Indexation benefit available from date of agreement not from date of possession

My client Rajesh was a captain in the merchant Navy and was a non-resident Indian (NRI). Rajesh had managed to sell his flat in Pune for Rs 43 lakh which he had booked for an all-inclusive cost of Rs 27 lakh in February 2011. The agreement was stamped and registered in the same month. He had managed to get the possession in September 2013. The buyer wanted a certified computation of the capital gains to appropriately deduct TDS in view of his NRI status. His tax advisor worked out long-term capital gains at Rs 10 lakh approximately: Index for FY 2013-14 (year of possession) – 220; Index for FY 2017-18 (year of sale) – 272, Hence, indexed cost of acquisition is Rs 27 lakh multiplied by 272 divided by 220 equal to Rs 33 lakh approximately. Sale price of Rs 43 lakh minus indexed cost of Rs 33 lakh is Rs 10 lakh. Approximately, long-term capital gains tax payable on that @20% is Rs 2 lakh which the buyer would deduct and pay the balance Rs 41 lakh to Rajesh.

Rajesh’s point was that the flat had been registered in 2011 itself even though it was delivered in 2013. If date of acquisition was assumed at February 2011 instead of September 2013 he would benefit by way of higher indexation value. The CII for FY 2010-11 was 167 and the capital gains would be revised : Indexed cost of acquisition would be Rs 27 lakh multiplied by 272 divided by 167 equal to Rs 44 lakh approximately. Since the indexed cost was higher than the sale price of Rs 43 lakh there was no capital gains and hence no tax was payable.

Rajesh asked me whether the date of acquisition could be considered as from the date of the registered agreement rather than the date of possession. As a corollary would indexation be applied on the total cost from 2011 itself rather than from the respective payment dates which were around Rs 11 lakh in 2010-11, Rs 9 lakh in 2011-12 and balance Rs 7 lakh in 2012-13.

There are many decisions on this matter favouring the tax payer. Similar case was decided by the Delhi bench of the income tax tribunal in the case of Praveen Gupta, assistant commissioner of income-tax [2012] 20 taxmann.com 308 (Delhi). There the tribunal came to the conclusion that ” By entering into an agreement to allot a flat, the assessee has identified a particular property which he intended to buy from the builder and the builder is also bound to provide the applicant with that property by accepting certain advance amount and making agreement for balance payment as scheduled in the agreement.

Thus, going into the provisions, it is not necessary that to constitute a capital asset the assessee must be the owner by way of a conveyance deed in respect of that asset for the purpose of computing capital gain. The assessee had acquired a right to get a particular flat from the builder and that right of the assessee itself is a capital asset. The word 'held' used in section 2 (14) as well as explanation to section 48 clearly depicts that assessee must have some right in the capital asset which is subject to transfer. By making the payment to the builder and having received allotment letter in lieu thereof, the assessee will be holding capital asset and, therefore, the benefit of indexation has to be granted to the assessee on the basis of payments made by him for acquiring the said asset and the assessee has rightly claimed the indexation benefit from the dates when he has made the payments to the builder”. Thus, the assessing officer was directed to allow indexation from the date of the allotment rather than the date of possession.

In the above case the tax payer himself had claimed indexation based on dates of payment only rather than for the total cost from the date of agreement. This despite section 48 clearly mentioning that the cost inflation index must be applied from the date when the asset was “first held by the tax payer” irrespective of when the amount was paid or even paid at all.

Rajesh should thus be able to get the benefit of full indexation from 2011 itself if he succeeds in treating 2011 as the date of acquisition. But he might be better off letting the buyer deduct TDS of Rs 2 lakh based on the more conservative approach and get the balance money remitted into his NRE account after obtaining the necessary certification from the tax department. He could always file his income tax return to claim refund of the TDS.

These issues arise in so many cases that a tax payer friendly circular from the department clarifying its position would be most welcome.

KNOW THE BASICS

• Cost inflation index must be applied from the date when the asset was “first held by tax payer”, says Section 48
   
• A circular which is tax-payer friendly issued  from the income tax department clarifying its position would help