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These days, the Indian real estate market and tax system is in the news for a decision of the Income Tax Appellate Tribunal (ITAT), which has brought great relief and deep thought to lakhs of taxpayers buying and selling property. Generally, there is a strong misconception in the minds of common people and small taxpayers that if an immovable property i.e. a flat or a house is sold within a few days or months of its registration, then the profit earned on it will always come under the ambit of ‘Short Term Capital Gain’ (STCG) and heavy tax will have to be paid on it. But, recently a unique case came before the ITAT, where a taxpayer sold the flat within just 10 days of its final registration, yet the tribunal granted him the benefit of Long Term Capital Gain (LTCG). After this decision, discussions have heated up among tax experts and lawmakers as to how the benefit of LTCG can be possible even after a very short period of time.
If we go deeper into this entire legal dispute, it comes to light that the taxpayer concerned had booked that flat long ago and had signed a statutory earnest money or allotment agreement with the builder, under which he had actually acquired possession and ownership of the flat by paying a major part of it. According to law experts, when the ‘holding period’ of a property is calculated under the Income Tax Act, it does not start only from the date of the last sale deed or registry, but is counted from the date on which the taxpayer had legally secured his rights on that property and received its allotment letter. Even though the administrative formalities and final registration had been completed just 10 days earlier, the overall actual time or holding period had exceeded the prescribed limit of two years. Strengthening this technical and legal basis, the taxpayer showed this profit as long term capital gain in his tax filing, which was strongly opposed by the Income Tax Department.
When the Income Tax Department scrutinized this claim of the taxpayer, the officials argued that since the last registry and sale deed are only 10 days old, it should be treated as short term capital gain and heavy tax and penalty should be charged on it as per the tax slab. The taxpayer fought a legal battle against this argument of the department and approached the Income Tax Appellate Tribunal (ITAT). Counsel for the taxpayer before the ITAT cited several old and established decisions of the courts and High Courts to establish that the actual time of ownership of the property starts from the date of the allotment agreement and not merely from the affixing of the final seal of the registry. After closely examining the pleadings and documents of all the parties, the ITAT ruled in favor of the taxpayer, clarifying that if the period of actual control and allotment exceeds the stipulated time, mere sale 10 days after final registration does not change its character as short term. This decision has shown taxpayers how legal protection can be achieved by making proper use of technical interpretations in tax laws.
This decision of ITAT is proving to be a major milestone for real estate investors and taxpayers of India. Through this, we learn how important it is to preserve not only the registration date but every legal document, builder buyer agreement and payment receipt while purchasing a property. Many times, due to lack of small technical information, people surrender before the Income Tax authorities and pay huge taxes without any reason. If you also have strong documents which prove that the property was legally owned by you for a long time, then you also have the full right to save tax under the legal provisions. However, the circumstances of each case may be different, so it is always wise to seek advice from a qualified Chartered Accountant (CA) or tax lawyer before taking any financial or tax related decisions.