When does the holding period for property begin according to the ITAT's ruling on the allotment letter?

Introduction

The Income Tax Appellate Tribunal (ITAT) has clarified that the holding period for computing capital gains on property should begin from the date of the allotment letter, rather than the date of registration or possession. This ruling is significant for taxpayers as it impacts the classification of capital gains as either long-term or short-term, which in turn affects taxliabilities.

Date of Allotment as Acquisition Date

The ITAT determined that the date of the allotment letter is to be treated as the date of acquisition of the property. This means that any property sold after a holding period exceeding 36 months from this date qualifies for long-term capital gains treatment

Case Examples

In previous rulings, such as in the case of Keyur Shah, the ITAT upheld that gains should be calculated from the allotment date, especially when substantial payments were made shortly after the allotment

Similarly, in Minaxi Mahesh Pawani v. ITO, the tribunal reiterated that holding periods should commence from the date of allotment, thus benefiting taxpayers by allowing them to claim long-term capital gains deductions.

Minaxi Mahesh Pawani v. ITO : In the case of Minaxi Mahesh Pawani (deceased), represented by her legal heir Pratik Mahesh Pawani, the ITAT Mumbai ruled that the holding period for computing capital gains should commence from the date of the property allotment letter, not the registration date of the sale agreement. The appeal challenged the treatment of long- term capital gains as short-term capital gains by the assessing omcer, who based his computation on the agreement registration date. The assessee was allotted a flat on February 15, 2010, and paid an advance, but the sale agreement was registered on May 13, 2014. When the flat was sold while still under construction, the omcer considered the gains short-term, thus denying exemptions under Section 54F.

Result : The ITAT held that the right to own the property was established upon issuance of the allotment letter, making the holding period exceed 36 months and qualifying the gains as long-term. The Tribunal also addressed the issue of claiming deductions under Section 54F without a revised return, supporting the assessee’s claim based on Supreme Court precedents. The order emphasizes the importance of the allotment letter in determining the holding period for capital gains tax purposes.

Impact on Tax Deductions

This ruling is particularly important for taxpayers who wish to claim deductions under Section 54-F, which allows for tax relief on long-term capital gains if proceeds are reinvested in another property within a specified time frame

Legal Precedents

The decision aligns with earlier judgments from various benches of ITAT, amrming that rights conferred by an allotment letter create a legitimate expectation of ownership, thus starting the holding period from that date rather than later stages like registration or possession.

Exceptions

There are specific exceptions and circumstances that may alter this application:

Conditional Allotments: If the allotment is subject to certain conditions or contingencies, the holding period might be calculated from the date when those conditions are fulfilled or when the agreement is completed rather than solely from the allotment date. This can occur in cases where significant obligations must be met before ownership rights are fully established.

Legal Ownership vs. Holding Period: The distinction between legal ownership and de facto holding can also play a role. The ITAT has clarified that for capital gains purposes, what matters is the holding period rather than absolute ownership, which could lead to different interpretations in complex cases.

Different Jurisdictions: Different benches of ITAT or High Courts may have varying interpretations based on jurisdictional nuances. For instance, while many ITAT rulings favor the date of allotment, some cases may emphasize the importance of registration dates or possession dates depending on specific facts.

Specific Tax Provisions: Certain provisions under tax laws, such as exemptions under Sections 54 and 54F, may necessitate a reevaluation of when the holding period starts based on how these exemptions are structured and applied in individual cases.

Conclusion

The ITAT's ruling that the holding period for computing capital gains begins from the date of the allotment letter represents a significant clarification in property tax law. This interpretation benefits taxpayers by potentially qualifying them for long-term capital gains treatment, which offers favorable tax rates and exemptions. However, it is essential to recognize that exceptions may apply based on specific circumstances.

Reference :

• 1. Times of India

• 2. Economic Timex

• 3. ITAT website

• 4.Tax Guru - Case law