Period of holding to be considered from the date of allotment or date of agreement?

Income Tax Act, 1961, Section 2(42A)

Capital gains—Short-term or long-term—Period of holding—Date of allotment v. date of execution of agreement

Conclusion: As property proposed to be acquired by the assessee was specific and a unique property which was clearly identified in allotment letter dated 22-10-2008 for which agreement was executed on 15-12-2011 which was in furtherance of the stated allotment only, therefore, period of holding had to be taken from the date of allotment and resultant gain earned by the assessee was long-term capital gains.

Assessee sold residential flat on 25-5-2012 and claimed deduction under section 54F in respect of resulting capital gain. AO denied deduction on the ground that since agreement for allocation of flat was executed on 15-12-2011, therefore, assessee held property for a prescribed period of less than 3 years and therefore, resultant profit was short term capital gain.

Held: Though agreement for allocation of flat was executed on 15-12-2011, however, this agreement was in respect of same flat which was allotted to assessee vide Allotment Letter dated 22-10-2008 and the agreement also contained reference to the allotment letter. Thus, property proposed to be acquired by the assessee was specific and a unique property which was clearly identified in allotment letter dated 22-10-2008 for which agreement was executed on 15-12-2011 which was in furtherance of the stated allotment only. Accordingly, period of holding had to be taken from the date of allotment and resultant gain earned by the assessee was long-term capital gains, eligible for deduction under section 54F.

Decision: In assessee’s favour.

IN THE ITAT, MUMBAI BENCH

C.N. PRASAD, J.M. & MANOJ KUMAR AGGARWAL, A.M.

ACIT v. Shradha Sudhir Valia

ITA No. 192/Mum/2017

5 February, 2019

Assessee by: Vijay Mehta, learned AR

Revenue by: B.B. Rajendra Prasad, learned CIT-DR

Manoj Kumar Aggarwal, A.M.

Aforesaid appeal by revenue for assessment year [AY] 2013-14 contest the order of learned Commissioner of Income-Tax (Appeals)-32, Mumbai, [CIT(A)], Appeal No. Commissioner (Appeals)-32/IT-617/ACIT-20(3)/15-16, dt. 26-10-2016 on following effective Grounds of appeal :–

1. On the fact and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in relying upon the CBDT Circular Nos. 471 & 672 without appreciating the fact that these circulars apply in the cases of investment in flats under Self Finance Scheme of DDA/Co-op. Societies/Institutions, with similar scheme, whereas in the case of assessee allotment has been made by a private entity and if additional evidence was produced before the learned Commissioner (Appeals) in respect of the similarity of schemes, same should have been remanded to the assessing officer for his examination and comments.”

2. On the fact and circumstances of the case and in law, the learned Commissioner (Appeals) erred in accepting the view of assessee that section 2(47)(v) is with reference to transfer for the purpose of capital gain in the hands of the transferor and is not to decide the date of purchase whereas the provisions of the Income Tax Act do not suggest that section 2(47)(v) will not be considered for determining the date of acquisition of capital asset

3. On the fact and circumstances of the case and in law, the learned Commissioner (Appeals) erred in allowing deduction under section 54F of the Income Tax Act, 1961 as the assessee purchased two residential houses instead of a residential house.”

4. On the fact and circumstances of the case and in law, the learned Commissioner (Appeals) erred in relying on the judgment of Bombay High Court in the case of Devdas Naik which is different from this case in respect of single kitchen in two flats whereas in assessee case two residential houses had two kitchen.

5. On the fact and circumstances of the case and in law, the learned Commissioner (Appeals) is not justified in allowing deduction under section 54F of the Income Tax Act, 1961 inspite of the fact that assessee has illegally adjoined two residential houses without prior permission of BMC, which is a responsible authority for implementation of safety norms of residences and only BMC can allow alternation in residential flats. Further, it is evident by the Society’s letter that assessee is using single entry for both residences and it is not possible to use both residences with single entry without breaking walls separating two flats illegally.”

6. The appellant prays that the order of the Commissioner (Appeals) on the above grounds be reversed and that of the assessing officer be restored.”

The assessment for impugned assessment year was framed by learned Assistant Commissioner of Income Tax, Circle-20(3), Mumbai [AO] in scrutiny assessment under section 143(3) on 23-3-2016 wherein the income of the assessee was determined at Rs. 2098.67 Lacs after certain adjustments as against returned income of Rs. 63.67 Lacs e-filed by the assessee on 26-7-2013. The assessee was saddled with impugned additions in view of the fact that certain Long-Term Capital Gain [LTCG] was treated as Short Term Capital Gain [STCG] and consequently, the deduction under section 54F as claimed by the assessee was denied to her.

2.1 During assessment proceedings, it transpired that the assessee sold her right in a residential property for sale consideration of Rs. 23.75 Crores on 25-5-2012. Those rights were stated to be acquired on 22-10-2008 for a sum of Rs. 3.40 Crores, the indexed cost of which worked out to Rs. 4.97 Crores. Accordingly, the gains of Rs. 18.77 Crores were reflected as Long-Term Capital Gain [LTCG] against which deduction under section 54F was claimed on account of purchase of two new flats. Since the new investments exceeded the LTCG earned by the assessee, the resultant gains as offered to tax became Nil.

2.2 The assessee was required to justify her claim under section 54F. Upon perusal of purchase documents related to property sold by the assessee, it was noted that purchase agreement was entered on 15-12-2011 between the assessee and Sanjay Kanubhai Patel and Vijay Mohanlal Parekh on behalf of Areal View CHS Ltd. for a consideration of Rs. 3.40 Crores. The said agreement was registered on 13-4-2012. The same led the learned assessing officer to form a belief that the flat under question was acquired by the assessee only on 15-12-2011 and therefore, the resultant gains were merely Short-Term Capital Gains in nature since the capital asset which was sold by the assessee was actually a flat and not a mere right in the flat. Applying the same logic, indexation benefit was denied to the assessee and STCG was worked out at Rs. 20.35 Crores against which the assessee was not entitled to claim deduction under section 54F since the benefit of that section was available only against LTCG.

2.3 The learned assessing officer, in the alternative, also noted that the assessee made investment in two flats i.e. Flat Nos. 1701 & 1702 for a consideration of Rs. 11.60 Crores and Rs. 11.30 Crores respectively. In terms of the agreement, the purchaser assessee intended to merge both the flats into one residential house after obtaining necessary approval from concerned authorities. It also transpired that both the flats had separate kitchens.

The assessee defended the same vide submissions dated 16-3-2016 and contended that the two flats were not only adjacent flats but were being used as a single residential house. To support the same, a certificate dated 29-2-2016 issued by the concerned society was placed on record. However, not convinced, learned assessing officer noted that the assessee had leased out these flats vide lease agreement dated 19-3-2013 according to which two flats were leased out and their area was mentioned separately in the lease agreements which show that both flats were independent flats even on the date of leasing out to an entity namely TPG Capital India Private Limited. These facts, in the opinion of learned assessing officer, negated assessee’s claim that both the flats were joined together. The reply received from Executive Engineer, BMC, Byculla, Mumbai in response to notice under section 133(6) revealed that no proposal was received by the authorities regarding amalgamation of two flats. The aforesaid facts led the learned assessing officer to conclude that the assessee violated conditions of section 54F and therefore, not entitled for the said deduction.

2.4 Finally, the resultant gain of Rs. 20.35 Crores were treated as STCG and added to the income of the assessee and the benefit of deduction under section 54F was denied to the assessee.

3. Aggrieved, the assessee contested the same with success before Commissioner (Appeals) vide impugned Order, dated 26-10-2016 wherein after due consideration of quantum assessment order and assessee’s submission, the matter was concluded in assessee’s favor in the following manner: —

5.7 I have carefully perused the assessment order and the submission of the appellant. The definition of transfer is read as under: —

Section 2(47) “transfer”, in relation to a capital asset, includes, —

(i) the sale, exchange or relinquishment of the asset; or ……..

Explanation 2.–For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;

Considering the definition as per section 2(47), transfer of interest in property can be construed as transfer of capital asset. The appellant had submitted the letter of allotment dated 22-10-2008 wherein she was entitled to the right in specific property of the proposed building “Vastu Pali Hill”. Also entire consideration of Rs. 3.4 crores was paid before date of allotment. Since the appellant is one of the members of the proposed Society, as per the circular dated 15-10-1986, the allottee gets title to the property on the issuance of the allotment letter. In the agreement for purchase that was registered the allotment letter is a part of the registered agreement Thus, it can be said that the appellant got title to the property when allotment letter was issued to her i.e. on 22-10-2008. Further it has been clearly stated in the agreement to sale that society has handed over the possession of the flat to the transferee as absolute owner thereof.

In case of CIT v. TATA Services Ltd. (1980) 122 ITR 594 (Bom) : 1980 TaxPub(DT) 0534 (Bom-HC) it has been held that —

The word “property”, used in section 2(14), is a word of the widest amplitude and the definition has re-emphasised this by use of the words “of any kind”. Thus, any right which can he called property will be included in the definition of “capital asset”. A contract for sale of land is capable of specific performance. It is also assignable.

Therefore, a right to obtain conveyance of immovable property, was clearly “property” as contemplated by section 2(14).”

In case of Richa Bagrodia v. DCIT-12(3), Mumbai (ITA No. 3601/M/2012) it was held that the “date of allotment” should be reckoned as the date for computing the holding period for the purpose of capital gains.

Applying the above decision in case of the appellant, period of holding will be considered from date of allotment letter i.e. 22-10-2008 and not 15-12-2011 i.e. when agreement was entered. Since the appellant has acquired the capital asset on 22-10-2008 and sold the same on 25-5-2012, the appellant is said to have transferred long term capital asset and is entitle to the benefit of indexation and can also claim deduction under section 54F provided condition laid down in section 54F are fulfilled.

6. Grounds of appeal no. 3. This ground is related to deduction claimed under section 54F of two flats purchased as against lawful permission of one flat. Since ground no. 1 and 2 are allowed, the appellant is entitled to claim deduction under section 54F.

6.1 During the year under consideration, the appellant has claimed deduction under section 54F for purchase of residential Flats No. 1701 & 1702 in C-Wing, Beaumonde, Prabhadevi, Mumbai from M/s. Sheth Developers Pvt. Ltd. amounting to Rs. 24,56,57,700 on 10-9-2012. During the course of assessment proceeding, the assessing officer issued show cause notice on 4-3-2016 asking the appellant to explain why deduction under section 54F should not be denied as there are purchase of more than one flat. In response, the appellant submitted letter dated 16-3-2016 and stated that though agreement shows purchase of two flats they are not only adjacent flats but are being used as single residential house and in addition the appellant had submitted Agreement for purchase of flats, CD wherein photographs of the said residential house are there which shows that it is a single house and Society certificate certifying that both the flats stands merged into one residential unit having single entrance since its purchase by the owners. Further notice under section 133(6) was issued by LAO to The Executive Engineer, BMC, Byculla, Mumbai on 4-3-2016 to enquire whether approval was taken from it before merging of two flats. In response to the same the Executive Engineer filed its reply vide letter dated 11-3-2016 and stated that no proposal is received regarding amalgamation of flat no. 1701 and 1702 on 17 floor, C-wing, Beau Monde. Various observations were laid down by assessing officer in his assessment order to support his contention that the appellant has violated the condition prescribed in section 54F in as much as she has acquired two flats as against lawful permission of one flat. These observations of the assessing officer are as under:–

(i) Consideration paid for two flats purchased by the appellant is mentioned separately in the agreement and as per various clauses of the agreement it is revealed that all the three parties to the agreement being appellant, owner and Developer admit the existence of two separate flats bearing Flat No. 1701 and Flat No. 1702.

(ii) it has been pointed out by assessing officer that as per clause 57(P) on page 40 of agreement it is clear that the merger of flat is not at a choice of the buyer but subject to the approval from the concerned authorities.

(iii) Reference has been made of the Annexure ‘F-I’ and ‘F-II’ of the agreements wherein both the flats have been shown with different kitchen. As per assessing officer, when the flats ere purchased from the developers they were independent flats as per the plan and if at all they have to be joined it was the responsibility of buyer to bear the cost as well as to seek the permission of the local authority.

(iv) As per assessing officer, Merger of two flats was after taking possession of flats and formation of society. Further, the society’s certificate does not spell out the date on which the merger of two flats was done. Therefore, there is a reason to believe that the two flats were joint together after society came into existence, till then both these flats were having definite existence.

(v) The assessing officer referred to Lease agreement dated 19-3-2013 which shows that the two flats were leased out and their area was mentioned separately which shows that both flats were independent flats even on the date of leasing of the flats to TPG Capital India P. Ltd.

(vi) Letter received from Municipal Authority makes it abundantly clear that till the date of letter there was no application from the appellant seeking permission for merging two flats.

The appellant in her submission has rebutted the above observation of the assessing officer by stating that:–

(i) It needs to be appreciated that the document entered into is only one and in the said agreement it is written that “…..are jointly herein after referred as the said premises”. Thus both are referred in common.

(ii) When a person is buying two adjacent flats the purpose is to use them as one flat only and to use as one flat there is no need for any approval.

(iii) It is the buyer who wants to use a larger flat. When such a larger size is not available she has to enter into purchase of two adjacent flats so that she can used them as one.

(iv) It is not to ascertain when the permission was obtained or whether society gives the permission late. It is to understand that from the beginning the purpose was to have one bigger flat and use the same as one flat. That is why the purchaser is the same and the agreement is only one and registered also as one agreement.

(v) Again assessing officer ignores that the agreement of lease is one and the rent decided is one only. There is no bifurcation of rent between two flats an in agreement, it is referred as “the said flat”.

(vi) It is user as one flat that is important. Above submissions prove beyond any doubt that the purchase of larger flat was required and hence two flats adjacent were purchased.

6.2 Further the appellant had relied on various following decisions to support her contention that deduction under section 54F can be allowed for two flats purchased adjacent to each other and used as single unit:

(i) Commissioner of Income Tax v. Devdas Naik (2014) 366 ITR 0012 (Bom) : 2014 TaxPub(DT) 3348 (Bom-HC)

(ii) Shri Satidh Nikam v. ITO, Hon’ble Mumbai Tribunal

(iii) ITO v. M/s. Sushila M. Jhaveri, (2007) 107 ITD 327 (Mum)(SB) : 2007 TaxPub(DT) 1732 (Mum-Trib)

(iv) CIT v. D. Ananda Basappa (2009) 309 ITR 329 (Kar.) : 2009 TaxPub(DT) 0955 (Karn-HC)

(v) Commissioner of Income Tax v. Gita Duggal (2013) 30 taxmann.com 230 (Delhi HC) : 2013 TaxPub(DT) 0960 (Del-HC) 

(vi) ACIT v. Mrs. Leela P. Nanda (2006) 286 ITR (AT) 113 (Mum) : 2006 TaxPub(DT) 0802 (Mum-Trib) 

(vii) CIT v. K.G. Rukminiamma (Smt.) (2010) 48 DTR 377 (Kar.) : 2011 TaxPub(DT) 0429 (Karn-HC)

(viii) CIT v. Syed Ali Adil (2013) 215 Taxman 283 (AP-HC) : 2013 TaxPub(DT) 1290 (AP-HC) 

6.2 I have carefully perused the assessment order and submission made by the appellant. The appellant has purchased two flats which are adjacent to each other and claimed deduction under section 54F for the said flats. As per section 54F, deduction is allowed for ‘a’ residential house purchased. Further section 54F was amended with effect from 1-4-2015 by substituting the word “a” with “one”. Thus, it shows that prior to the amendment the exemption provided under section 54(1) was not restricted to investment made in one residential house.

6.3 In various decisions given by Hon’ble High Court and Hon’ble Tribunal, interpretation of the word “a” preceding the expression “residential house” has been given. In case of CIT v. DEVDAS NAIK (Supra), it was held that deduction under section 54 can be allowed if flats are a single unit and a house for purpose of residence even if acquisition of flats were done independently. In case of CIT & Anr. v. D. Ananda Basappa it was held that expression “a residential house” should not be understood to indicate a singular number; assessee having purchased two residential flats, exemption under section 54 was available, more so as these flats are situated side by side and the builder has effected modification of the flats to make it as one unit.

6.4 From the above judicial pronouncements, it is clear that deduction can be claimed under section 54F for two residential flats if they are being used as a single unit although the flats are acquired independently. Objection of the assessing officer is that they are two flats. He has not said that they are not adjacent. In the appellant’s case, the appellant has purchased two flats which are adjacent to each other. The appellant had entered into one agreement for purchase of two flats. Further, the appellant had leased out both the flats to single party i.e. TPG Capital India P. Ltd., entered into single lease agreement and also was receiving rent for both the flats together.

Further the appellant had submitted society’s certificate which certified that both the flats stands merged into one residential unit having single entrance since its purchase by the owners. Thus, this further strengthens the appellant’s contention that she was entitled to take deduction under section 54F.

6.5 Considering the facts of the appellant’s case and following the decision of Jurisdictional Bombay High Court in case of DEVDAS NAIK, the appellant is entitled to take deduction under section 54F.

Aggrieved as aforesaid, the revenue is in further appeal before us.

4. The learned CIT-DR submitted that the assessee had sold flat during impugned assessment year which was held for a prescribed period of less than 3 years and therefore, the resultant gains were STCG in nature. It has further been submitted that deduction under section 54F could not allowed against two flats since it was never the intention of the statute to provide deduction for more than one house property. Per Contra, learned AR supported the observations made by first appellate authority and submitted that the assessee had transferred mere interest in the property which was held for a period of more than 3 years and therefore, the gains were LTCG in nature. It was further submitted that the new flats were adjacent units and were being used only as a single unit and therefore deduction under section 54F was available to the assessee.

5. We have carefully heard the rival contentions and perused relevant material on record including documents placed in the paper-book and judicial pronouncements cited before us. Upon due consideration, we find that this is undisputed fact that the assessee acquired the right in specific Flat No. 702, 7th Floor, Aerial View CHS Ltd. by way of allotment letter dated 22-10-2008, as placed on record. The sale consideration was fixed at Rs. 3.40 Crores which was already paid by the assessee on 29-9-2008 i.e. much before issuance of allotment letter. The agreement for allocation of flat was executed vide agreement dated 15-12-2011 which was registered on 13-4-2012. This agreement is in respect of the same flat which was allotted to the assessee vide Allotment Letter dated 22-10-2008 and the agreement also contains reference of the allotment letter. The perusal of these facts reveal that the property proposed to be acquired by the assessee was specific & a unique property which was clearly identified in the allotment letter dated 22-10-2008 for which the agreement was executed on 15-12-2011 which was in furtherance of the stated allotment only. The learned assessing officer, in our opinion, got misled by the fact that right in the flat got vested in the assessee upon allotment and the same got exchanged with actual flat upon execution of the agreement and therefore, the holding period should have been counted from the date of the agreement. However, we have noted that allotment as well as execution of the agreement did not vest two different capital assets in the hands of the assessee which got exchanged with each other upon execution of the agreement rather the event of allotment as well as execution of agreement was part & parcel of the same transaction and only an improvement in ownership rights held by the assessee in the flat.

This being the case, no infirmity could be found in the impugned order and therefore, this ground stands dismissed. Having said so, the resultant gains earned by the assessee would be LTCG only and therefore, we proceed to delve into the issue of assessee’s eligibility to claim deduction under section 54F.

6. It is noted that the assessee has made new investment in two flat Nos. 1701 & 1702 in C-Wing, Beaumonde, Prabhadevi, Mumbai stated to be purchased from M/s. Sheth Developers Pvt. Ltd. for a consideration of Rs. 24.56 Crores during September, 2012. It is undisputed fact that the flats were adjacent flats. The perusal of the purchase agreement reveal that the two flats were being intended to be used by the assessee as a single unit. The flats were, subsequently, stated to be merged into one unit which is evidenced by certificate issued by the concerned society certifying the said fact. This is further fortified by the fact that these flats were leased out as single unit under single lease agreement and a composite rent was fixed against the same. All these factors bolster the assessee’s claim that the flats were used as a single unit and therefore, the assessee, in our opinion, was eligible to claim the impugned deduction under section 54F. For this proposition, we draw strength from the following judicial pronouncements: —

1. CIT v. Gita Duggal [Hon’ble Delhi High Court (2013) 357 ITR 153 (Del) : 2013 TaxPub(DT) 0960 (Del-HC)] as confirmed by Hon’ble Apex Court by way of dismissal of SLP [(2014) 52 Taxmann.Com 246 (SC) : 2018 TaxPub(DT) 3187 (SC)]

2. CIT v. Syed Ali Adil [Hon’ble AP High Court (2013) 352 ITR 418 (AP) : 2013 TaxPub(DT) 1290 (AP-HC)]

3. CIT v. Smt K.G. Rukminiamma [Hon’ble Karnataka High Court (2011) 331 ITR 211 (Karn) : 2011 TaxPub(DT) 0429 (Karn-HC)]

4. DCIT v. Jai Trilokchand Rao (2014) 149 ITD 112 (Mum-Trib) : 2014 TaxPub(DT) 2658 (Mum-Trib)

This is further fortified by the observation of first appellate authority that amendment to section 54F was applicable only with effect from 1-4-2015 wherein the word “a” was substituted with the word “one” which shows that prior to the amendment, the exemption was not restricted to investment made in one residential house. Lastly, the aforesaid deduction, merely on the basis of stated certificate of BMC, in our opinion, could not be denied to the assessee particularly when the corroborative evidences stood in assessee’s favor. Resultantly, the overall factual matrix leads us to concur with the stand of first appellate authority. We order so.

7. The appeal stands dismissed in terms of our above order.