) | 80 | 2003-04 | 463 | 85.88 |
| Capital Gain | 39.64 | |||
| Long-term capital gain tax @ 20% | 7.93 |
3.2 Option (2) - Treating the gain as short term gain as per decision of Jaimal Shah (supra).
The flat had been sold within 3 years of possession date (i.e., 2-4-2003). Hence, the entire gain shall be taxed @30% without any indexation benefit and other benefits of saving tax by modes of reinvestment as prescribed under section 54 of the I.T. Act, 1961 and its various sub-sections. In such as situation the tax liability shall be as under:
| Sale Consideration | Rs. 150 |
| Less : Cost of Acquisition | Rs. 100 |
| Date of Acquisition | 1-4-2003 |
| Date of Sale | 1-4-2005 |
| Therefore, short term capital gain | : Rs. 50 |
| Tax-@-30% | Rs. 15 |
Other relevant court rulings
4. In an earlier decision in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594/[1979] 1 Taxman 427 (Bom.), the Mumbai High Court has held that the term "property" used in the definition of the term "Capital Asset" under section 2(14) is word of wide amplitude. "Right to obtain conveyance of property", being specifically enforceable under the law, is "property" which is to be treated as capital asset and the gain arising from alienation shall be liable to be tax under the head "capital asset". This decision was followed in the case of CIT v. Vijay Flexible Container [1990] 186 ITR 693/48 Taxman 86 (Bom.) by the Mumbai High Court and thereafter, there has been a plethora of decisions which have settled the law on the subject that the "right to acquire property" is a capital asset which would result in taxable capital gain, when the same is alienated. Therefore, an interpretation of law cannot be made which renders nugatory the above decisions holding fort for so long. The period of holding the capital asset being "right to aquire property" has to be inbuilt in the computation of capital gain.
If we apply the decision of the Mumbai ITAT (as shown in option 2), in effect, the assessee would get no benefit of indexation for the amount of Rs. 20 lakhs paid on 1-4-2000 for acquiring the capital asset being the "right to acquire property". No benefit shall be available for holding the capital asset being "right to acquire property" since 1-4-2000. The event of 1-4-2000 till the date of possession (i.e., 1-4-2003) gets totally effaced from records which cannot be the intention of the Legislature. In the case of Nita A. Patel v. ITO [2010] 40 DTR 507 (Mum.)(Trib.) it has been held that indexation shall be allowed from the date of first payment and not when the unit is physically possessed. At this juncture one must consider the definition of the term "Short Term Capital asset" as provided for in section 2(42A) of the Act which states as under :-
"short-term capital asset" means a capital asset held by an assessee for not more than [thirty-six] months immediately preceding the date of its transfer…
Interpretation by courts of term 'held'
5. The term "held" has been interpreted by the Courts wherein unanimous view has been that the said term 'held' is different from the term 'acquire'. The Punjab and Haryana High Court has in the case of CIT v. Ved Prakash & Sons (HUF) 207 ITR 148 stated that the term 'held' is deliberately used in deference to the term 'owned'. Hence, a person can hold the asset as owner, lessee, tenant, etc. Therefore, the right to the property is held by a person from the date when he enters into an agreement for purchase and not when he acquires possession. A similar phrase has been used in the Explanation (iii) to section 48 which defines the term "indexed cost of acquisition". The said phrase is reproduced hereunder:
(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;
(emphasis added)
A perusal of the above provision reveals that even for calculating indexation the base year is to be taken as the year from which the capital asset is 'held' by the transferor and not the year in which the asset is acquired by the transferor. Such a difference cannot be ignored.
Where the asset was 'held' by the transferor by virtue of an agreement for sale by paying Rs. 20 lakhs in year 2000, the indexation on said Rs. 20 lakhs shall be calculated from the year 2000 and not from 2003 when possession was taken. Any different interpretation is neither intended nor is borne out from literal construction of the provision.
Actual user vis-a-vis an investor
6. The interpretation of law as made by the Mumbai ITAT in Jaimal Shah's case puts an assessee who has taken possession of property in a worse off situation compared to an assessee who has not taken possession. This discrimination is directly opposed to public policy of government for encouraging housing for actual user as compared to an investor.
Absolute right flows from allotment
7. The reliance by the Mumbai ITAT upon the decision of the Mumbai High Court in the case of Dr. D.A. Irani (supra) is also misplaced. The said decision does not deal with the capital asset being the "right to acquire property". It deals with the conversion of tenancy right into absolute right of the assessee in a flat. The decision in the case of Dr. D.A. Irani (supra) cannot be applied to the case of capital asset being the "right to acquire property", since such right is a natural and normal pre-condition for the possession of the flat. In other words, absolute right flows from the allotment. The conversion of tenancy into absolute right is not a pre-condition for acquiring any property, rather it is a conversion of a right into a superior right. The P&H High Court has in the case of Vinod Jain (supra) dealt with this issue by holding that the right to acquire property gets vested in the assessee with agreement. Handing over of possession is a mere procedural formality emanating from the right to acquire property.
8. The above argument finds support from CBDT's Circular No. 471 [F.No.207/27/85-IT (A-IT)], dated 15-10-1986 wherein it has been held as under :
"Circular No. 471
Capital gains tax - Whether investment in a flat under the Self-Financing Scheme of the Delhi Development Authority would be construction for the purpose of sections 54 and 54F of the IT Act, 1961.
15-10-1986
CAPITAL GAINS : Sections 54, 54F.
| 1. | Sections 54 and 54F of the Income-tax Act, 1961, provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case of purchase of a house, the benefits available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of a house, the benefit is available if the investment is made within three years from the date of transfer. | |
| 2. | The Board had an occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme of the Delhi Development Authority amounts to purchase or its construction by the Delhi Development Authority on behalf of the allottee? Under the Self-Financing Scheme of the Delhi Development Authority the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final, unless it is cancelled or the allottee withdraws from the Scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the Delhi Development Authority to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession. | |
| 3. | The Board has been advised that under the above circumstances, the inference that can be drawn is that the Delhi Development Authority takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the Scheme, the tentative cost of construction is already determined and the Delhi Development Authority facilitates the payment of the cost of construction in instalments, subject to the conditions that the allottee has to bear the increase, if any, in the cost of the construction. Therefore, for the purpose of capital gains tax, the cost of the new asset is tentative cost of construction and the fact that the amount is allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the Delhi Development Authority shall be treated as cases of construction for the purpose of capital gains." |
Although the said circular is in the context of allotment of property by a government organization, yet such circular only follows the general law relating to acquisition of property. It in no way either enlarges or digresses from the general law on the subject of acquisition of property. Therefore, the distinction that the said circular is applicable to a government allotment is irrelevant.
The following table gives the comparative position of provisions of Circular vis-a-vis the general law:
| Contents of Circular | Position in General Law |
Under the Self-Financing Scheme of the Delhi Development Authority the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the Scheme. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action andtaking the delivery of possession is only a formality. | In case of allotment of flat by the builder to the purchaser the allotment is final unless the purchaser defaults on the payments of instalment amounts or cancels the allotment of flat on his own end. As per section 54 of the Transfer of Property Act the "Agreement for Sale" is enforceable contract and the purchaser gets exclusive right to acquire the said property. Further payments and taking possession are mere formalities as dependant upon stage of construction by the builder. |
| 3. . . .the Delhi Development Authority takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the Scheme, the tentative cost of construction is already determined and the Delhi Development Authority facilitates the payment of the cost of construction in instalments subject to the conditions that the allottee has to bear the increase, if any, in the cost of the construction. Therefore, for the purpose of capital gains tax, the cost of the new asset is tentative cost of construction and the fact that the amount is allowed to be paid in instalments does not affect the legal position stated above. | In case builders sell under construction flat to the buyer, the cost of the asset is determined through the allotment letter and, therefore, the cost of acquisition is the cost as mentioned in the allotment letter. Therefore, payments in instalments do not affect the legal position as mentioned in circular itself. Needless to mention that under service tax law the buyer of the flat pays the service tax only because he has purchased under construction flat before the completion. |
Conclusion
9. Various Courts have held that a gain on sale of right to acquire property would be liable for a long-term capital gain tax. Some of the decisions which have held so are cited hereunder :—
| ♦ | CIT v. Jitendra Mohan [2007] 165 Taxman 524 (Delhi) | |
| ♦ | Vinod Kumar Jain (supra) | |
| ♦ | CIT v. Jindas Panchand Gandhi [2005] 279 ITR 552 (Guj.) |
Even the Mumbai ITAT in other decisions has held that the acquisition period is to be calculated from the date of agreement and first payment. Some of these decisions are as follows:
| ♦ | First ITO v. Prem P. Tharanee [1983] 3 ITD 482 (Bom.) | |
| ♦ | Lata G. Rohra [2008] 21 SOT 541/[2012] 21 taxmann.com 541 (Mum.) | |
| ♦ | Girish C. Bathija v. ITO [2010] 37 SOT 6 (Mum.)(URO). | |
| ♦ | Charanbir Singh Jolly v. 8th ITO [2006] 5 SOT 89 (Mum.) |
The controversy created by decision of Jaimal Shah will be finally settled by the higher Courts. It will also create issues in the mind of a transferor whether to subscribe to capital gain tax saving bonds or not? To further confound the confusion there is a time-limit for subscription to such bonds, default in which will take away the statutorily allowed tax benefit.
Till finality on the issue is arrived at the assessee will remain in a dilemma and face departmental heat.
Regards
Prarthana Jalan
__._,_.___
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