Allotment Letter By Developer Shall Be Treated As 'Construction' For Benefit Of Set-Off Of Capital Gains U/S 54: Kolkata ITAT

While treating the allotment letter by the developer as 'construction activity', the ITAT granted the benefit of set off of capital gain to the purchaser (appellant here).

Section 54 of Income Tax Act provides exemption on long term capital gains from the sale of residential property if the proceeds from such sale are reinvested in purchasing or constructing another residential property within a specified time frame.

The Bench of Rajpal Yadav (Vice-President) and Rakesh Mishra (Accountant Member) observed that allotment letter given by the developer to the assessee way back in 2010 would be construed as an agreement of purchase between the developer and the assessee.

Thus, the Bench held that the payments made to the developer through account payee cheque would be an agreement to sell and granted benefit of proviso appended to section 56(2)(vii)(b).

Section 56(2)(vii) of Income Tax Act states that any sum of money or property received by an individual or entity without consideration is taxable under the head “Income from Other Sources” if the aggregate value of such gifts exceeds Rs. 50,000 in a financial year.

Facts of the case

The observation came in reference to the fact that, the assessee, an individual, has purchased a residential flat jointly with his wife Gargi Das through Deed of Conveyance, registered in 2014 before District Sub-Registrar. The value of said transaction was declared by assessee at Rs.24,05,715/- as against stamp duty valuation of Rs.38,74,500/-. The difference of both these amounts of Rs.14,68,785/- was treated by AO as deemed gift within the meaning of section 56(2)(vii)(b)(ii).

On being confronted, the assessee submitted the copy of receipt from Greenfield City Project LLP and letter of allotment by Greenfield City Project. The AO did not equate this allotment letter and payment of instalment by assessee through account payee cheque as an agreement contemplated in proviso appended to section 56(1)(2). Resultantly, he made addition of such differential amount.

The assessee therefore filed an application u/s 154 emphasizing that the letter given by the developer demonstrating the booking of flat amounts to an agreement. However, the AO rejected the application.

When the matter reached the Tribunal, the Bench referred to Sec 56(2) and observed that when date of agreement fixing the amount of consideration for transfer of immovable property and date of registration are not same, then stamp duty valuation on date of agreement may be taken for purpose of this provision.

The Bench further stated that in case of variation between the amount disclosed by assessee as a purchase consideration, vis-a-vis the amount on which stamp duty was paid, the differential amount will be treated as deemed gift in the hands of assessee.

The Bench opined that the allotment letter is be equated to an agreement to sale, and clarified that the only requirement under law is that agreement should be followed by payments through banking channel, so that its veracity cannot be doubted.

In the present case, the Bench found that assessee has established the genuineness of the allotment letter by showing that payments were made through account payee cheques.

Therefore, the valuation date for the purpose of any deemed gift is the date when first payment was made, added the Bench.

Hence, the ITAT deleted the additions made u/s 56(2)(vii)(b) as deemed gift in the hands of assessee and allowed Assessee's appeal.

Counsel for Appellant/ Assessee: Saswati Mitra Dutta and Rajshree Dutta

Counsel for Respondent/ Revenue: L.N. Dash

Case Title: Tamojit Das versus ITO

Case Number: I.T.A. No. 1200/KOL/2024

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