Extinguishment of Right in Property would result in Capital Gain: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the extinguishment of any rights in the property would result in the capital gain under the Income Tax Act, 1961.

The assessee, an advocate was allotted a flat vide an allotment letter. He paid advance amounting to Rs. 50,00,000 on the allotment of said flat. By virtue of the said allotment, the assessee has acquired the right to the proposed flats. The construction of the building was yet to commence on the date of allotment. Due to various delay in regulatory approvals, the builder could not obtain permission to construct the building up to the 17th floor. Under such circumstances, the assessee surrendered the right to receive the flats and the builder cancelled the allotment of the above flats and agreed to pay the compensation for an amount of Rs. 1,10,00,000/- on account of the surrender of such flats.

The assessee claimed that this would amount to the extinguishment of assessee’s right in the Flat and the extinguishment of any right in relation to capital asset falls in the definition of transfer and hence will result in the Capital Gain chargeable to tax under section 45 of the Act. Since the above right was held for more than 3 years the assessee has treated the gain on extinguishment of right as long term.

The AO has not accepted the claim of the assessee and treated the compensation on surrender of flats amounting to Rs. 1.10 crores as income of the assessee under the head of income from other sources.

The Tribunal noted that the above-narrated facts are undisputed. The facts clearly show that the extinguishment of assessee’s right in Flat No. 1703, 1704 and 1705 proposed building known as “shubh Residency” allotted vide allotment letter dated 20.06.2008 is actually extinguishment of any right in relation to capital asset in view of the provisions of section 47 of the Act and falls in the definition of transfer and hence, result in capital gain chargeable under section 45 of the Act.

“It is a fact that assessee held this right for more than 3 years for a reason that these flats were subject to allotment vide allotment letter dated 20.06.2008 and assessee received compensation of ₹ 1.10 crores and in lieu of that acquired flat No. 301 and 305 in the same project vide agreement dated 28.02.2012, which period is more than three years. The assessee has made payment of Rs. 1.10 crores on various dates mentioned above and this are eligible for the claim of deduction under section 54 of the Act also. We find that the CIT(A) has rightly deleted the addition made by the AO in regard to disallowance of the claim of the assessee disallowing deduction of long term capital gain under section 54 of the Act on the premise that the compensation received is income from other sources. We noted that the CIT(A) has rightly allowed the claim of the assessee and we confirm the same,” the Tribunal said.