 "Date of allotment is key in under-construction flat")
Everybody wants a piece of real estate. Investments in realty have grown by leaps and bounds over the last decade, luring many landlords and owners to sell their existing assets and invest the money in residential houses/builder flats. But sellers need to be aware of the transactions that deal with the tax on the profits gained. If you sell real estate for a profit, you will need to pay capital gains tax on the profit earned. The capital gains tax varies, depending on the time period the property was held on to.
The sale of a property involves short-term capital gains tax if it was sold before the completion of three years from the date of acquisition. Such gains are taxed at the same rate as applicable to any other income of a taxpayer. However, if the property was sold after three years from its date of acquisition, the resultant gains (known as long-term gains) are taxable at a fixed rate of 20 per cent.
That apart, the taxpayer becomes entitled to avail the benefit of an inflated cost of acquisition of the property as prescribed. In addition to this, the Income Tax Act exempts the capital gains from the sale of a house if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years from the date of sale. Once the exemption has been claimed the newly acquired asset should not be sold within three years from its date of acquisition, else the earlier capital gain exempted becomes taxable. It can be seen that the provisions of the Income-tax Act have put great emphasis on the date of acquisition, which is of utmost importance to understand the nature of the capital asset as well as to claim the exemption. Confusion arises on builder flats where the date of acquisition has been interpreted differently and has led to massive litigation on various issues:
Whether the right on the flat is an asset
A capital asset means property of any kind held by a taxpayer that may or may not be connected with his business or profession. The word 'property' is used in a wide sense and its definition has re-emphasised this by the use of the words "of any kind". Accordingly, a right to obtain conveyance of immovable property is clearly "property". Therefore, if the booking agreement and allotment terms and conditions of the builder gave a right to obtain conveyance on the said flat, the property after fulfilling certain conditions, that itself becomes "an asset" under the Income-tax Act.
What is the date of acquisition of the flat?
A considerable issue which arises in context of transfer of rights in the property under construction as well as in case of transfer of property (after taking the possession) is - whether the gain on transfer is short-term or long-term?
The relevant question which will help decide the nature of capital gain is: "What is the date of acquisition?" In this regard, there can be various views. One view can be the date when the initial advance is given by the intended buyer. The other view can be taking the date when allotment letter is issued to the intended buyer after the project has been properly described. Yet another view can be that the date on which the sale deed is registered, while still another view can be the date when the buyer agreement is executed and so on.
Tax authorities in India are taking a position on the basis of various judgments, that the facts of the case are given a priority to consider the availment. For instance, to qualify the investment in case of builder flats, the crucial date is the date of allotment of the residential flat and the payment of installment is a follow up action. Allotment is a sufficient compliance for getting the benefits, even if the taxpayer has not paid all installments due under the said scheme. The provisions of the section are a beneficial provision for promoting the construction of residential house. Thus, the date of issue of an allotment letter gives a right to the taxpayer (Intended buyer) to obtain conveyance on the said flat so that it becomes an asset within the purview of the Income-tax Act. The date of acquisition of the said flat shall be the date on which the allotment letter is issued to the intended buyer.
Allowing of exemption under Section 54/54F of the Income-tax Act
If the builder does not complete construction of house within three years, is the taxpayer liable to pay the tax thereon? While the plain reading and strict application of the provision seems to suggest that exemption is not allowable in case of any delay beyond three years. But there have been cases where the judge has given relief to taxpayers in those cases where they found that most of the sales consideration have been spent for construction of house, still some portions were not complete for various reasons. The courts in India have taken the view that section 54/54F being a relief provision, should be viewed in relaxed manner. Various principles laid down by the courts for interpreting the date of acquisition are as under:
* If taxpayer has acquired substantial domain over new house and has made substantial payment towards cost of construction within a period specified under section 54/54F, then taxpayer can be said to have complied with requirements for claiming exemption, even if construction of building is not completed within a specified period.
* Merely because the builder failed to hand over possession of the flat to the taxpayer within the specified period, the taxpayer cannot be denied the benefit of the said benevolent provision.
* A mere absence of the sale deed or a procedural delay in obtaining registration, does not disentitle a taxpayer from the applicable exemption. If investment is made in the construction of house, then it should be deemed that sufficient steps have been taken and this satisfies the requirements of section 54/54F.
* The Central Board of Direct Taxes (CBDT) has also clarified that to qualify as an investment for construction under section 54F the crucial date is the date of allotment of flat by an institution and payment of installments was only a follow-up action and taking possession of the flat is only a formality.
However, one needs to remember that the court needs to be satisfied that the sales consideration was used for investment in the new residential house.
The scheme provided by the government is a tax saving as well as an effective investment scheme for the taxpayer's who get a double privilege through wise investment. It can be said that the provision has to be construed liberally and for achieving the purpose for which it stands incorporated in the statute.
The sale of a property involves short-term capital gains tax if it was sold before the completion of three years from the date of acquisition. Such gains are taxed at the same rate as applicable to any other income of a taxpayer. However, if the property was sold after three years from its date of acquisition, the resultant gains (known as long-term gains) are taxable at a fixed rate of 20 per cent.
That apart, the taxpayer becomes entitled to avail the benefit of an inflated cost of acquisition of the property as prescribed. In addition to this, the Income Tax Act exempts the capital gains from the sale of a house if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years from the date of sale. Once the exemption has been claimed the newly acquired asset should not be sold within three years from its date of acquisition, else the earlier capital gain exempted becomes taxable. It can be seen that the provisions of the Income-tax Act have put great emphasis on the date of acquisition, which is of utmost importance to understand the nature of the capital asset as well as to claim the exemption. Confusion arises on builder flats where the date of acquisition has been interpreted differently and has led to massive litigation on various issues:
Whether the right on the flat is an asset
A capital asset means property of any kind held by a taxpayer that may or may not be connected with his business or profession. The word 'property' is used in a wide sense and its definition has re-emphasised this by the use of the words "of any kind". Accordingly, a right to obtain conveyance of immovable property is clearly "property". Therefore, if the booking agreement and allotment terms and conditions of the builder gave a right to obtain conveyance on the said flat, the property after fulfilling certain conditions, that itself becomes "an asset" under the Income-tax Act.
What is the date of acquisition of the flat?
A considerable issue which arises in context of transfer of rights in the property under construction as well as in case of transfer of property (after taking the possession) is - whether the gain on transfer is short-term or long-term?
The relevant question which will help decide the nature of capital gain is: "What is the date of acquisition?" In this regard, there can be various views. One view can be the date when the initial advance is given by the intended buyer. The other view can be taking the date when allotment letter is issued to the intended buyer after the project has been properly described. Yet another view can be that the date on which the sale deed is registered, while still another view can be the date when the buyer agreement is executed and so on.
Tax authorities in India are taking a position on the basis of various judgments, that the facts of the case are given a priority to consider the availment. For instance, to qualify the investment in case of builder flats, the crucial date is the date of allotment of the residential flat and the payment of installment is a follow up action. Allotment is a sufficient compliance for getting the benefits, even if the taxpayer has not paid all installments due under the said scheme. The provisions of the section are a beneficial provision for promoting the construction of residential house. Thus, the date of issue of an allotment letter gives a right to the taxpayer (Intended buyer) to obtain conveyance on the said flat so that it becomes an asset within the purview of the Income-tax Act. The date of acquisition of the said flat shall be the date on which the allotment letter is issued to the intended buyer.
Allowing of exemption under Section 54/54F of the Income-tax Act
If the builder does not complete construction of house within three years, is the taxpayer liable to pay the tax thereon? While the plain reading and strict application of the provision seems to suggest that exemption is not allowable in case of any delay beyond three years. But there have been cases where the judge has given relief to taxpayers in those cases where they found that most of the sales consideration have been spent for construction of house, still some portions were not complete for various reasons. The courts in India have taken the view that section 54/54F being a relief provision, should be viewed in relaxed manner. Various principles laid down by the courts for interpreting the date of acquisition are as under:
* If taxpayer has acquired substantial domain over new house and has made substantial payment towards cost of construction within a period specified under section 54/54F, then taxpayer can be said to have complied with requirements for claiming exemption, even if construction of building is not completed within a specified period.
* Merely because the builder failed to hand over possession of the flat to the taxpayer within the specified period, the taxpayer cannot be denied the benefit of the said benevolent provision.
* A mere absence of the sale deed or a procedural delay in obtaining registration, does not disentitle a taxpayer from the applicable exemption. If investment is made in the construction of house, then it should be deemed that sufficient steps have been taken and this satisfies the requirements of section 54/54F.
* The Central Board of Direct Taxes (CBDT) has also clarified that to qualify as an investment for construction under section 54F the crucial date is the date of allotment of flat by an institution and payment of installments was only a follow-up action and taking possession of the flat is only a formality.
However, one needs to remember that the court needs to be satisfied that the sales consideration was used for investment in the new residential house.
The scheme provided by the government is a tax saving as well as an effective investment scheme for the taxpayer's who get a double privilege through wise investment. It can be said that the provision has to be construed liberally and for achieving the purpose for which it stands incorporated in the statute.
The author is Managing Partner, Nangia & Company