Friday, April 11, 2014

Date of Allotment under Sec. 54/54F

All roads seem to be leading to real estate. Majority if not all investors are willing to sell their other financial assets to own a piece of realty. Realty as it appears to be the holy grail of all investments where one simply cannot go wrong.

But investors particularly the sellers---need to be careful of the taxation aspect on the profit booked. In other words, if a property is sold at profit, then capital gains tax liability arises in the hands of the seller.

The quantum of tax liability depends on the period the property was held prior to being sold.
The gains will be short term if the property was sold before completion of 3 years from the date of its acquisition and such gains will be taxed at the tax slab applicable to the assesse. If however the property has been held for more than 3 years from the date of its acquisition, then such gains—known as LONG Term capital gains—will be taxed at flat rate of 20%. However, the investor gets the benefit of indexation as set out in the Income tax act.

Income tax act also exempts such gains from being taxed provided some conditions are fulfilled. They are
  • The investor has either one year before or two years after the date of transfer purchased another house property
  • Or has within three years after the date of transfer constructed another residential house property.
  • The investor does not own more than 1 residential house property apart from the one he is presently living in.
  • Does not purchase another residential house within 1 year or constructs another residential house within 3 years from the date of sale-- other than the new house.
  • The new residential house property so acquired or constructed should not be sold within 3 years from the date of its acquisition.

 Income tax act has laid great emphasis on the date of acquisition. This date is at the heart of section 54/54F of the Indian Income Tax Act.

A question now arises as to what can be taken as date of acquisition!

There can be different views on this. For example:
  1. Date of acquisition can be the date on which the advance is given by the intended buyer.
  2. It can also be the date when the allotment letter has been issued to the intended buyer.
  3. The date when the sale deed has been registered.

In absence of clear directives in the Income tax act, tax authorities rely on various judgments pronounced by courts of law.
For example to qualify the investments in case of an apartment, date of acquisition is the date of allotment of the residential flat. The payment of instalment is only a follow up action. The mere fact that allotment has been made entitles the investor to the benefits laid out under the act---even though all the installments have not been paid by the investor. Thus the date of issue of allotment letter gives the right to the investor to obtain the conveyance on such flat---enough to be called an asset within the purview of the Income Tax Act.

Now another question arises:-

Does the investor loses the benefit of exemption of capital gains u/s 54/54F if the builder fails to complete the construction within 3 years?

A plain reading of the act and strict interpretation of the provisions of the act would seem to suggest that the investor stands to lose the benefit of exemption should the construction not be completed within the mandated 3 years!

Many judicial pronouncements in different cases have provided relief in cases where it had been established that a major part of the sales consideration has indeed been spent on construction. The logic of such relaxation is that courts have viewed suctions 54/54F as relief provisions and as such should be viewed as such.

Different principles laid down by courts for interpretations of date of acquisition
  •  If the assessee has made substantial payments towards the cost of construction within the period specified under section 54/54F, then the tax payer is entitled to claim exemption.
  • The tax payer cannot be denied the benefits of the exemption merely because the builder has failed to hand over the possession of the flat.
  • Failure to execute the sale deed or a procedural delay in obtaining the registration will not prevent the buyer/investor from claiming the exemption.
  • CBDT has also clarified that to avail the benefit of section 54F the crucial date is the date of allotment of the flat by the seller/promoter, and payment of instalment was only a follow up action while taking possession of the flat only a formality.

In case of a legal dispute, the court needs to be satisfied that the sale proceed was used for investment in the new house property.

(Courtesy: - Business Standard)