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This paper is written to high light the impact of recent High Court decision in Ms Madhu Kaul & CIT w.r.t. point of time when an assessee starts holding a real estate property.

The decision will beneficially impact those assessee who are entering into real estate transactions as it may lead to Long Term Capital Gain which previously claimed as short terms capital gain and thereby lower their income tax burden and availability of more avenues of tax exemption.

The whole case may be understood with the help of illustration:-

A flat was allotted to the assessee on 7-6-1986 vide letter conveyed on 30-6-1986. Assessee paid the first installment on 4-7-1986. The possession of flat was delivered on 30-11-1988. Thereafter assessee sold the flat on 5-7-1989.

The question here is, whether flat shall be deemed to hold wef 4-7-1986 treating it as long terms capital gain or from the date of actual possession and taxed normally as short term capital gain.

Rules of determination:

Section 2(14) defines capital asset.

Under Section 2(29A) long term capital asset is one which is not a short term capital asset.

Section 2(42A) short term capital asset at the relevant time meant, a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.

Conclusion: A capital asset which is held by the assessee for 36 months would be termed as a long term capital asset and any gain arising on account of sale thereof would constitute long term capital gain.

The analysis of case is as under:

Points of consideration

Situation before HC decision

Tax impact as per HC decision

Effect of allotment and payment of first installment, i.e. 04-07-1986

The mere allotment and or payment of the first installment without identification of the flat or delivery of possession has been rightly held not to confer any right.

Further, allotment letter could be cancelled at any time.

It does not confer any right in any specific unit but merely confers a right to be allotted a unit.

Conferred a right upon the assessee to hold a flat.

The allotment of flat may be cancelled only in exceptional circumstances and hence can safely be said to have right over property.

Payment of balance installments, identification of a particular flat and delivery of possession, i.e., 30-11-1988

It confers a right of assessee in specific unit and can be claimed as holder of property.

These are consequential acts and relate back to and arise from the rights conferred by the allotment letter.


Since the High Court decisions are mandatory for AO falling under their respective jurisdictions, hence all assessee of Panjab and Haryana can claim benefit of above decision. However, other assessee may take guidance from the above case and claim property to be hold back from date payment of first installment. Benefits of treating flat as long term capital gain are:

1. Concessional rate of taxation

2. Under few circumstances sale of house property will not be included in his total income

3. Benefit of indexation – Here cost of acquisition and construction is enhance to some extent at par with inflation.

4. Exemption benefit u/s 54. 54B etc. 

By: Sensys Technologies

For any further information or query you can be reached to experts of our panel at contact@sensysindia.com


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