No capital gain on merely issuing allotment letter for giving possession

No capital gain accrued by mere issuing allotment letter which merely entitles the possession of the plot to the prospective buyers.

In the case of Sujata Farms Pvt. Ltd. Versus DCIT, Circle – 6, Pune – ITAT PUNE

The Assessing Officer claimed that the assessee company is following mercantile system of accounting and therefore, it was required upon the assessee company to recognize sales, on handing over the possession of the plot of land i.e. the date of letter of allotment. In the opinion of the Assessing Officer the assessee company has not recognized the sales and accordingly, correct income has not been declared in all these assessment years.

However assessee company claims that merely handing over possession of plots of land to the buyers by issuing the letters of offer and allotment, transactions would not declared as a sales.

For deciding the timing of recognition of income from sale of goods, it is necessary to fulfill two conditions specified in paragraphs 10 and 11 of Accounting Standard (AS)-9, which read as under:
(i) The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards or ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership;

Here, exclusive possession is not given to the buyers at the time of signing of ‘letter of Offer of allotment’ of plot and the company retains full and effective control of the ownership of the land at all the times until the Sale Deed is executed.


(ii) No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.”

By way of allotment letter the assessee assures the buyer that the plot selected by the buyer will be ultimately sold to him. Assessee submits that GIRIVAN is a very big project occupying the huge land, having different locations of the plots. Hence, it is choice of the buyers to select his plots.

A letter of the allotment is nothing but it is a first stage of acceptance of the offer of the buyer by issuing him to letter. Assessee submits that the assessee is following mercantile system of accounting since, 1990-91 by recognizing the income on the sale of plot only after the registered sale deed is executed.Assessee referred to the said copy of the allotment letter and submits that it is clearly mentioned that the timely payment is essential of the contract. Assessee submits that even if the buyer fails to pay two installments as per letter of allotment the booking of the plot will be cancelled. The allotment letter is nothing, it is one sort of the booking of plot

He submits that mere issuance of the allotment it cannot be said that the assessee has given the possession to the prospective buyer when in fact it is acknowledgment of the booking of the plot.

Further, the applicability of Section 2(47) of the Income-tax Act, assessee submits that the definition of the transfer is not applicable when the income is assessed under the head income from business or profession but the said definition is specifically applicable when the income is determined under the head Capital Gain and hence, reliance placed by the Assessing Officer is totally misplaced.

As per the Transfer of Property Act the title is transferred only on the completion of the terms and conditions agreed between the parties. ITAT find that authorities below have referred to Section 2(47) of the Act. Section 2(47) of the Income-tax Act is a definition of the term “transfer”. As rightly argued by the Ld. Counsel the said definition is applicable when the income is computed under the head Capital Gain not for the head of business and profession.

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