1. Recently, the above issue was well covered by the Income Tax Appellate Tribunal, Mumbai by its Order dated 25^th August 2020 in ITA No. 4255/MUM/2018 in the matter of Mukesh Sohanraj Vardhan V/s. ITO.
2. Material Facts are: –

• The Appellant acquired the right in the residential Flat in the form of an Allotment Letter dated 10-01-2005 issued by the Builders read along with receipts of payments of Rs. 30,00,000/- by cheques.
• Subsequently, during the period commencing from 13-09-2011 to 26-11-2011, the Appellant received a sum of Rs. 48,75,000/- from the Builders against cancellation of the said Allotment Letter resulting in a surplus of Rs. 18,75,000/-.
• On or about 23-12-2011, the Appellant acquired a new flat for the total consideration of Rs. 1,01,95,357/- and invested Rs. 75,53,469/- in the same. The Appellant claimed exemption u/s. 54/54F of the Act, since the holding of Appellant’s right in the, said Flat exceeded 36 months, after availing indexation benefit for the cost of the Flat paid in installments.
• The Appellant filed his return of income for Assessment year 2012-2013 on 19-07-2012 declaring total income of Rs. 3,10,322/- since the gain from cancellation of the Flat was already re-invested.
• During the Assessment, the Assessing Officer came to the finding that the gain received by the Appellant from the Builder on cancellation of the deal has resulted in the benefit of compensation of Rs. 18,75,000/- and the same is nothing but “income from other sources”.
• The Appellant’s Appeal before the CIT (A) against the Order of Assessing Officer came to be rejected by an Order dated 15-05-2018 with the observation that letter dated 10.01.2005 cannot be called as an allotment letter for the reason that (a) the same is a plain letter with no details of commencement certificate issued by the Municipal Corporation; (b) the land details are not recorded; (c) authenticity of address of the builder is not established – telephone number/PAN/Registration Number etc. are not recorded in the document; (d) paragraph 3 of the allotment letter spells out certain conditions, which is not in accordance with 5 ITA No. 4255/Mum/2018 which includes execution of an agreement; (e) in the course of hearing details of such agreement arising out of paragraph 3 of the purported allotment letter was sought to which it was stated as not available; (f) the details of flat (area, amenities, specifications etc. are not recorded; (g) the total sum payable is not mentioned; (h) the document is not registered and there is no registration of any allotment agreement at any time; (i) the Assessee has not signed the purported letter of allotment; and (j) it is the Assessee who signed in his capacity as partner of the builder firm. Thus, the Learned CIT(A) arrived at a finding that the incomplete, non- registered “letter of allotment” cannot be treated as an “allotment letter” for deciding ownership of Capital Assets. Further, it is observed by him that the above documentary evidence does not establish ownership of capital assets and hence the question of assessment of capital gains does not arise.

3. Aggrieved by the Order of the CIT (A), the Appellant’s approached Income Tax Appellate Tribunal (ITAT) Mumbai, the ITAT has, while setting aside the Order of CIT (A), discussed on the subject issue as under: –
4. In the light of provisions of section 2(14) of the Act, “Capital Asset” means “a property of any kind” held by the Assessee and the term “property” includes any rights in property and therefore, the right to obtain conveyance of the immovable property is clearly a capital asset as contemplated u/s 2(14) of the Act. Further, it is stated that the exemption from capital gains u/s 54/54F of the Act can be claimed if long term capital gains accrued on the transfer of a specified long-term capital asset is invested in a residential flat within the specified period. It is stated that the Appellant purchased a new flat within the specified period and, as such, denial of the exemption is unwarranted and legally unsustainable.
5. In the Appellant’s submission, Appellant states that by paying the advance for the flats and obtaining the allotment letter on 26.6.2008 they have acquired the right to the property and right to property is a capital asset and when it is transferred and if any surrender amount is received it has to be assessed under capital gain.
6. Appellant has relied on CBDT Circular No.471 dated 15.10.1986 where it is provided that property acquired by allotment letter was considered as Capital Asset for the purpose of exemption from capital gains.
7. In the case of Mukesh Sohanraj Vardhan. 10 ITA No. 4255/Mum/2018 and with reference to the above CBDT circular, it is held that surrendering of allotment of Flat has to be considered as a right in the property which is a capital asset and any capital gain arising from that capital asset and if the appellant purchases new flat, he is eligible for exemption u/s 54.
8. The ITAT followed the decision given by its Co-ordinate Bench in ITA No. 4255/MUM/2018 and allowed the Appeal of the Appellant.
9. Other cases discussed are ITA No. 4202/MUM/2015, ITA No. 1614/KOL/2010, ITA No. 6822/MUM/2016.

4. CONCLUSION:

• The “letter of allotment” to purchase a Flat is the right in a property amounting to a “Capital Asset” as contemplated u/s. 2 (14) of the Act.
• The long term Capital Gain accrued from the transfer of such a “Capital Asset” (including accrued upon cancellation of the allotment letter) after holding it for more than a specified period, if invested in a residential flat within the specified period, the exemption from Capital Gain u/s. 54/54F of the Act can be claimed.

Further Observations:

The subject Letter of Allotment of the flat is dated 23-12-2011. The Real Estate (Regulations and Development) Act, 2016 (“RERA”) has come into force with effect from 15th May 2017. Keeping in mind various provisions of RERA, while obtaining such a letter of allotment in respect of flats in the projects falling within the ambit of RERA, it should be ensured that the following requirements, apart from others, are met within the Letter of Allotment:

• A detailed project description should be mentioned.
• Project registration details with RERA.
• The description of the flat, including the number, size, and floor.The details of permission to commence the construction. 
• The total cost of the flat, along with the mode of payment. 
• The particulars of fixtures and amenities to be provided in the flat. 
• The common amenities of the project. 
• The fact of payment of Goods and Services Tax (GST) on the amounts already paid should be referred.
• The expected date of possession.
• The willingness of the executor of the Agreement under RERA in the future.
• If the Letter of Allotment is silent in respect of the above factual aspects, it could be contended that the said letter does not create any legal right in the property and cannot be considered as a Capital Asset under the provisions of Section 2(14) of the Income Tax Act.