In a decision by the Mumbai Tax bench of the Income Tax Appellate Tribunal (ITAT), it was recently held that the date of allotment of a house shall be treated as the date of acquisition. The holding period will be counted from this date and not from the date of registration. This ruling will benefit many taxpayers.
Gains arising from the sale of a long term capital asset are treated as long term capital gain (LTCG). For an asset to be regarded as long-term, the holding period of house property is 24 months. Prior to 2017-18 financial years, it was 36 months.
The tribunal’s decision is important as taxpayers (under Section 54-F) is entitled to a deduction from LTCG arising on sale of a house if investments are made in another house within the stipulated period.
This deduction reduces the taxable component of the capital gains and results in lower tax outgo. On the other hand, if the gains arising on the sale of a house are treated as short-term, purchase of a new house will not entitle a taxpayer to any such benefit. With the ITAT saying that the holding period should be computed from the date of allotment, it will help many taxpayers as typically the registration happens much later.
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What is Capital Gain &Capital Assets?
Any profit or gain arising from the sale of a ‘capital asset’ is a capital gain. This gain or profit is considered as income and hence charged to tax in the year in which the transfer of the capital asset takes place. This is called the capital gains tax, which can be short-term or long-term.
Capital assets include land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian company or rights of management or control or any other legal right.
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There are the following two types of capital assets:
- Short-term capital asset:an asset which is held for a period of 36 months or less is a short-term capital asset. From the financial year 2017-18, the criteria of 36 months have been reduced to 24 months in the case of immovable property being land, building, and house property.
- Long-term capital asset:the asset held for more than 36 months is a long-term capital asset. The movable property such as jewellery, debt-oriented mutual funds, etc. will be classified as a long-term capital asset if held for more than 36 months as earlier.
Tax on Long-Term Capital Gains
The long-term capital gain is taxable at 20%.To calculate the long term Capital Gains, full value consideration is taken from which expenses incurred exclusively for such transfer, the indexed cost of acquisition, the Indexed cost of the improvement is deducted and from this resulting number, the exemptions provided under sections 54, 54EC, 54F, and 54B are deducted.
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Section 54-F reads as follows:
(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
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Provided that nothing contained in this sub-section shall apply where—
(a) the assessee,—
- owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
- purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
- constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.
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Facts of the Recent Ruling
- In the matter before the ITAT, Keyur Shah had sold a duplex apartment on April 4, 2012, for Rs. 12 crores. His share in the property was 50% and the corresponding capital gains worked out to Rs. 2.9 crore.
- In the income tax (I-T) return for the financial year 2012-13, he claimed a deduction under Section 54-F of Rs. 1.09 crore (for investment in a new house) and offered the balance Rs. 1.8 crore as taxable.
- However, the I-T officer contested that the duplex apartment was purchased via a registered agreement only on March 25, 2010.
- Counting from this date to the date of sale, the holding period was less than 36 months. This, the capital gains should be treated as short-term and the Section 54F benefit could not be allowed, the official held.
- The I-T department submitted to the ITAT that, “the allotment letter is only an offer and the right or interest in property accrues only on signing and stamping of the agreement.”
- On the other hand, Shah argued that the duplex flat was purchased via an allotment latter dating back to February 26, 2008, and a substantial payment of Rs. 1.86 crore was already made by July that year. Thus the holding period when counting from the date of the allotment letter was more than 36 months.
- “The ITAT rightly held that the date of allotment should be treated as the date of acquisition since there were no material changes in the terms and conditions as compared to those in the final registered agreement,” said Gautam Nayak, tax partner at CNK & Associates.
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This post is written by Damini Aggarwal of Punjab University (2020 batch). For more info on subject, please dial 99888-17966.