Property ownership: Allotment letter determines the date of purchase

In case there are terms and conditions for transferring the rights, then the date of sale agreement will be considered

The process of property ownership can be a long one, especially in today’s scenario when many projects get delayed. Many buyers have paid the entire money for their houses years ago, but are still awaiting delivery. So, what should be the date of purchase, especially when it is critical to determine the quantum of capital gains - whether it is long term or short term?

Say, a person booked a house in 2012 and received an allotment letter from the developer. In the following year he registered the flat. He paid the entire amount within three years by 2015. But possession was delayed, and the buyer received it in 2018. For tax purpose, which among these four would be the year of purchase?

In a recent ruling, the Bombay High Court held that date of acquisition of the residential unit should be considered as the date on which the developer issued the allotment letter. Earlier, many tribunals have also held the same view. In the recent case, the buyer had received an allotment letter on December 31, 2004, and the date of the agreement was May 17, 2008. When he sold the flat in financial year 2008-09, he claimed long-term capital gains tax benefit. The assessing officer denied it and took the view that the date of acquisition would be the same as the date of agreement. But the high court ruled in favour of the taxpayer.

Tax experts say that in such cases a reference can be made to the Central Board of Direct Taxation (CBDT) circular number 471 dated October 15, 1986. The authority clarified that the period of holding of the property booked by an assessee under self-finance scheme of Delhi Development Authority (DDA) would be counted from the date of issuance of allotment letter. “While there are judgements based on it, this view is not free from litigation. The authorities may litigate this and consider the date of possession as the date of start of period of holding. There is no specific provision contained in the tax laws on this aspect, and it depends on the various specific circumstances,” says Kuldip Kumar, partner and leader, personal tax, PwC India.

Many times tax tribunals and courts have looked at the intention of the buyer. “If the intention of the buyer was to purchase the flat and not merely make a profit on it, allotment date is sufficient,” says Arvind Rao, a chartered accountant and founder of Arvind Rao and Associates. He further explains: “Intention is determined by looking at the allotment letter. If it has all the specifics of the house, such as flat number, floor, etc, that helps,” says Rao.

Kumar points out that the terms and conditions of the allotment letter matter. “It is important to pay attention to surrounding facts and circumstances such as terms and conditions of the allotment letter, whether transformation from ‘right’ to ‘building’ is automatic or dependent upon conditions, payments made by the buyer, and so on,” says Kumar.

If a person is constructing his own house, the date of ownership will be split into two — one for the plot and second when the construction is completed. Each has to be held for over two years before it is sold to term the capital gains as long term.

According to Rao, a buyer can even get long-term capital gains tax benefit for selling a house under-construction two years after allotment. Those selling completed house will get the tax benefits under Section 54, where the gains from a residential property need to be invested in a new one. Buyers who sell an under-construction house can get Section 54F benefit, where entire proceeds of any long-term capital asset should be invested in a new residential house.

Avoid tax hassles later

• Register agreement for sale as soon as possible
• The allotment letter should specify the flat number, floor, and other details
• The allotment letter should not have conditions for transferring ownership rights to the buyer
• For those constructing a house, both the date of plot ownership and of completion of construction matter