PERSONAL TAX: Count holding period from agreement date

A taxpayer filed his return of income for the year ended March 2012 declaring income from other sources and capital gains totaling to Rs 6,84,760 and within the prescribed due date. The taxpayer had purchased a godown as per an agreement dated April 24, 2008. Under the terms of the agreement, he had made an initial payment of Rs 1,26,000 as against the total purchase consideration of Rs 12,26,000, with the promise to make the balance payment on or before May 3, 2008.

Against the part payment and the agreement, the seller had transferred all rights, title and interest in favour of the taxpayer, including shares in the society.

The taxpayer had paid the stamp duty on the agreement on the same date, that is, April 24, 2008. The seller agreed to complete the rest of the formalities including registration of the property on receipt of full and final payment. The seller had even made the application to the society for transfer of shares on the basis of No Objection Certificate. Consequently, the balance payment was received and the agreement was registered on July 11, 2008.

The taxpayer sold the godown on April 30, 2011 and handed over the possession on the same date. In his return of income, taxpayer offered capital gains arising from the sale of this asset at Rs 5,71,282 as long-term capital gains, by computing the period of holding from April 24, 2008 till April 30, 2011.

During assessment, the tax officer argued that as the registration of the original asset was completed on July 11, 2008; the asset was held for a period less than 36 months and, therefore, disallowed the taxpayer's claim for long-term capital gains (LTCG) on sale of the godown. The tax officer treated the capital gains as short-term capital gains (STCG) and added income to the extent of Rs 86,82,000, without granting the benefit of indexation of cost of original asset, as well as the exemption from LFTG claimed u/ 54F of the Act.

At the first level of appeal, the appellate authority agreed with the tax officer and confirmed his view that the gains are STCG. Before the tax Tribunal, the taxpayer argued that the relevant provisions of the Act in relation to the process of transfer of assets have envisaged a transfer with payment of part consideration and possession/ enjoyment of the property. These clauses do not stipulate the registration of the immovable property being a mandatory condition in order to constitute transfer as defined under the Act. The taxpayer relied on a previous Supreme Court decision, which held that transfer under the Income Tax Act means a de facto ownership and not necessarily legal ownership.

Based on the facts of this case, the Tribunal observed that by virtue of the agreement for sale and making the part payment, the taxpayer had acquired irrevocable right, title and interest including possession of the godown. The registration of the property done subsequently on July 11, 2018 was only a formality. In view of this, the Tribunal observed that period of holding for the godown should be computed from April 24, 2008 and not July 11, 2008. The tax officer was thereby directed to delete the addition made on account of the short term capital gains and allow the exemption claimed u/s 54F on account of LTCG.

The writer is Sebi-registered investment adviser