The Property and the Transaction

Ranjan Talakshi Vora, a resident of Parel, Mumbai, had acquired rights in Flat No. B/1201, Palm Paradise, Navi Mumbai, developed by M/s Moraj Finanz Corporation. The flat was originally allotted to one Mrs. Kalavati R. Trivedi. During FY 2006-07, Mrs. Trivedi transferred her rights in the flat to Vora, with the developer’s consent. Vora formalised the booking via a letter of reservation dated 25 January 2007, at a total consideration of ₹20,12,670.

The payments were made promptly. A sum of ₹2,62,000 was paid directly to the developer by cheque dated 11 January 2007. The remaining ₹16,28,470 was paid to Mrs. Trivedi on 20 January 2007 — essentially buying out her allotment rights. Both payments were traceable through bank statements.

Vora also had other flats booked with the same developer and maintained a consolidated ledger under the head “Advance Against Flat,” with separate working sheets to track the cost attributable to each individual flat.

The Surrender and the Tax Filing

Seven years later, in December 2013, Vora decided to exit the investment. She surrendered her rights in the flat via a cancellation letter dated 16 December 2013, for a consideration of ₹74,25,000. As per the arrangement with the developer, the amount was payable after the developer sold the flat to a new buyer. The money was accordingly received by Vora on 15 March 2014.

When filing her income tax return for Assessment Year 2014-15, Vora declared a total income of ₹18,650 and reported the profit from this transaction as Long Term Capital Gain (LTCG) — after claiming indexed cost of acquisition and brokerage expenses of ₹1,48,500. Since she had held the rights for over seven years, this was a straightforward LTCG claim on the face of it.

How the Tax Department Saw It Differently

The return was selected for scrutiny. During assessment proceedings, the Assessing Officer (AO) examined the books of account and noticed something that would become the cornerstone of his entire case — the journal entry recording the booking and allotment of Flat No. B/1201 appeared in the assessee’s books only on 31 March 2011, not in FY 2006-07 when the actual reservation and payments had taken place.

The AO seized on this date. Treating 31 March 2011 as the date of acquisition, he calculated the holding period from that date to the surrender date of 15 March 2014 — arriving at a period of less than 36 months. Under the Income Tax Act, an immovable property or rights therein must be held for more than 36 months to qualify as a long-term capital asset. Since the holding period came to under 36 months on this reading, the AO reclassified the entire gain as Short Term Capital Gain (STCG).

This single reclassification resulted in an addition of ₹17,04,705 to the assessee’s income, taxable at full slab rates instead of the concessional LTCG rate with indexation benefit.

The AO did allow deduction for brokerage expenses and permitted set-off of a current year short-term capital loss of ₹35,59,125 — but the fundamental reclassification stood, and the tax demand followed.

First Appeal: CIT(A) Backs the Tax Department

Aggrieved by the AO’s order, Vora appealed to the Commissioner of Income Tax (Appeals), NFAC. The CIT(A) examined the case and sided with the AO. The reasoning: as per the builder’s ledger and allotment records, the property was acquired on 31 March 2011. The holding period being under 36 months, the STCG treatment was upheld.

The only relief the CIT(A) granted was on a separate, procedural point. Vora had declared short-term capital losses of ₹11,15,396 for AY 2009-10 and ₹1,96,273 for AY 2010-11, and had claimed a set-off of brought-forward losses of ₹2,87,435 in her capital gains computation. Since those returns were filed within the prescribed time under Section 139(1) of the Act, the losses were eligible for carry-forward and set-off under Section 74. The CIT(A) directed the AO to allow this set-off and recompute accordingly.

But on the main issue — LTCG versus STCG — the CIT(A) confirmed the AO’s position. Vora was now before the ITAT.

Arguments at the ITAT

What the Assessee’s Counsel Argued

Vora’s authorised representative, Mehul Shah, made a detailed factual and legal submission. He placed on record the reservation letter dated 25 January 2007, bank statements evidencing payments in January 2007, and — critically — the developer’s own written confirmation in response to a notice issued by the tax department under Section 133(6) of the Act. In that confirmation, M/s Moraj Finanz Corporation stated unambiguously that Flat No. B/1201 was originally allotted to Mrs. Kalavati R. Trivedi and that, with the consent of all parties, the rights were transferred to Vora during FY 2006-07.

On the difference in ledger amounts, the AR explained that because Vora had booked multiple flats with the same developer, a common consolidated ledger was maintained by the developer, and the difference of ₹1,22,200 between the amount paid and the amount credited was simply an internal adjustment made by the developer across Vora’s various flat accounts. This was a bookkeeping matter and had no bearing on when the rights were actually acquired.

On the legal side, the AR cited two important CBDT Circulars — Circular No. 471 dated 15 October 1986 and Circular No. 672 dated 16 December 1993 — which clarify that in cases of flat allotments, the date of the allotment letter is the relevant date for determining acquisition, since the allottee obtains a right in the property at that point, and all subsequent payments are merely consequential. The AR also pointed to provisions of Section 50C and Section 56(2)(x) of the Income Tax Act, which themselves distinguish between the date of agreement or allotment and the date of registration — further reinforcing that rights in a property vest from the date of the allotment letter, not from the date of any later documentation.

What the Tax Department Argued

The Senior Departmental Representative, Pravin Salunkhe, maintained the department’s position. He argued that the journal entry in the books showed 31 March 2011 as the acquisition date, that the assessee had failed to fully reconcile the total payment of ₹20,12,670 with the developer’s records, and that since the assessee had only surrendered rights (and never obtained ownership), the book entry date should govern. The CBDT Circulars, he argued, were not applicable here.

ITAT’s Ruling: Documents Speak Louder Than Ledger Entries

The bench of Beena Pillai (Judicial Member) and Jagadish (Accountant Member) ruled comprehensively in Vora’s favour.

The Tribunal observed that the reservation letter of January 2007, the bank statements showing payments made at that time, and most decisively the developer’s own confirmation — given under a statutory notice where false information invites legal consequences — together established beyond doubt that the rights in the flat were acquired in FY 2006-07.

The Tribunal held that a subsequent accounting entry in the books cannot override contemporaneous transaction documents. The assessee’s explanation about maintaining a common consolidated ledger for multiple flats, and the internal adjustment of advances by the developer, was noted as a plausible and logical explanation that the department had not disproved by bringing any adverse material on record.

On the legal principle, the ITAT affirmed that the right acquired by an allottee in a property is a valuable capital asset, and the date of allotment or reservation is what determines when the holding period begins — consistent with the CBDT Circulars cited by the assessee.

Accordingly, the Tribunal held that the rights surrendered by Vora in FY 2013-14 constituted a Long Term Capital Asset, having been held since FY 2006-07 — well over the 36-month threshold. The gain is therefore liable to be assessed as Long Term Capital Gain with indexation benefit. The AO was directed to recompute the capital gains accordingly.

Both grounds of appeal raised by the assessee were allowed. The appeal stands allowed.

Why This Order Matters

This case is a pointed reminder that tax authorities cannot mechanically rely on accounting entries — particularly those in a builder’s books — to determine the date of acquisition of property rights. What governs is the actual date of the transaction, evidenced by the allotment letter, payment records, and the conduct of parties. A builder’s delay in recording an entry in his ledger cannot retroactively alter when a buyer’s rights in a property vested. The ITAT’s order reinforces a well-settled legal principle that has been clarified by the CBDT itself through multiple circulars — that for flat allottees, the clock starts ticking from the date of the allotment letter, not from the date of any subsequent paperwork.

Also Read: No Tax on Temporary Flat: ITAT Rules Developer’s Alternate Accommodation Isn’t a Taxable “Transfer” of Property

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