2006 (2) TMI 652 - AT - Income Tax

Summary

Issues Involved:
1. Determination of whether the capital gain from the sale of two houses is long-term or short-term.
2. Interpretation of the term "held" in the context of capital gains.
3. Application of Section 53A of the Transfer of Property Act, 1882.

Issue-Wise Detailed Analysis:

1. Determination of whether the capital gain from the sale of two houses is long-term or short-term:

The core issue revolves around the classification of the capital gain from the sale of two houses purchased by the assessee from the Housing Board, Haryana. The assessee claimed the income as long-term capital gain, while the Assessing Officer (AO) assessed it as short-term capital gain. The assessee argued that the houses were allotted on 5-8-1986 and possession was handed over on 1-9-1986, making the holding period long-term. However, the AO contended that the ownership was established only on 13-1-1997 when the final payment was made and the property was registered in the assessee's name. The CIT(A) upheld the AO's view, emphasizing that the assessee was a tenant until the full payment and registration were completed.

2. Interpretation of the term "held" in the context of capital gains:

The assessee argued that the term "held" should be interpreted broadly, encompassing possession under an agreement of sale, even if the legal title had not been transferred. The assessee relied on Circular No. 471 dated 15-10-1986 and the judgment in CIT v. Mrs. Hilla J.B. Wadia, which suggested that possession under an agreement could be considered as holding the property. The AO and CIT(A) disagreed, asserting that legal ownership and title transfer were necessary for considering the holding period. The CIT(A) cited the Supreme Court's decision in Budhan Singh v. Babi Bux, which stated that "held" connotes possession by legal title.

3. Application of Section 53A of the Transfer of Property Act, 1882:

The assessee contended that the possession handed over on 1-9-1986 constituted a transfer under Section 53A of the Transfer of Property Act, 1882, which should be considered for determining the holding period. The CIT(A) and AO rejected this argument, stating that the hire purchase agreement did not confer ownership until the full payment and registration were completed. However, the Tribunal found that the agreement, though titled as a hire purchase agreement, was essentially an agreement to sell, with possession given in part performance of the contract. Thus, the Tribunal concluded that the possession under the agreement should be considered as holding the property, making it a long-term capital gain.

Conclusion:

The Tribunal held that the lower authorities were not justified in treating the flats as short-term capital assets. It directed the AO to treat the flats as long-term capital assets and compute the capital gains accordingly. The appeal of the assessee was allowed, recognizing the possession under the hire purchase agreement as sufficient to consider the holding period from the date of possession.