The main legal principle established is that the accrual of rights or interests in an immovable property for tax purposes is determined by the execution of an agreement embodying consensus ad idem, and the holding period of a capital asset is crucial in determining its tax treatment.

S. Ravindra Bhat, J.

1. This is an appeal filed against the order of the Income Tax Appellant Tribunal (“ITAT”) in ITA No. 161/Del/2012 dated 27.02.2013, which upholds the order of the Commissioner of Income Tax (Appeals) (“CIT-A”) confirming the assessment order of the Assessing Officer (“AO”). The short question of law that arises is whether on facts, capital gains are taxable as long-term or short-term capital gains. The brief facts are as follows:

2. The appellant (the assessee) and his wife had booked an apartment vide an application dated 31.07.2004, by payment of a booking amount of Rs.2,00,000/-on 3.08.2004 and consequently, it is claimed, acquired rights or interests in the same. The builder DLF Universal Limited (“DLF”) issued a letter dated 6.08.2004 provisionally allotting the apartment and two parking spaces, stating specifically the receipt of Rs.2,00,000/- (Annexure 3). Consequent to this, regular payments were made per the payment plan of the builder. A buyer’s agreement was executed on 4.11.2004 between DLF and the allottees i.e. the appellant and his wife. Per the payment schedule, a total payment of Rs.87,12,500/- was made from 31.07.2004 to 03.08.2006 towards the purchase of the apartment. Following this, the appellant and his wife entered into an agreement to sell dated 2.11.2007 to sell their booking rights/rights or interest in the apartment to Smt. Srilekha Nayak for a sum of Rs.1,44,87,500/-. The period between acquisition and sale of the booking rights in the apartment is claimed to be 39 months and 2 days, thus greater than 36 months, i.e. from 31.07.2004 to 02.11.2007. The appellant subsequently filed return of income on 31.3.2009 for the assessment year 2008-2009, with income declared to be Rs.3,84,874/-. In the computation of income, the appellant had declared a long term capital gain of Rs.31,35,740/- on the sale of booking rights/extinguishment of rights in the apartment. An exemption was claimed under Section 54 of the Act, 1961 as the same was invested in purchase of another apartment in June 2008.

3. After the return was processed under Section 143(1) of the Act and the case was thereafter selected for compulsory scrutiny, an order of assessment was passed under Section 143(3) of the Act on 30.12.2010 whereby an addition of Rs.28,20,000/- was made by the Assessing Officer (AO) to the income declared by the appellant on account of short-term capital gain. No deduction under Section 54 was allowed since it is available only in respect of long-term capital gains. The total income was thus assessed to be Rs.32,10,145/-. The appeal against the order of the AO before CIT-A was dismissed by an order dated 25.11.2011, on the grounds that the rights in the apartment accrued to the appellant only when the apartment was purchased by the agreement dated 4.11.2004. It was also noted that only rights in the property and not title were transferred vide the agreement of 2.11.2007 as the assessee never had possession of the apartment. The assessee’s second appeal before the ITAT was also dismissed vide order dated 27.02.2013 on the ground that no rights in the property accrued to the appellant/allottees on the date of filing of the application for allotment i.e. 31.7.2004, as notes 1 and 2 enclosed with the confirmation letter dated 06.08.2004 received in response to the allotment application states clearly that no rights to the property would accrue to the allottees until the buyer’s agreement was signed and returned; the buyer’s agreement was executed only on 4.11.2004. Consequently, the ITAT found that the capital asset was sold within a period of 36 months thus rendering the profits from the sale taxable as short-term capital gains, which do not qualify for the deduction under Section 54.

4. The question that arises for consideration is whether any right accrued to the assessee by way of the application for allotment that can be considered a capital asset; this would determine whether the date of ap