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Kolkata Tribunal holds the income from ‘transfer of right to purchase flat’ as
‘capital gains’
24 January 2014
Background
Recently, the Kolkata Income-tax Appellate Tribunal
(the Tribunal) in the case of Subhas Chandra
1
Parmanandka (the taxpayer) held that income from the
transfer of right to purchase a flat is taxable as capital
gains. Further, in case, the right was so held for more
than 36 months, the gain will be treated as a long term
capital gain, thereby allowing relief from capital gains if
2
invested in residential property .

The taxpayer offered the differential amount of
compensation received and advance paid as Long
Term Capital Gains (LTCG) and claimed
exemption in respect of investment in another
residential property.

The Assessing Officer (AO) treated the
compensation paid as ‘income from undisclosed
source’. Per the AO, the booking of the space was
never converted into the ownership of the flat and
hence was not a long term capital asset,
consequently denying exemption on the LTCG.

On appeal, the Commissioner of Income-tax
(Appeal) [CIT(A)], concurred with the AO, by
holding that the income should be treated as
‘income from other sources’ under the provisions
of the Act, and not as LTCG
Facts of the case

The taxpayer had booked a space with a builder in
Kolkata by paying an advance amount.
Subsequently, the builder being unable to provide
the booked space paid compensation towards
cancellation of the agreement.
_________________
1
Subhas Chandra Parmanandka v. ITO (ITA No.1614/Kol/2010, Assessment
Year 2006-07, dated 16 January 2014)
2
Section 54F of the Income-tax Act, 1961
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Issue before the Tribunal
Our comments
Whether gain from the relinquishment of the right to
purchase a flat is a Long Term Capital Gain, eligible for
exemption?
This is a welcome decision, which deals with a critical
tax issue faced by persons investing in under
construction properties. This will help the persons in
claiming the income as capital gains at the time of
transfer of the right to purchase property.
Tribunal’s ruling
The Tribunal held that the receipts on the transfer of the
right to purchase the flat was LTCG, and was eligible for
deduction under section 54F of the Act.
The observations of the Tribunal were as follows:

Once the taxpayer has entered into an agreement, it
becomes the right of the taxpayer and such right is an
asset which has a value. When surrendered or
transferred after 36 months, gains if any, arising on the
transfer of such asset is liable to be treated only as
LTCG.

Further, when an income falls under a specific head
(income from capital gains) it cannot be taxed under a
residuary head (income from other sources).

Since the source of the income is not disputed, the
income cannot be treated as ‘undisclosed income’.
The Tribunal concluded by reversing the decision of the AO
and CIT(A) in favour of the taxpayer by allowing the
exemption under the Act regarding LTCG.
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.