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Cap gains on sale of under construction property

Neha sharma (-) (1257 Points)

27 May 2013

One of my cleints purchased a under construction property from DLF on 04-09-2009

He got the possession of the property on 06-07-2011. Now he sold the property on 20-04-2013

Is this short term or long term capital gain ?? Would the period during which the property was under construction be considered ??

Please state with reasons

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8 Replies

mouniCA (article clerk) (44 Points)
Replied 27 May 2013

I think property under construction is not a capital asset and hence no capital gains are attracted.

Z ( ) (2960 Points)
Replied 31 May 2013

Theres always confusion in these cases.

There is this case of C.R.Subramanian where, the assesse HAD the land and he constructed BUILDING thereon.Lateron he sold such PROPERTY.

It was held that period of holding should be reckoned on individual basis and therefore Land was chargeable to LTCG whereas Building was charged to STCG.

But the facts of your case are different.

Legal fiction

What the buyer is Purchasing is not a part of land or part of building, he is Purchasing the residential unit. Therefore date of transfer as per 2(47),read with sec 53A of transfer of property act, is date of possession.

S 53A basically says right in the property will be of tranferee

"Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract: Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof"

(This is basically for seller)

The above is created by legal fiction, the courts are taking the substance of transaction into consideration

U.P. State Agro Industrial Corporation (supra)

"The assessee will be considered to be an owner of the building under Section 32 if he is in a position to exercise the rights of the owner not on behalf of the person in whom the title vests but in his own rights"

(They were allowed to take Dereciation on the asset which was not in their name.)

Text from CIT vs R.L. Sood

The date of agreement of purchase should be taken as the date of purchase

Also making referrence of DDA because what DLF does is akin to this. (Board Circular No. 471)

Under the Self Financing Scheme of DDA, the allottee gets title to the property on the issuance of the allotment letter and the payment of Installment is only a follow up action and taking the delivery of possession is only formality. If there is a failure on the part of DDA to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for the recovery of the possession. Therefore, for the purpose of capital gain 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 stated above.

[https://www.incometaxindiapr.gov.in/incometaxindiacr/contents/CBDTFiles/Circulars/CBDTLaws/HTMLFiles/sec54_672_93.htm]

In short, when you receive the letter of allotment you have purchased/acquired the property.NOT THE DATE OF POSSESSION

Period of holding is to be considered from such date. This is your date of purchase/acquisition

I will be Glad to read other view points with some supporting

Mohammad Asif (chartered accountant) (191 Points)
Replied 31 May 2013

Period of holding will start from 06.07.2011 and since the property is sold on 20.04.2013.period of holding will start from 06.07.2011 and will end on 19.04.2013 since period of holding is less than 36 months hence capital gains will be short term. period of holding starts from the date of possession

Ramesh Jayaram (DY VP) (21 Points)
Replied 25 September 2014

There is an inherited property which is in the name of the client and he has declared rental income from the property. The client has demolished the old building and has constructed flats on the property and he has sold part of the flats prior to completion of the project . The questions are

Will the sale of the flats be considered as long term capital , since the inherited property is held for more than 3 years .
Since the old building was there , will the new flat be considered as change in state and the whole amount will be considered long term capital gains.
Will the land be calculated as lomg term and building be considered for short term.

alokedeep (Product Head) (29 Points)
Replied 17 December 2014

I sold off an un-construction flat in Apr,2014 that I had bought in June,2010 for a value of Rs.80.4 Lakhs, I had bought flat for Rs. 48 Lakhs+ ST(as levied by builder for un-construction property)

My purchase for this flat was funded by a Home Loan As the loan was only partially disbursed(around 34 Lakhs), the Bank did an internal transfer of loan in their books to new buyer and balance 46 Lakhs was paid to me.

As I am still searching property to invest, I have deposited the 46 Lakhs(Profit+My investment) in to Bank FD.

Please advise, how I take care of LTCG(if I need to pay) and Tax on Fixed Deposit(Bank is already deducting TDS on FD)

(Guest)

@ Neha Sharma:

The date of issue of an allotment letter gives a right to the taxpayer to obtain conveyance on the said flat so that it becomes an asset within the purview of the Income-tax Act. The date of acquisition of the said flat shall be the date on which the allotment letter is issued.

@ Alokedeep

1. In case the intended buyer transfer his rights in the property during the period when construction is in progress and he has not obtained possession of the property, the right of the buyer would be in the nature of capital assets and accordingly, gain arising on such transfer would be in the nature of long term or short terms gain depending upon the period of holding. Consequently, the property is a capital asset and the gains thereon are Long term.

2. Service tax paid to builder, interest paid on the loan are all added to your cost of acquisition and indexation is available for respective years in your case.

3. I hope by investment in FDs you imply bonds u/s 54EC or else you must immediately invest the net sales proceeds in the REC etc bonds available u/s 54EC. Tax on those FD interests is a different matter altogether.

Hope it helped.Regards

1 Like

alokedeep (Product Head) (29 Points)
Replied 17 December 2014

Thanks Bhadresh, the sale proceeds after paying of Bank loan, I had parked in normal Bank FD so that they can be easily liquidated, I was planning to purchase another flat

While I am still looking around for another flat, do I have a the 2 year period from date of sale(in April,2014) to invest entire amount and avoid any capital gains of any sort? Your advice on this will be really helpful

(Guest)

You may refer to the following dates for tax planning:

Date of transfer of eligible long term capital asset = April 2014

Assessment year concerned 2015-16

Due date of filing return of income u/s 139(1)= 31st July 2015

Date of filing return of income u/s 139(4)= 31st March 2017

Time limit for utilization of net sale consideration for construction of the new asset [without depositing in to capital gain scheme] = 31st March 2017

Time limit for deposit of unutilized portion of net sale consideration in capital gain scheme 31st July 2015

Time limit for utilization of net sale consideration for the construction of the new asset [if deposited in capital gain scheme = Date of agreement (April 2014) + 3years

Hope it helped. Regards.