Any Land or Building sold after a holding period of more than 2 years is considered as Long Term Capital Assets and is eligible for indexation benefit. The profit there from is termed as Long Term Capital Gain (LTCG) and is normally taxable at a special rate of 20%. More importantly, tax on such LTCG can be saved by claiming an exemption u/s 54, 54F or 54EC. Question emerges as to counting of the period of 2 years for reckoning such assets as Long Term in certain scenario. Let us have a look:
- In case of Assets received by way of Gift, Will or inheritance:
The period of holding of previous owner is also added to the holding period of successive owner. For example, Mr. Ram has received a property by way of gift from his brother Mr. Shyam on 01.04.2018. Mr. Shyam has purchased the said property on 01.04.2010. Even if actual holding period of Mr. Ram is of around 1 year only still it would be treated as Long Term. The holding period of previous owner i.e., Mr. Shyam would be added to the holding period of successive owner and so holding period of Mr. Ram would be reckoned from 01.04.2010.
- In case the sale deed is not executed but either allotment letter is issued or possession is handed over by the seller:
Normally, the period of holding is recognized from the date of execution of sale deed. But there are numerous instances wherein the sale deed is delayed due to some legal or personal issues & sale deed gets deferred for a considerable period of time. As a result, legal holding period and actual holding period may be different. Reckoning the holding period in such cases may differ from case to case basis. Income tax authorities normally counts the holding period from the date of sale deed. However, judiciary has taken a lenient view in such scenario. Few interesting decisions are delivered by judiciary in different cases, as under:
- a)Delhi High Court in CIT Vs K Ramakrishanan 48 com 55 (Delhi) has held as under:
In order to determine taxability of capital gain arising from the sale of property, it is the date of allotment of property which is relevant for the purpose of computing holding period and not the date of registration of conveyance deed.
- b)Recently, Mumbai ITAT in the case of one Mr. Keyur Shah has concluded that the Allottee gets title to the property on the issue of allotment letter and the payment of installments was only a follow- up action and taking the delivery of possession is only a formality.
If the allotment letter is not conditional, then entering into an agreement of sale subsequently is a mere improvement of the tax payer’s existing right to acquire a specific property and is part and parcel of the same transaction.
The position emerging from above pronouncement is that the legal ownership may not be critical for computing the period of holding from Income Tax perspective.
Date of allotment of a house can be considered as the date of acquisition.
ITAT has held that the date of allotment is the date of acquisition as no material changes were there in the terms and conditions as compared to those in the final registered agreement. The holding period may be recognized from this date of allotment and not from the date of registration.
Above decisions can help taxpayers where sale deed is executed much later than the date of allotment or handing over the possession by the builders.
The intention of the law in using the word “held” indicates that the legal ownership of the asset is not the main criteria for determining holding period. An allotment letter means that the buyer has the right in the property. Execution of sale deed at a subsequent date is not of much relevance for capital gain computation. It is not necessary that the buyer needs to be the owner with sale deed to determine the holding period.