ITAT Mumbai Clarifies: Date of Agreement, Not Possession, Crucial for LTCG Indexation

Mumbai, Maharashtra – In a significant ruling for taxpayers, the Income Tax Appellate Tribunal (ITAT) Mumbai Bench "I" has held that the date of the 'Agreement to Sale,' particularly when substantial payments are made, should be considered the date of acquisition for calculating indexation benefits on Long Term Capital Gains (LTCG), rather than the date of possession. The decision came in the case of Braj Kishore Singh vs. Assessing Officer, Int. Tax Ward 4(2)(1), Mumbai (ITA No. 1011/MUM/2025) for the Assessment Year 2015-16.

The bench, comprising Ms. Padmavathy S (Accountant Member ) and Shri Raj Kumar Chauhan (Judicial Member), allowed the assessee's appeal, providing clarity on a frequently disputed issue under Section 48 of the Income Tax Act, 1961.

Case Background: The Dispute Over Indexation

The assessee, Mr. Braj Kishore Singh , a non-resident individual, sold an immovable property during FY 2014-15 (AY 2015-16) for a consideration of Rs. 70,00,000. He had initially not filed a return of income, leading the Assessing Officer (AO) to reopen the assessment under Section 147 of the Act.

In response, Mr. Singh filed his return, declaring an LTCG of Rs. 1,66,482. He had calculated this by taking the financial year of the 'Agreement to Sale' (16.11.2007, i.e., FY 2007-08) as the year of acquisition for indexation purposes. The cost of acquisition was Rs. 36,77,020.

However, the AO contended that the indexation should be granted from the financial year in which possession of the property was given (16.12.2010, i.e., FY 2010-11). Consequently, the AO recomputed the LTCG to Rs. 17,04,264. This view was upheld by the Dispute Resolution Panel (DRP), leading the assessee to appeal before the ITAT.

The core of the dispute revolved around Explanation (iii) to Section 48 of the Income-tax Act, concerning the 'Indexed Cost of Acquisition.'

Arguments Presented

Appellant (Assessee - Mr. Braj Kishore Singh ): * The assessee's counsel argued that indexation benefits must commence from the year of the agreement to sale or when substantial payments were made, not from the date of possession. * It was highlighted that the first payment was made in FY 2006-07, and by FY 2007-08 (when the agreement was registered on 16.11.2007), over 64.85% of the total cost had been paid. * The counsel contended that the DRP's interpretation linking the term "held" (as used in Explanation (iii) to Section 48) to physical possession was misplaced in the context of capital gains computation. * Reliance was placed on several judicial precedents, including the Supreme Court's decision in Sanjeev Lal vs. CIT , which established that rights in a property are created upon execution of an agreement to sell. * The AR also pointed out that the DRP had erred in observing that the specific flat (B-707) was identified only at the time of possession, as it was clearly mentioned in the 2007 agreement.

Respondent (Revenue): * The Departmental Representative (DR) supported the orders of the AO and the DRP, maintaining that the date of possession was the correct date for determining the holding period for indexation.

Tribunal's Analysis and Ruling

The ITAT meticulously examined the arguments and the extensive case law presented. The Tribunal heavily relied on its coordinate bench's decision in Anand Swarup Mehta vs. ITO (ITA No. 851/Mum/2025) , which in turn drew from other precedents.

The Tribunal emphasized that the term "held" under the Income Tax Act, for the purpose of determining the nature of a capital asset and its holding period, does not necessitate absolute legal ownership through a registered conveyance deed. The critical factor is when the assessee acquires a right to hold the property.

Key observations from cited judgments highlighted by the Tribunal:

* Mrs. Madhu Kaul vs. CIT (Punjab & Haryana High Court) : "On allotment of the flat and upon payment of the first installment, a right to hold the flat is conferred... The mere fact that possession was delivered later, does not detract from the fact that the allottee was conferred a right to hold property on issuance of an allotment letter."

* PCIT vs. Vembu Vaidyanathan (Bombay High Court) : The High Court, referring to CBDT circulars, noted that "the allottee gets title to the property on the issue of allotment letter and the payment of installments was only a follow-up action and taking the delivery of possession is only a formality."

* Anita D. Kanjani vs. ACIT (ITAT Mumbai) : "The legislature was concerned with the period during which the asset was held by the assessee for all practical purposes on de facto basis. The legislature was apparently not concerned with absolute legal ownership of the asset for determining the holding period."

The Tribunal found that the 'Agreement to Sale' dated 16th November 2007 clearly identified the specific flat (B-707) and its consideration. Furthermore, substantial payments (64.85% of the cost) were made by the assessee by FY 2007-08.

The ITAT concluded:

"We are of the considered opinion that the assessee/appellant has got the right to hold the asset from the date of ‘agreement to sale’ dated 16th November 2007 (FY 2007-08) and the arguments of the Ld. AR on behalf of the assessee are therefore cogent and convincing wherein he has argued that the indexation benefit should start from FY 2007-08. Thus, the assessee has justified his claim of considering the date of acquisition of the asset for the purpose of computation of capital gain from the date of agreement for sale dated 16th November 2007 and not from the letter of possession dated 16th December 2010..."

Decision on Other Grounds

Jurisdictional Validity of Notice (Ground 1): As the appeal was allowed on merits, this legal ground was kept open and not decided.

Additional Amenities Cost (Ground 5): The assessee claimed an additional cost of Rs. 2,32,500 for amenities. The ITAT restored this ground to the AO for consideration.

Interest and Penalty (Grounds 6 & 7): These grounds were deemed premature and not considered at this stage.

Final Order and Implications

The ITAT allowed grounds 2, 3, and 4 in favour of the assessee. The AO was directed to recompute the Long Term Capital Gain by considering the date of acquisition as 16th November 2007 (FY 2007-08) for indexation purposes.

This ruling reaffirms the principle that the right to hold a property, often established by an allotment letter or an agreement to sale coupled with significant payments, is the determining factor for the commencement of the holding period for capital gains tax purposes. It provides significant relief to taxpayers, especially in cases of under-construction properties where there's often a considerable time lag between the agreement/allotment and the final possession.