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Taxing property transfers written by Indu Bhan, published in The Financial Express. July 7, 2014

Consumers looking at taking the benefit of the government's emphasis on the real estate sector, especially the housing sector, need to be aware of the tax implications related to sale-purchase of properties particularly when the sale-purchase agreements and their executions are spread over several days/months or even years.

 

It is important to note that property is regarded as a capital asset and any gains arising from the sale of property are assessed under the head "capital gains" according to the Income-Tax Act, 1961. The tax varies, depending on the time period the property was held on to.

 

Irrespective of how the property has been acquired, the revenue authorities scan through every real estate transaction and go strictly as per the rule book and levy tax. They consider profit generated by property sale as regular income for that year and apply tax accordingly. However, there are instances where assessees don't intend to avoid paying taxes but situations are beyond their control. Then how the taxmen are to calculate taxes.

 

The Supreme Court, in the case Sanjeev Lal versus Commissioner of Income Tax, has dealt with one such unavoidable situation and has directed the tax authorities to take a re-look at their assessments.

 

In this landmark case, the assessees (Lal and his wife) had entered into an agreement to sell a house in Chandigarh on December 27, 2002, for a consideration of Rs 1.32 crore. An earnest money of Rs 15 lakh was received by them. But the sale deed could not be executed due to a trial court order restraining them from concluding the deal till the disposal of a connected case.

 

While the transfer deed was finally executed on September 24, 2004, the new house was purchased within one year on April 30, 2003, thus investing the capital gains money in the new asset. Believing that the long-term capital gains were not chargeable to income tax, Lals did not disclose the long-term capital gains in their income tax return for the assessment year 2005-06.

 

However, the assessing officer was of the view that Lals were liable to pay income tax on the capital gains on the grounds that the transfer of the original asset had been effected on September 24, 2004, whereas the new property was purchased on April 30, 2003, i.e. more than one year prior to the purchase of the new asset. Both the Income Tax Appellate Tribunal and the Punjab and Haryana High Court upheld the department's findings.

 

On appeal, the apex court accepted the assesses' submissions that the taxmen should have considered the date on which the agreement to sell had been effected for transfer of property. By virtue of the agreement to sell, a right had been created in favour of the buyer and a certain right of Lals in respect of the house had been extinguished. Therefore, December 27, 2002, should have been considered as the date of transfer and the delay in execution of the sale deed was on account of a factor which was beyond their control, the Supreme Court ruled, asking the department to re-assess the income of Lals after holding that they were entitled to the benefit.

 

It further added that if a person who gets some excess amount upon transfer of his old residential premises and thereafter purchases or constructs a new premises within the time stipulated under Section 54 of the Act, the Legislature does not want him to be burdened with tax on the long-term capital gains and, therefore, relief has been given to him in respect of paying income tax on the long-term capital gains.

 

Such ruling may lay the roadmap for calculation of taxes in situations which are beyond the assessee's control. Therefore, consumers looking at selling-buying of properties—houses, apartments or plots—should examine all aspects and seek legal opinion from every possible angle including taxation laws.