Property buyers in India can get tax relief by keeping in mind an important consideration: the Income Tax Act allows calculating the holding periods for Long-Term Capital Gains (LTCG) benefit from the date of the allotment letter instead of the date of possession or registration of the property.
However, in a significant ruling by the Income Tax Appellate Tribunal (ITAT), Surat Bench, the tribunal dealt with two important issues regarding his flat against a Mumbai-based taxpayer.
The first issue was whether the gain from the sale of his flat was a short-term or long-term capital gain.
The taxpayer sold a residential flat in Thane, Mumbai, on October 10, 2016 but the issue arose after the tax department calculated the holding period as 10 days only, i.e., from the date of registration to the sale of the flat, and treated the gains as short-term capital gains (STCG).
However, he challenged the Assessing Officer (AO), asking to consider his claim for long-term capital gains treatment because he calculated the gain from the allotment date.
The second issue concerned whether the taxpayer may be subject to taxation on the difference between the purchase price and the higher stamp duty amount that was decided at the time of registration.
For property owners, the ruling highlights an important distinction: the date on which a property is formally registered may not always be the date from which its holding period is calculated for capital gains tax purposes.
The case
In Jagdishkumar Chhotubhai Gandhi v. ITO (International Taxation), Surat [ITA No. 245/SRT/2024, AY 2017-18, order dated 29 September 2026], Mr. Gandhi, an NRI, had originally filed his return declaring income of about Rs. 14.27 lakh, and the first assessment accepted that return.
Later, the Commissioner of Income Tax (CIT) invoked revisionary powers under section 263 and directed the Assessing Officer (AO) to make a fresh assessment.
In the reassessment, the AO made two major adjustments i.e., for an amount of Rs. 68.12 lakh treating the gain on sale of the flat as short-term capital gain, as well as Rs. 45.79 lakh under section 56(2)(vii)(b) for the difference between the purchase price and the stamp duty value.
His assessed income consequently increased to about Rs. 1.28 crore.
The flat had been allotted to Mr. Gandhi by Roma Builders through a Letter of Allotment dated 8 January 2011 for Rs. 1.43 crore, excluding taxes and other charges.
He made substantial payments through banking channels from 2010 onwards. However, the formal conveyance deed was registered much later, on 30 September 2016, and he sold the flat on 10 October 2016 for Rs. 2.78 crore.
He treated the gain as long-term because he counted the holding period from the allotment date in 2011. He accordingly claimed indexation benefit and a deduction under section 54.
The AO, however, counted the holding period only from the date of registration in September 2016 and treated the property as having been held for just ten days.
The ITAT did not agree with the AO’s contention. It held that, for deciding whether a property is a long-term or short-term capital asset, the important question to be considered is when the taxpayer started “holding” the asset and not merely when the formal conveyance deed was registered.
Considering Mr. Gandhi had acquired rights in the flat from the date of allotment and had also made payments over the years, the Tribunal held that the holding period should begin from 8 January 2011.
And as the said period exceeded 36 months, the flat qualified as a long-term capital asset. Therefore, the ITAT directed the AO to treat the gain as long-term capital gain, and allow the related indexation and section 54 benefits in accordance with law.
The second dispute concerned the Rs. 45.79 lakh addition. At the time of registration, the stamp authority valued the property at Rs. 1.8899 crore, while Mr. Gandhi’s purchase consideration was Rs. 1.432 crore. The AO taxed the difference.
He argued that the relevant stamp duty value should be the value prevailing on 8 January 2011, when the allotment agreement fixed the price, because he had already made payments through banking channels before that date.
The ITAT accepted this argument in principle and relied on its earlier decision in ACIT v. M/s Dianco, which held that an allotment letter containing definite terms and acted upon through banking-channel payments may qualify as an agreement for this limited purpose.
Thus, the ITAT held that the Letter of Allotment could be treated as an agreement for the purpose of the provisos to section 56(2)(vii)(b), particularly because it identified the property and fixed the consideration, and Mr. Gandhi had already made part-payments through banking channels before the allotment.
Therefore, the Department could not simply use the higher stamp duty value prevailing on the 2016 registration date. The Tribunal sent this issue back to the AO to determine the stamp duty value as on 8 January 2011 and then recompute any taxable difference, if applicable.
Accordingly, he succeeded on the capital-gains issue and obtained recognition of the gain as long-term.
Further, on the stamp-duty-value issue, he received partial relief as the ITAT did not delete the addition but directed the AO to recompute the issue using the value relevant to the allotment date. The appeal was therefore partly allowed.
Section 56 tax relief: Is registration of allotment letter mandatory?
The fundamental principle is that the statutory requirement for the capital asset is to be held for the prescribed period, and not necessarily owned through a registered conveyance.
“If the Revenue appeals, the High Court may have to decide whether an allotment letter that was not registered can qualify as an agreement for applying the stamp-duty-value proviso under section 56(2)(vii)(b),” said Dipesh Jain, Partner, Economic Laws Practice.
“The Revenue may argue that the letter merely records a provisional allotment, or does not set out sufficiently definite and binding terms to be treated as an agreement fixing the consideration,” Jain further added.
The Surat ITAT relied on Dianco and on evidence that the flat was allotted and payments were made through banking channels.
Further, the taxpayer argues that provisos refer to an agreement fixing consideration and qualifying non-cash payment and they do not expressly state that the agreement must be registered.
“The outcome would therefore likely depend on the letter’s terms and the supporting evidence such as whether it identified the flat, fixed the price, created a binding allotment, and whether the payments made by banking channels related to that allotment and were made by the required date,” Jain stated.
Accordingly, where established documentary evidence like an allotment letter confers identifiable and enforceable rights over the property, the holding period may commence from the date of allotment, and upon the subsequent execution or registration of the conveyance deed.
This principle finds support from the cases adjudicated at various High Courts and even from CBDT Circulars.
Higher Stamp Duty Value? How to Avoid Section 56 Tax
“The statute provides that, for the purpose of stamp duty valuation, the value as on the date of the agreement needs to be considered; however, the crucial question that still stands is, whether the allotment letter constitutes a valid agreement. That is where we need to study if the allotment letter embodies the essentials of a valid agreement,” said Jain.
Even in the present case, the ITAT Surat, relying on one of its own decisions, held that an allotment letter specifying the essentials of a valid contract can constitute an agreement, for this purpose.
Property allotment letter: When is it valid for tax purposes?
The allotment letter must identify the terms that are essential to a valid contract.
“These terms include details of the property, the consideration to be paid, payment arrangements and any other essential conditions accepted by both parties,” according to Jain.
Banking records showcasing the payment of consideration dates on or before allotment can further strengthen the claim.
This is highly fact-specific, and a mere expression of interest or provisional booking may not suffice. It is pertinent to note that there is no bright-line test in this regard.
Importance of this ITAT ruling for common taxpayers
The ruling protects genuine homebuyers from recharacterization of long-term capital gains as short-term, potentially resulting in a higher tax liability where the sale period is cutting close to the threshold period for long term.
It also reinforces the importance of proper documentation in establishing the holding period of an asset. However, the applicability of the case is highly fact-specific and must be assessed against the circumstances of each case.
The holding period generally begins when the taxpayer acquires a right in the capital asset.
For an under-construction flat, that may be the date of allotment depending upon the terms of such letter i.e. whether the same identifies the flat, fixes the consideration, and gives the buyer substantive rights that are acted upon, such as through payments made under its terms etc.
In Jagdishkumar Chhotubhai Gandhi v. ITO, the Surat ITAT accepted the allotment date on the facts before it, despite the later registration of the conveyance deed. However, this needs to be examined on a case-to-case basis.
Disclaimer: This article is based on the Surat ITAT order in Jagdishkumar Chhotubhai Gandhi v. ITO (International Taxation), Surat [ITA No. 245/SRT/2024, AY 2017-18. The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
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