Provisions as per Income Tax Act, 1961:

Short-term capital asset means a capital asset ‘Held’ by an assessee for not for then [thirty-six] months immediately preceding the date of its transfer: Provided also that in the case of a share of a company not being a share listed in a recognised stock exchange in India or an immovable property, being land or building or both, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twenty-four months” had been substituted. [The period of twenty-four months with respect to the immovable property instead of thirty-six months has been made applicable from A.Y. 2018-19]

Detailed Analysis of Section 2(42a) of the Income Tax Act, 1961:

A perusal of the aforesaid definition shows that the legislature has used the expression held. It is to further note that in various other allied or similar sections, the legislature has preferred to use the expression owned (in Sections 26 and 27 of The Act), purchased (Section 54/54F of The Act). Thus, it shows that the legislature was conscious while making use of this expression. The expression “owned” has not been used in Section 2(42A) of The Act for the purpose of determining the nature of the asset as short-term capital asset or long-term capital asset. Thus, the intention of the legislature is clear that for the purpose of determining the nature of capital gain, the legislature was concerned with the period during which the asset was held by the assessee for all practical purposes on de facto basis.

The legislature was apparently not concerned with absolute legal ownership of the asset with a registered deed of conveyance conferring a title for determining the holding period. It is also to be noted that Section 2(42A) uses the term “capital asset” which has been defined in clause (a) of Section 2(14) of The Act to mean “property of any kind held by an assessee, whether or not connected with his business or profession.” Thus, a conjoint reading of Section 2(14) read with Section 2(42A) makes it crystal clear that what is to be transferred as per Section 2(47) of The Act to calculate capital gains on transfer of immovable property is a capital asset which has to be construed as per clause (a) of Section 2(14) of The Act which nowhere uses the expression “owned”.

It has been observed during litigations that various tax authorities have taken a view that the period of holding shall be taken from the date the property is registered before the sub-registrar as the legal ownership and title of the property passes on from the seller to the buyer after payment of requisite stamp duty and registration charges. The tax authorities have further gone on to say going by the provisions of the Indian Evidence Act, 1872, instruments which are not duly stamped are inadmissible in evidence and as per Section 35(a) of the Indian Stamp Act, 1899, no instrument chargeable with duty shall be admitted in evidence or shall be acted upon, registered or authenticated by the public officer, unless such instrument is duly stamped. As pointed out above, the expression owned has neither been used in Section 2(14) of The Act nor in Section 2(42A) of The Act which if taken a stand amounts to re-writing the provisions of law which can only be done in the parliament and no tax authorities have the power to do so. Therefore, what has to be ascertained is the point of time from which it can be said that assessee started holding the asset on de facto basis.

Normally, the following chronology of events are looked at from booking an immovable property to claiming an exemption under section 54/54F of The Act:

a. Allotment of an immovable property on payment of token money or first instalment as the cost of construction and thus, issuing an allotment letter.

b. Entering into a purchase agreement/deed to purchase the property.

c. Registration of the property before the sub-registrar.

d. Sale of the aforesaid property.

e. Either purchasing or constructing the new property under Section 54/54F.

When an allotment letter is issued to an allottee on payment of token money or first installment of the cost of construction, the allotment is final unless it is canceled. Generally, in an allotment letter, the property is already identified on a specific floor admeasuring the area. The allottee, thereupon, gets title to the property which is nothing but a right in the property which is nothing but a capital asset as per clause (a) of Section 2(14) of The Act on the issuance of the allotment letter and the payment of installments is only a follow-up action and taking delivery of possession is only a formality. It has generally been seen that this is the view that the assessee’s normally relied upon before the various tax authorities during litigations which the tax authorities do not agree to and take a different view as discussed above.

The CBDT has concurred with the assessee’s view by way of clarifying vide circular no.471 dated 15.10.1986 and circular no. 672 dated 16.12.1993 that for the purpose of Income Tax Act, 1961, the allottee gets title to the property on the issuance of the allotment letter and the payment of installments is only a formality. In the case of construction agreements, the tentative cost of construction is already determined and the agreement provides for payment of the cost of construction in installments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction.

Therefore, for the purpose of capital gains tax, the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in installments does not affect the legal position.

It is a well-settled proposition of law and there is no dispute whatsoever that transfer of property shall be effective only on registration of conveyance deed in view of Section 54 of Transfer of Property Act, 1882. The transfer of ownership is not the issue to be decided here for computing the holding period. As discussed earlier, holding period is to be determined in terms of section 2(42A) of The Act.

In light of the expanded definition as contained in Section 2(47) of The Act, even when a sale, exchange or relinquishment of any right, under a transaction whereby the assessee is allowed the possession of immovable property or retained the same in part performance of the contract under Section 53-A of Transfer of Property Act, 1882, it amounts to transfer. Similarly, any transaction whether by way of becoming a member of or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of any immovable property, also constitutes transfer and the assessee is said to hold the said property for the purpose of the definition of ‘short-term capital gain’. It is important to draw the attention towards Section 47 of The Registration Act, 1908 which says; “A registered document shall operate from the time which it would have commenced to operate if no registration thereof had been required or made, and not from the time of its registration.”

The CBDT has made it clear by way of circular no. 495 dated 22.09.1987 that transactions of nature referred to above are not required to be registered under The Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are the common mode of acquiring flats particularly in multi-storied constructions in big cities. A person holding the Power of Attorney is authorized the powers of the owner, including that of making construction though the legal ownership in such cases continues to be with the transferor.

The intention of the legislature is to treat even such transactions as transfers and the capital gain arising out of such transactions are brought to tax. In construing such taxation, what should be the approach of the courts and the tax authorities and the interpretation to be placed is clearly set out by the Apex Court in the case of Smt. Saroj Aggarwal vs. CIT 156 ITR 497 wherein it was noted that courts should, whenever possible unless prevented by the express language by any section or compelling circumstances of any particular case, make a benevolent and justice-oriented inference.

Conclusion:

Therefore, keeping the aforesaid principles in mind, when we look at Section 2(14), Section 2(42A) along with circular nos. 471, 672, and 495 it is very clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset-based upon the registration of conveyance conferring a title, what is to be looked at is the date from which the assessee has got a right in the property (title) which is nothing but the date of issuance of allotment letter.