MOHAMMED FARHAN MOHAMMED YUNUS ATTARWALA,MUMBAI vs. WARD 20(2)(1), NFAC DELHI, MUMBAI

The assessee is an individual and filed the return of income for AY 2020-21 on 01.01.2021 declaring a total income of Rs. 13,80,550/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) noticed that the assessee has shown a Long Term Capital Gain (LTCG) of Rs. 1,21,691/- on sale of immovable property located at 51 East, Bandra, Mumbai. The AO noticed that the assessee has claimed indexed cost of acquisition and improvement while computing the LTCG. The AO called on the assessee to furnish the documentary evidences to substantiate the deductions claimed from the LTCG. The assessee in response furnished the agreement registered on 03.10.2016 along with three other members. The AO noticed that the assessee as on the date of registration of the agreement had paid only a portion of the total cost and that the final payment of the property was made only on 21.08.2019. The AO further noticed that the assessee has sold the property on 19.06.2019 and has claimed the indexed cost of acquisition to declare the difference as LTCG. Since the final payment and the possession was given to the Mohammed Farhan Mohammed Yunus Attarwala.

The AO did not accept the submissions of the assessee and held that “5.5 Subsequently, an opportunity of Video Conference (VC) has been granted to the assessee, as requested and accordingly a meeting has been scheduled on 15.09.2022. The assesse's AR attended the VC on 15.09.2022 and has reiterated the arguments which were made in the earlier written submissions filed on 12.09.2022. The AR of the assessee has been provided adequate time to present his case and the explanation/submission put-forth by him has been taken into due consideration.

6 The aforesaid written submissions together with the enclosures annexed therewith have been carefully perused. Similarly, the arguments put forth by the assessee's counsel have also been taken into due consideration. The judicial decision on which the assessee's AR has placed reliance in support of his contention has also been examined carefully. It is observed that the assessee, in his detailed submissions, is prima facie contending that the date of acquisition of the property is to be reckoned from the date of 03.10.2016 itself. However, the assessee's contention it is not found to be acceptable. The Circulars No.471 & 672 on which the assessee has placed reliance, are issued in relation to cases of construction for the purposes of sections 54 and 54F of the Income-tax Act. As such, the same are not applicable to the facts of the instant case. Further, as pointed out in preceding paragraphs, there is only an 'agreement to sale. No final 'sale deed' has been filed. This in itself indicates that some of the crucial terms as mentioned in the agreement dated 03.10.2016, i.e., handing over possession of the property, payment of balance sale consideration, intimation from the developer/builder etc., have not been discharged on the date of agreement dated 03.10.2016. As such, It cannot be held that the assessee has acquired the property as on 03.10.2016. The acquisition of the property is only after fulfilment of all such Mohammed Farhan Mohammed Yunus Attarwala.

5 In view of the above discussion, it is held that the period of holding of the property is less than 'one year' and hence the profit earned on sale of such property is chargeable to tax under the head "Short Term Capital Gain' as against 'Long Term Capital Gain' shown by the assessee. Accordingly, the gain is worked out as under:-

Aggrieved the assessee filed further appeal before the CIT(A) who upheld the decision of the AO. The assessee is in appeal before the Tribunal against the order of the CIT(A).

The ld. AR at the outset drew our attention to the computations of LTCG calculated by the assessee which is extracted below: Mohammed Farhan Mohammed Yunus Attarwala.

The ld. AR further submitted that the agreement with the Builder towards acquisition of the property was entered into on 03.10.2016 (page no. 14 to 57 of the PB) and that the assessee has paid the stamp duty on the value of the property at the time of registration. The ld. AR also drew our attention to the fact that the assessee has paid portion of the consideration out of his share of Rs. 78,54,000/-. The ld. AR further drew our attention to agreement of sale entered into by the assessee dated 19.06.2019 (page 73 to 81 of PB) where the assessee along with other co-owners have sold the property. The ld. AR in this regard submitted that the assessee sold the property in his capacity at the owner of the property which fact has been mentioned in the agreement of sale. Accordingly, the ld. AR argued that the property has been in possession of the assessee from 03.10.2016 and therefore the gain arising on the transfer should be treated as LTCG. Mohammed Farhan Mohammed Yunus Attarwala.

The ld. DR on the other hand relied on the orders of the lower authorities.

We heard the parties and perused the material on record. We notice that the assessee along with three other members have entered into agreement with M/s Dhudhwala Property Developers for the purchase of Flat at 51 East, Bandra and the said agreement is registered on 03.10.2016. It is the contention of the assessee that for the purpose of capital gains the period of holding should reckoned from the date of registration when the flat was allotted. It is the contention of the AO that the assessee has obtained the possession of the property by making the final payment on 21.08.2019 only and therefore, the gain should be treated as STCG. We in this regard notice that the assessee at the time of registration has made payment to the tune of Rs.37,69,208/- including stamp duty and as per the terms of the agreement, the assessee and the other three members are termed as purchasers. We further notice that the assessee vide sale agreement dated 19.06.2019 has sold the property and as per clause-(2) of the sale agreement, the assessee has purchased the rights, title and interest in the impugned property on 03.10.2016. The relevant clause in the sale agreement is extracted below:

We also notice that the coordinate bench in a recent decision in the case Minaxi Mahesh Pawania vs ITO(IT) [2024] 164 taxmann.com 255 (Mumbai - Trib.) has considered a similar issue and held that 12. We have heard the rival contentions and perused the material on record. The moot point before us is in respect of treating the capital gain as long-term or short-term vis-a-vis the two dates under consideration, that is, the date of letter of allotment which would result into long-term capital gain or the date of registration of the agreement between the builder and the assessee for the booking of the flat by which Assessing Officer has computed the gain as short- term capital gain. It is an undisputed fact that letter of allotment was issued by the builder to the assessee on 15.02.2010 by which a right to own the flat as identified by the assessee and builder in the project to be undertaken for construction had accrued on the assessee. The right which accrued to the assessee is the booking right, i.e., the right to purchase the flat and obtain the title. The only question that arises for consideration is whether booking right to the flat accrues to the assessee on the date of allotment of the flat by way of issuing the letter by the builder or on the date of execution and registration of the agreement to sell, i.e., the buyer's agreement. In our considered view, only that agreement which intends to convey these rights accruing to parties can be considered as the source of accrual of rights to the assessee.

We have already taken note of various terms and conditions from the letter of allotment dated 15.02.2010 which have been subsequently recorded elaborately in the agreement to sell registered on 13.05.2014. It is not in dispute that assessee has not defaulted on the terms and conditions of the letter of allotment. Assessee has made all the payments as required under the letter of allotment which has been duly acknowledged in the subsequent registration of the agreement to sell. Further, assessee has furnished details of payments made in each of the year which is tabulated as under:

In the light of above stated facts and narrations, let us understand the effect of letter of allotment issued by the builder to the assessee for the identified flat in the building project. Consequence of issuance of letter of allotment for the flat signifies a contractual arrangement between the assessee and the builder by which a right in personam is created in favour of the assessee. When such a right is created in favour of the assessee, the builder is restrained from selling the said identified flat to someone else because the assessee in whose favour the right in personam is created, has a legitimate right to enforce specific performance in terms of the said letter of allotment, if the builder, for some reason is not executing and complying with the terms stated therein. Thus, by virtue of the letter of allotment, some right to own a property is given by the builder to the assessee. In real life, there are events when a person, even after holding such a letter of allotment issued by the builder, tries to sell same property to another person which would not be in accordance with law because once such a contractual arrangement has been agreed upon, the said person gets the right to get the property transferred in his favour by filing a suit for specific performance. Therefore, it can be said that in respect of the said property, though yet to be constructed but identified and allotted to the assessee, some right has been extinguished at the end of the builder and some right had been created in favour of the assessee. A right in personam had been created in favour of the assessee in whose favour the letter of allotment had been issued and who has paid 20% of the total agreed consideration as advance. Further, all other payments on various milestones identified in the said letter have been duly met by the assessee on subsequent dates, duly acknowledged by the builder. Undoubtedly, such contractual right arising out of the letter of allotment can be surrendered or neutralised by the parties through subsequent contract or conduct but such is not a case in hand before us.

For the aforesaid understanding, we gainfully rely on the decision of Hon'ble Supreme Court in the case of Sanjeev Lal v. CIT [2014] 46 taxmann.com 300/225 Taxman 239/365 ITR 389 wherein similar observations and findings were given by the Hon'ble Apex Court, though in the context of agreement to sell. In paragraph 23 of the said decision, it is held as under:

1. Similar issue had come up before the Hon'ble High Court of Punjab and Haryana in the case of Vinod Kumar Jain v. CIT in [2010] 195 Taxman 174/344 ITR 501 wherein assessee was allotted a flat on 27.02.1982 on instalments under residential scheme of Delhi Development Authority (DDA). The possession of the said flat was, however, given to the assessee on 15.05.1986 and the letter issued in that behalf indicated the flat number and called upon the assessee-allottee to deposit the balance amount. The assessee sold the said flat on 06.01.1989 and claimed that capital gain arising on sale of said flat was long-term capital gain u/s. 2(29A) and as he had purchased another flat on 31.01.1989, such capital gain is set off u/s. 54. However, the assessing officer disallowed the claim of the assessee by taking the date of possession as 15.05.1986 by treating the capital gain as short-term capital gain. On these set of facts, Hon'ble Court referred to CBDT circular No. 471 dated 15.10.1996 whereby instructions were issued regarding treatment of capital gains tax, in case of a flat purchased under self financing scheme. In para 3 of the said circular, it was stated that "it has been decided that cases of allotment of flats under the self financing scheme of the Delhi Development Authority shall be treated as cases of construction for the purpose of capital gains." In para 2, facts of the case were described according to which "under the self financing scheme of the Delhi Development Authority the allotment letter is issued on payment of the 1st instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the Delhi Development Authority to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession."

2. Further, Hon'ble High Court dealt with the issue on the meaning to be assigned to the word "held" occurring in section 2(42A) of the Act. For this, the Hon'ble Court relied on another decision in the case of CIT v. Ved Prakash and Sons (HUF) [1993] 73 Taxman 70/207 ITR 148 (Punjab & Haryana) wherein, it was observed as under:

3. Thus, Hon'ble Court held in para 16 in favour of the assessee, by referring to the date of allotment of the flat and not the date when the possession was delivered to the assessee for the purpose of computing the period of holding of the property by the assessee.

In the present case before us, assessee has been issued a letter of allotment by the builder setting out the terms and conditions for the construction of the flat to be undertaken by the builder and various milestones listed for making payment by the assessee. There are other restrictive covenants for both the parties as stated in the letter of allotment which would result into adverse consequences, if not met.

We are also conscious of the proposition that transfer of the property is effective on registration of conveyance deed in view of section 54 of Transfer of Property Act. The absolute legal ownership of an immovable property takes place in terms of various provisions of Transfer of Property Act which needs to be read with provisions of section 2(47) of the Act for the purpose of computing tax liability arising on account of sale or purchase of immovable properties under the Act. However, the issue before us is different. The issue of transfer of ownership is not the issue to be decided here for computing the holding period. Under the present set of facts which have been discussed in detail in above paragraphs and taking into consideration the judicial precedents referred above, we find that holding period should be computed from the date issue of allotment letter. Once this is considered, the holding period becomes more than 36 months and consequently the right to own the property transferred by the assessee would be a long-term capital asset in the hands of the assessee and the gain on transfer of the same would be taxable in the hands of the assessee as long-term capital gain. We direct accordingly. Ground no. 1 taken by the assessee is allowed.

The ratio laid down is that the period of holding is to be computed from the date of issue of allotment letter. The facts in assessee's case is in a better position Mohammed Farhan Mohammed Yunus Attarwala.

In result, the appeal of the assessee is allowed.