LTCG tax computation on sale of house property: How this ITAT order favouring a taxpayer will change the way capital gains is calculated
Apr 11, 2025
Synopsis
Homebuyers wins: The income tax dept imposed Rs 1.42 crore short term capital gains (STCG) on house that was sold in FY 2009-10. This flat was alloted on October 7, 2005 and was registered in FY 2015-16 by the builder. This is why tax dept. rejected the Section 54 capital gains tax exemption on this property sale & imposed STCG. Read below to know how this case was won.
The Mumbai bench of Income Tax Appellate Tribunal on March 24, 2025 held that the allotment date and not registration date of a home determines the capital gains (long term or short term) for real estate property sale transactions. This is a very significant precedent for homeowners as usually the allotment letter is given when 10% or more payment is made and the registration of house is done when the builder gives possession of the flat. The difference in time between property allotment and registration can sometimes span over a few years if not months.
In the case being referred to here, a homeowner sold two flats in Malad, Mumbai in AY 2010-11 (FY 2009-10) for Rs 43 lakh each. The flats were alloted on October 7, 2005 (FY 2005-06) and sold in FY 2009-10 but were registered in FY 2015-16. Further, he reinvested the gains from the sale of these flats to buy another property and thereby claimed Section 54 long term capital gains (LTCG) tax exemption in his income tax return (ITR) for FY 2009-10.
The Income Tax assessing officer (AO) rejected the calculations and also the process used by this homeowner to arrive at the conclusion that the gains from sale of these flats were of long-term nature (LTCG). The AO contended that the gains from sale of the two flats, were short term capital gains (STCG) amounting to Rs 1.42 crore (1,42,86,671). Accordingly, an order under Section 143(3) was passed on December 29, 2018, making the homeowner liable for tax on STCG of Rs 1.42 crore for property sale.
Subsequently the homeowner filed an appeal with the Commissioner of Income Tax Appeals (CIT A) and the system selected the CIT (A) Delhi bench. CIT (A) Delhi upheld the income tax AO’s decision and confirmed the addition of Rs 1.42 crore STCG income in the homeowner’s ITR. The homeowner then filed an appeal against the order of CIT (A) in ITAT (Mumbai bench).
ITAT Mumbai analysed the legal facts and circumstances of this case and held that the allotment date of a flat determines capital gains taxation holding period- short term or long term. This is contrary to the stance taken by the AO and CIT (A).
Due to this decision by the ITAT, the entire Rs 1.42 crore STCG on property was deleted from the taxpayer’s ITR. The ITAT applied the precedent set in a similar case (Anita D Kanjani – 2291/Mum/2015) and also heard about K. Ramakrishnan Delhi High Court 2014 (Taxman 123) case.
Read below to understand how this case was won by the homeowner and what was the legal analysis used, that can impact those who want to sell their property and claim capital gains tax exemption under Section 54.
How did this case start?
According to the order of the ITAT dated March 24, 2025, here’s a timeline of events:
On October 7, 2005, the taxpayer booked two flats costing Rs 6,16,500 each in the joint name of him and his wife. Both the flats were in Malad, Mumbai, Maharashtra.
On December 11, 2009, he sold the two flats for Rs 21.55 lakh each (21, 55, 500).
He filed his ITR for FY 2009-10 (AY 2010-11) before the deadline and claimed Rs 13.71 lakh (13, 71, 540) as long-term capital gains tax exemption (LTCG) for each of the flats. He claimed an indexation benefit of Rs 7.83 lakh (7,83,960) each for the two flats sold.
In the ITR filed for AY 2010-11, he claimed Section 54 capital gains tax exemption and the said ITR was accepted by the income tax department in AY 2010-11 (FY 2009-10).
In FY 2015-16 (AY 2016-17), both the flats were registered. And this is when the tax department started the fight by imposing the STCG income of Rs 1.42 crore.
Primary reason for dispute between the tax department and the homebuyer
When the tax assessing officer imposed STCG of about Rs 1.42 crore and rejected the LTCG exemption on these houses' sale, the homebuyer filed an appeal in CIT (Appeals). Here’s what CIT (A) said:
The homeowner failed to furnish any agreement to the effect of transfer of property in AY 2010-11.
The homeowner failed to furnish any document/evidence in support of the possession of the immovable property under consideration.
The sale consideration of the flats were considered as Rs 93 lakh (93,89,191) each, instead of Rs 43 lakh each (43,11,000).
CIT (A) upheld the calculation of the AO and confirmed the addition of Rs 1.42 crore as STCG and denied LTCG on the property sale.
Homeowners says in ITAT flats were allotted in FY 2004-05 and therefore their sale in FY 2009-10 qualify for LTCG and not STCG
In FY 2009-10, for a property sale to be considered as long-term capital gains, the period of holding it must be more than three years.
According to the ITAT’s order, the homebuyer’s lawyers submitted a 152 page paper book containing the details of how the flats were purchased and ultimately sold off. Highlights of the paper book are:
A memorandum of agreement was signed by the homeowners when they sold the flat in FY 2009-10. These flats were booked in FY 2004-05.
The builder registered the flats in FY 2015-16 (AY 2016-17).
In this case the flats were allotted in FY 2004-05 and therefore, sale in AY 2010-11 (FY 2009-10) was liable for long term capital gains which has been declared in the ITR for AY 2010-11 (FY 2009-10).
The homeowner’s lawyers referred to the following High Court precedents- K. Ramakrishnan (2014 Delhi 225 Taxman 123) and Anita D Kanjani (ITA 2291 Mum 2015).
ITAT Mumbai answers the question about how holding period for property sales are to be calculated
ITAT Mumbai in its judgement order said which question it will answer:
Q1. The issue in dispute in the case is whether the holding period of the property should be computed from the date of the conveyance deed or from the date of the allotment letter.
ITAT answers:
Part 1: The builder allotted two flats to the homeowner along with his wife. In the case of Anita D Kanjani, the coordinate bench of the Tribunal held that the date of the allotment letter should be considered for the holding period of the property. Therefore, the said date to be treated as the date of the purchase of the property rather than the date on which the purchase deed of conveyance was entered into the year under consideration.
Part 2: As far as sale of property is concerned though the property has been registered for the purchase and sale in the year under consideration but the assessee had already entered into agreement for sale of flats in FY 2009-10 (AY 2010-11). The homeowner claimed in the ITR for AY 2010-11 ( FY 2009-10) deduction under Section 54 on the LTCG.
The assessing officer cannot ignore the said LTCG declared in AY 2010-11 and the gain arising from the sale of the property in the year under consideration as short term capital gain, without any valid reason for rejection of capital gains shown in AY 2010-11 (FY 2009-10).
ITAT Mumbai rules in homeowner’s favour and dismissed Rs 1.42 crore STCG income
ITAT Mumbai said: We are of the opinion that the registration of the flats for purchase and sale entered into the year under consideration (FY 2015-16) are liable for any capital gain tax as the assessee had already declared the said transaction of sale in AY 2010-11, which has been duly accepted by the department. In the result the appeal of the assessee is allowed.
However, Mumbai ITAT refused to go into the correctness of the LTCG calculation but told that the AO cannot ignore the LTCG gain declared in AY 2010-11.
Sandeep Jhunjhunwala, Partner- M&A Tax, Nangia Andersen LLP, says: "The issue in dispute in the judgement pronounced by the Mumbai Income Tax Appellate Tribunal is whether, for the purpose of calculating capital gains, the holding period should be reckoned from the date of conveyance deed or the date of allotment letter."
"Although, in the facts of the case, the assessee has claimed an exemption under Section 54/ 54F of the Act, the same is not in dispute. Having regard to the subject matter of the judgement, the Mumbai ITAT has held that the letter of allotment is to be considered to determine the period of holding. Tribunals and High Courts of various jurisdictions have arrived at a similar conclusion in the context of different fact patterns."
"However, the underlying principle that emergers is that the sale deed or document of conveyance only transfers the legal title while an agreement to sell or allotment letter confers the right of ownership to the purchaser and hence, the date of such allotment letter should be considered for the purpose of determining the period of holding. The above is a fact specific exercise and courts have, in certain circumstances held that the cumulative conditions ie (i) registration of sale deed, (ii) assessee should have acquired a legal right to receive consideration and (iii) property's possession must be handed-over to the buyer, should be satisfied for a transfer to take place."
What is the significance of this judgement for homeowners?
Chartered Accountant Dr Suresh Surana says, this position, reaffirmed by the Tribunal in reliance on the precedent set in Anita D. Kanjani ITA No. 2291/Mum/2015, is largely beneficial to the taxpayers.
“By recognizing the date of allotment as the commencement of ownership, the ruling facilitates earlier qualification of a property as a long-term capital asset,” says Surana.
Surana says this beneficial classification of holding period may benefit taxpayers for a more favourable tax treatment.
“Taxpayers may benefit from more favorable tax treatment, including a reduced tax rate of 12.5%/ 20% on long-term capital gains (LTCG) with indexation benefits, as opposed to being taxed at the applicable slab rates for short-term capital gains (STCG). Furthermore, this classification enables taxpayers to claim exemptions under Sections 54 and 54F of the Income-tax Act, 1961, which are not available for STCG,” says Surana.
Experts also highlight that this judgement’s precedent is likely to reduce the instances of disputes and reassessment by the income tax authorities. “This is because this judgement brings clarity to the determination of the holding period based on substantive rights acquired at the time of allotment. However, taxpayers are required to maintain appropriate documentation, such as allotment letters, payment records, and correspondence with the builder, to substantiate their claim of ownership from the allotment date,” says Surana.
How does Section 54F capital gains tax exemption work?
According to Jhunjhunwala from Nangia Andersen LLP: "Section 54F of the Income Tax Act, 1961 provides an exemption from capital gains arising from the transfer of a long-term capital asset (referred as ‘original asset') other than a residential house.
This exemption is available only to individuals and Hindu Undivided Family ('HUF'). The essential condition to claim the exemption under Section 54F of the Act is that the taxpayer must purchase or construct a residential house (referred as 'new asset') within a specified period prescribed therein. If the taxpayer proposes to purchase the residential house from the proceeds of the original asset, the same must have been effected within one year before or two years after the date of transfer of the original asset. In case of construction, the new asset must be constructed within three years from the date of transfer. Hence, the objective of this exemption to encourage or enable the taxpayer to convert any long term capital asset into a residential house.
If the net consideration from the transfer of the original asset is fully deployed on the purchase or construction of the new residential house, the entire capital gains is exempt. Only a proportionate exemption can be availed where the cost of the new asset is less than the net consideration. It would be important to note that the Finance Act, 2023 introduced a cap of INR 10 crore on the exemption that can be claimed under this Section ie where the cost of the new asset exceeds INR 10 crore, the exemption would be limited to INR 10 crore. The amount of net consideration which is not appropriated by the taxpayer towards the new asset before the due date of furnishing the original return should be deposited in the Capital Gains Accounts Scheme (CGAS) before such date.
The Act outlines certain important exceptions to the exemption granted under Section 54F of the Act. The taxpayer will not be entitled to the exemption under this Section if he owns more than one residential house, other than the new asset, on the date of transfer of the original asset. The exemption is also jeopardised where the taxpayer purchases within one year or constructs within three years from the date of transfer, a residential house other than the new asset. In summary, during the specified period, the taxpayer is permitted to pre-own/ own only one residential house other than the new asset to claim or protect the exemption under Section 54F of the Act.
Where the taxpayer purchases or constructs any other residential house within the specified period, the exemption under Section 54F, if allowed, shall stand forfeited and the amount of capital gains which was not charged to tax would be made subject to tax under the head "Capital Gains" in the year in which the residential house is so purchased or constructed. In addition, the exemption would also stand forfeited where the new asset is transferred within a period of three years from the date of its purchase or construction, as the case may be.
How does Section 54 capital gains tax exemption work?
According to Jhunjhunwala from Nangia Andersen LLP, "The main purpose of Section 54 of the Act is to give relief in respect of profits on the sale of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (referred as 'original asset').
"The conditions on reinvestment in the new asset (ie residential house) are similar to that prescribed under Section 54F of the Act ie the taxpayer must have, within a period of one year before or two years after the date of transfer of original asset, purchased or within a period of three years from that date, constructed, a residential house. However, the mode of computation of the exemption under Section 54 varies from that prescribed under Section 54F."
"The exemption under Section 54 depends upon the extent of investment of the capital gains in the new asset vis-à-vis the amount of investment of net consideration as prescribed under Section 54F . Where the amount of capital gain is more than the cost of the new asset, the differential would be subject to tax."
An important aspect of Section 54 is that, the said Section provides for the exemption even where the taxpayer re-invests in two residential houses in India provided that this option can be exercised only where the amount of capital gains from the transfer of the original asset does not exceed Rs 2 crore. The cap of Rs 10 crore on the exemption and the provisions for depositing the unutilised amount in the Capital Gains Account Scheme (CGAS) remain the same as that prescribed for Section 54F."
Does this judgement’s precedent apply to pre 2001 properties also?
If the property was purchased before 1st April 2001, then Fair value as of 1st April 2001 will be deemed to be the cost of acquisition. However, it is to be noted that Fair value as on 1st April 2001 cannot exceed Stamp Duty Value as on 1st Aril, 2001. The question is, does the above judgement’s precedent apply to such properties? Yes.
“The principle that the date of allotment determines the period of holding would be applicable to properties allotted on or before April 1, 2001. When combined with the benefit of FMV substitution as per Section 55(2)(b), this results in a significantly advantageous position for taxpayers in terms of long-term capital gain treatment, indexation benefits, and potential exemptions under Sections 54 or 54F,” says Surana.
[The Economic Times]
