The Income Tax Appellate Tribunal (ITAT), Surat Bench, resolved a critical controversy regarding the determination of holding period for capital gains tax in cases of property acquired under builder allotment schemes. The assessee, an NRI, purchased a flat via allotment letter dated 08.01.2011, made pre-allotment payments through banking channel, and sold the property on 10.10.2016. The Assessing Officer (AO) had treated the capital gain as short-term by reckoning the holding period from the date of registration of the conveyance deed (30.09.2016), thereby disallowing indexation benefits and deduction under Section 54 of the Income-tax Act, 1961. The Tribunal held that the holding period must be computed from the date of issuance of the allotment letter, as the assessee had acquired rights in the property from that date, making the asset a long-term capital asset and allowing consequential benefits.
Background & Facts
The Dispute
The assessee, Jagdishkumar Chhotubhai Gandhi, an NRI, acquired Flat No. 2004, Annora, Building No. 3, Rodas Enclave, Hiranandani Estate, Behind Municipal Corporation Bunglow, Patlipada, Ghod Bunder Road, Thane, Mumbai, from M/s Roma Builders Pvt. Ltd. under a builder allotment scheme.
Key Facts
- The assessee received a Letter of Allotment dated 08.01.2011 from M/s Roma Builders Pvt. Ltd. for the flat, with a total consideration of Rs. 1,43,20,000/- (exclusive of taxes and expenses).
- Prior to the allotment letter, the assessee made payments of Rs. 27,95,298/- on 28.09.2010 and Rs. 1,00,000/- on 04.05.2010 to M/s Roma Builders Pvt. Ltd. through banking channel.
- Between 10.01.2012 and 01.07.2013, the assessee made further payments through banking channel.
- During 14.09.2016 to 04.10.2016, the assessee made additional payments towards consideration (Rs. 3,00,000 + Rs. 3,88,942) and charges like interest, maintenance, club fee, society charges, service tax, SBC, and VAT.
- The conveyance deed for the flat was executed and registered on 30.09.2016.
- The assessee sold the flat to Mr. Nitin Sharma on 10.10.2016 for a consideration of Rs. 2,78,00,000/-.
- The assessee incurred a total cost of Rs. 1,57,16,963/- (inclusive of taxes and expenses) via payments to M/s Roma Builders Pvt. Ltd. and Rs. 6,91,900/- on stamp duty and registration charges.
- For the Assessment Year (AY) 2017-18, the assessee filed his return of income declaring a total income of Rs. 14,26,950/-, which was accepted by the AO in the assessment order dated 20.12.2019 under Section 143(3).
Procedural History
- 20.12.2019: AO passed assessment order u/s 143(3) accepting returned income for AY 2017-18.
- 07.03.2022: CIT (IT&TP), Ahmedabad conducted revisionary proceedings u/s 263 and passed order setting aside the assessment order dated 20.12.2019, directing the AO to frame assessment de novo.
- 14.03.2023: AO issued draft assessment order u/s 144C(1) proposing additions/disallowances.
- 12.04.2023: Assessee filed objection to the Learned Dispute Resolution Panel-2, Mumbai (Ld. DRP) u/s 144C(5).
- 20.12.2023: Ld. DRP passed order u/s 144C(5) rejecting the assessee's objections and approving the draft assessment order.
- 12.01.2024: AO passed final assessment order u/s 143(3) r.w.s. 263 after making additions/disallowances:
- Addition of Rs. 68,12,137/- on account of short-term capital gain due to disallowance of deduction u/s 54.
- Addition of Rs. 45,79,000/- u/s 56(2)(vii)(b) on account of alleged difference in purchase consideration as per agreement and market value.
- Accordingly, the AO re-assessed total income at Rs. 1,28,18,087/-.
Relief Sought
The assessee appealed challenging:
- The AO's error in law and facts in passing the order u/s 143(3) r.w.s. 263.
- The order being time-barred and void ab initio.
- Errors by the Ld. DRP in issuing directions u/s 144C(5).
- Errors in disallowing deduction u/s 54 amounting to Rs. 57,28,883/-.
- Errors in making addition of Rs. 68,12,137/- as alleged short-term capital gains.
- Errors in making addition of Rs. 45,79,000/- u/s 56(2)(vii)(b) on account of alleged difference in purchase consideration.
The Legal Issue
The central question was whether the holding period for determining whether a capital asset is long-term or short-term under Section 2(42A) of the Income-tax Act, 1961, commences from the date of issuance of the allotment letter or from the date of registration of the conveyance deed for property acquired under a builder allotment scheme.
Arguments Presented
For the Appellant
The assessee's counsel relied on CBDT Circular No. 471 dated 15.10.1986 and CBDT Circular No. 672 dated 16.12.1993, which clarify that allottees under self-financing schemes get title to the property on issuance of the allotment letter, with payment of installments being a follow-up action and taking delivery of possession a formality. Counsel cited judicial precedents including Anita D. Kanjani Vs. Assistant Commissioner of Income-tax (ITAT Mumbai, 2017), Madhu Kaul vs. CIT (Punjab & Haryana HC), Vinod Kumar Jain vs. CIT (Punjab & Haryana HC), CIT vs K Ramakrishnan (Delhi HC), and CIT vs S.R. Jeyashankar (Madras HC), all of which held that the date of allotment is relevant for computing the holding period, not the date of registration of the conveyance deed. It was argued that the assessee had acquired rights in the flat from 08.01.2011, held the property until 10.10.2016 (exceeding 36 months), and was thus entitled to long-term capital gain treatment with indexation benefits and deduction under Section 54.
For the Respondent
The departmental representative relied on the orders of lower authorities, contending that the allotment letter is not a registered document and does not convey any right upon the assessee. It was argued that the CBDT Circulars cited by the assessee are applicable only to cases of houses allotted by the Delhi Development Authority (DDA), not to private builder schemes like the one involving M/s Roma Builders Pvt. Ltd. The representative further relied on the Supreme Court judgment in Suraj Lamps & Industries Pvt Ltd vs. CIT to assert that transfer of property is effective only on registration of the conveyance deed under Section 54 of the Transfer of Property Act, and thus the holding period should commence from the date of registration.
The Court's Analysis
The Tribunal began by examining Section 2(42A), which defines a 'short-term capital asset' as 'a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer'. It noted that the legislature used the expression 'held' rather than 'owned', indicating consciousness in distinguishing between legal ownership and factual possession. The Tribunal referred to CIT vs A Suresh Rao (Karnataka HC), which held that for the purpose of determining the holding period, it is not necessary for the assessee to be the owner of the asset based on a registered deed of conveyance; even in the absence of a title deed, the assessee holds the property, and the point of time at which he holds the property is relevant for determining the period between acquisition and transfer.
The Tribunal further cited Smt. Saroj Aggarwal vs CIT (Apex Court), which emphasized that facts should be viewed in the natural perspective of the circumstances, and where there is no evidence of dishonest or improper motive, courts should draw inferences that lead to equity and justice, avoiding hyper-technical or legalistic approaches. It was held that the intention of the legislature in Section 2(42A) was to consider the period during which the asset was held by the assessee for all practical purposes on a de facto basis, not absolute legal ownership.
Crucially, the Tribunal distinguished Suraj Lamps & Industries Pvt Ltd vs. CIT, noting that while that judgment dealt with the transfer of ownership (relevant for Section 2(47) and Section 54 of the Transfer of Property Act), the issue before the Tribunal was solely about determining the holding period under Section 2(42A). The Tribunal observed that the expression 'owned' has not been used in Section 2(42A), and the legislature was concerned only with the period of holding, not legal title.
Thus, following the judgments of various High Courts, the Tribunal found that the holding period of the impugned property must be reckoned from 08.01.2011 (date of allotment letter) and not from 30.09.2016 (date of registration of conveyance deed). The property was held by the assessee for a period exceeding thirty-six months immediately preceding the date of transfer (10.10.2016), thereby constituting a long-term capital asset within the meaning of Section 2(29A) read with Section 2(42A) of the Act. Consequently, the AO's action in treating the gain as short-term capital gain by reckoning the holding period from the date of registration could not be sustained. The Tribunal directed the AO to treat the capital gain as long-term capital gain and allow the consequential benefit of indexation and deduction under Section 54 in accordance with law.
Regarding Ground No. 6 (addition of Rs. 45,79,000/- u/s 56(2)(vii)(b)), the Tribunal held that the Letter of Allotment dated 08.01.2011 constitutes an 'agreement' for the purposes of the provisos to Section 56(2)(vii)(b), as the assessee had made part payments of Rs. 27,95,298/- and Rs. 1,00,000/- on 28.09.2010 and 04.05.2010 through banking channel prior to the issuance of the allotment letter, satisfying the condition in the second proviso. Therefore, the stamp duty value as on the date of the agreement/allotment (08.01.2011) must be considered, and the addition made by the AO based on the stamp duty value as on the date of registration (30.09.2016) could not be sustained. The issue was restored to the AO for determining the stamp duty value as on 08.01.2011 and recomputing the taxable income.
The Verdict
The appeal was partly allowed. Grounds 4 & 5 were allowed: the AO was directed to treat the capital gain arising from the sale of the impugned property as long-term capital gain, allow the indexation benefit of Rs. 2,20,71,117/- and the deduction under Section 54 of Rs. 57,28,883/-. Ground 6 was allowed: the addition of Rs. 45,79,000/- made u/s 56(2)(vii)(b) was set aside, and the AO was directed to determine the stamp duty value as on 08.01.2011 and recompute the income taxable under Section 56(2)(vii)(b) in accordance with law. Grounds 1, 2, and 3 were dismissed as non-pressed. No specific monetary compensation, interest rate, or compliance timeline was prescribed in the operative direction, as the relief was limited to the re-computation of tax liability.
What This Means For Similar Cases
Holding Period Commences at Allotment, Not Registration
For property acquired under builder allotment schemes, the holding period for capital gains tax under Section 2(42A) begins from the date of issuance of the allotment letter, not the date of registration of the conveyance deed. Payments made through banking channel prior to the allotment letter date satisfy the provisos to Sections 54 and 56(2), allowing assessees to claim indexation benefits and deduents based on the allotment date.
Allotment Letter Treated as Agreement for Tax Purposes
Where an allotment letter specifies the terms of acquisition and part payments are made through banking channel before its issuance, it constitutes an 'agreement' under the provisos to Section 56(2)(vii)(b). Consequently, the stamp duty valuation for the purpose of Sections 56(2) must be taken as on the date of the allotment letter, not the date of registration of the conveyance deed, preventing unjustified additions based on post-allotment market fluctuations.
Substance Over Form in Tax Interpretation
Courts must adopt a benevolent, justice-oriented approach to tax statutes, avoiding hyper-technical reliance on registration formalities when the economic substance indicates an earlier acquisition of rights. The focus should be on the de facto holding of the asset by the assessee, not merely on legal title conveyed through registered documents, to ensure equitable application of capital gains tax provisions.
