2022 (7) TMI 474 - AT - Income Tax

Exemption u/s 54F - Long term capital asset or not - period of holding - AO observed that assessee has sold residential flat after seven months from its acquisition, therefore, it is a short term capital gain - assessee was asked to explain why the above sale should not be treated as short term capital gain and exemption claimed u/s. 54F - Assessee expalined that he was allotted flat based on the joint development agreement entered with the developer - HELD THAT - The fact remains that assessee has promised and allotted the flat in the new proposed building in lieu of the right on the land which was subject matter of the development. Assessee surrendered the right on the land based on the allotment of the flat, may not be a specific flat but having a legal promise that assessee will get a flat of 3BHK measuring 1000 Sq.ft. and accordingly, builder has allotted Flat No. 201. Therefore, as held in the case of Pr.CIT v. Vembu Vaidyanathan 2019 (1) TMI 1361 - BOMBAY HIGH COURT it was held that for computing capital gain tax the date of allotment would be the date on which purchase of residential unit can be stated to have acquired property. We are of considered view that assessee has transferred the property with the promise of allotment of flat. Therefore, the date of acquisition should be the date of allotment of flat, in this case the date of entering into the joint development agreement. Therefore, the claim made by the assessee is proper and justified and accordingly, we direct the Assessing Officer to allow claim made by the assessee u/s. 54F of the Act and accordingly, ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Determination of whether the capital gain from the sale of the flat is short-term or long-term.
2. Eligibility for exemption under Section 54 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Determination of whether the capital gain from the sale of the flat is short-term or long-term:
The core issue was whether the capital gain from the sale of the flat should be treated as short-term or long-term. The assessee acquired a plot of land on 14.10.2006 and entered into a tripartite development agreement on 12.04.2007. The developer allotted a flat to the assessee in lieu of the land rights. The possession of the flat was obtained on 10.07.2013, and the flat was sold on 26.02.2014. The Assessing Officer (AO) treated the gain as short-term since the flat was sold within seven months of possession. The AO argued that the assessee only had a "special right" until the possession of the flat, which ceased upon acquiring the flat. Therefore, the period of holding should be reckoned from the date of possession, making it a short-term capital gain.

2. Eligibility for exemption under Section 54 of the Income Tax Act, 1961:
The assessee claimed exemption under Section 54, arguing that the capital gain should be considered long-term since the right to the flat was acquired when the development agreement was signed in 2007. The assessee cited various case laws to support this claim. The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal, distinguishing between the right to acquire the flat and the ownership of the flat. The CIT(A) held that the capital gain on the transfer of development rights should be long-term, while the gain from the sale of the flat should be short-term. The CIT(A) directed the AO to recompute the total income, treating 25% of the sale consideration as short-term capital gain and the remaining as long-term capital gain.

Tribunal's Decision:
The Tribunal considered the rival submissions and the material on record. It noted that the assessee entered into a joint development agreement in 2007, surrendering land rights in exchange for a flat. The Tribunal referred to the case of Pr.CIT v. Vembu Vaidyanathan, where it was held that for computing capital gain tax, the date of allotment is relevant. The Tribunal also cited the case of Madhu Kaul Vs. CIT, where it was held that the right to hold property is conferred upon the issuance of an allotment letter, and subsequent possession is a consequential act. Based on these precedents, the Tribunal concluded that the date of acquisition should be the date of the development agreement. Therefore, the capital gain should be considered long-term, and the assessee's claim for exemption under Section 54 was justified. The Tribunal directed the AO to allow the exemption and recompute the capital gain accordingly.

Conclusion:
The Tribunal allowed the appeal, holding that the capital gain from the sale of the flat should be treated as long-term, and the exemption under Section 54 should be granted. The decision emphasized that the date of allotment or development agreement is crucial for determining the period of holding for capital gains purposes.