The Scheme of Taxation of Capital Gains as it exists in the Income tax Act is quite simple and has remained the same for a long time now. The statute defines the terms ‘capital asset’ and ‘transfer’ and the gain from the transfer of a capital asset owned by the assessee is taxed which is a plain arithmetical calculation. Thereafter depending on the period of holding of the asset, certain deductions which are essentially beneficial provisions to satisfy socio-economic requirements are provided.  The law-makers in the early stages obviously did not envisage the innovative and new age methods and schemes by which real estate would be developed in the future and the manner in which profits and gains arise from these transactions. Thus, transactions involving Joint Development of Properties, lease cum sale agreements etc were not given any specific attention. This, in recent years has resulted in much litigation mainly because of the rapid changes in the property and real estate development sectors.  In this article, a few cases are analysed, wherein the courts and tribunals had occasion to examine situations as to whether the assessee becomes the owner of a capital asset even though the legal title thereof  had not passed on to him and if so, at what point of time he can be said to started holding the asset.  

It is generally accepted that subject to any limitations that may be required in any particular context the term ‘property’ is a word of widest import and it usually signifies every possible interest which a person can possibly hold and enjoy.  While defining the term capital asset, Sec 2(14) of the Income Tax Act also uses the phrase "property of any kind" and thus widens the scope of the term even further so as to include tangible and intangible assets and also any benefits, rights and actionable claims that a person may obtain in respect of such assets.  In short a property in legal parlance may be set to create a bundle of rights of all kinds to a person.

Again in respect of the definition of the word "transfer" in Sec 2(47) it may be seen that the Income Tax Act has given a wide scope for the same that it not only includes a regular sale but also any transaction that results in any extinguishment of any right in the property or any relinquishment of the same.  Thus the definition takes into its ambit not only cases where a person gives up his rights in the property voluntarily but also instances where he gives up his rights in favour of another person in consideration of the other person fulfilling his part of the obligations as per the contracted terms. 

In CIT vs Lakshmi Devi Ratani (296 ITR 363) the MP High Court has held that when the legislature defines the particular type of transaction to be in the nature of transfer for taxing purpose then effect has to be given to it.  A reading of the definition of the term transfer u/s 2(47) clearly indicates that the intention of the legislature is to include several kinds of transaction in that category for the purpose of brining them into the income tax net.  It further held that when this is read along with the expression property of any kind used in sec 2(14) it is clear that giving up a right to claim specific performance results in extinguishment of the right in the property.  In other words the action on the part of a person in giving up his right over an asset in favour of another person to the exclusion of all others would amount to transfer within the meaning section 2(47) and make the other person, the owner of such property from that date.

In the case of CIT Vs Tata Services Ltd (122 ITR 594) the Bombay High Court held that the word property used in Sec 2(14) is a word of the widest amplitude and any right which can be called property will be included in the definition of capital asset.  It held that since a contract for sale of land is capable of specific performance and is also assignable, a right to obtain conveyance of immovable property is also clearly a capital asset contemplated u/s 2(14) of the Income Tax Act.

The Hon’ble Supreme Court in the cases of CIT v Podar Cement Pvt. Ltd. 226 ITR 625 and Mysore Minerals Ltd. v CIT 239 ITR 775, has held that ownership is not only complete when the Sale Deed has been executed but also complete when anyone is in the possession of the property in his own title so as to exclude others from exercising any right over the said property and as also anyone who is in occupation of the property would be the owner of the property though a formal deed of title may not have been executed. The same view has been taken by the Hon’ble Andhra Pradesh High Court in the case of Syamala Rao v/s CIT 234 ITR 140 in which it was observed by the Hon’ble Court as below:

 “…….a perusal of the document made it clear that the agreement of sale was executed in 1962 and possession was delivered to the assessee on the same date and the sale consideration was also paid by the assessee to the vendor, though the document was registered on June 8, 1979. The registration of the document related back to the date on which the agreement of sale was executed in favour of the assessee by the vendor. Therefore, the assessee was deemed to be the owner of the property with effect from May 1, 1962. Therefore, the assessee had held the property for more than 36 months and the capital gains derived by the assessee on the sale of the plots could not be assessed as short-term capital gains.”

In CIT v Rama Rani Kalia (2013) 358 ITR 499, the court held that the difference between the 'short-term capital' asset and 'long-term capital asset'  depends on the period over which the property has been held by the assessee and not the nature of tittle over the property. The court held that conversion of the rights of the lessee in the property from having lease hold right into free hold is only by way of improvement of her rights over the property, which she enjoyed. It would not have any effect on the taxability of gain from such property, which is related to the period over which the property is held. If the period is less than 36 months, the gain arising from such transfer would be of short-term capital gain.

In CIT v Frick India Ltd 369 ITR 328, the Delhi High Court observed that the Expression “held by the assessee” means date from when assessee acquired right, got hold of and started enjoying the said asset. It went on to add that the words  "held‟ or "to hold‟  have to be given widermeaning to effectuate the object and purpose of provision and therefore these  words are not synonymous with right of the assessee over the asset as an owner. A similar view was also taken in the case of CIT v All India Tea and Trading Company Ltd 117 ITR 525 in the Calcutta High Court and in the case of CIT v/s Ved Prakash & Sons (HUF) 207 ITR 148 in the Punjab and Haryana High Court.

The only jarring note in this context was initially given by the Karnataka HC in the case of CIT vs Dr. V V Mody 218 ITR 1, wherein it was held where the plot of land initially allotted by the Bangalore Development Authority by way of a lease cum sale scheme and after 10 years an absolute sale deed was executed in favour of the allottee, the limited rights as a lessee get merged with the larger rights as an owner when the sale deed is executed. Accordingly it was held that the transfer of the plot within 3 years from the date of absolute sale deed resulted in short term capital gain. However this decision was rendered prior to the inclusion of clause (v) in section 2(47) which makes a reference to section 53A of the TP Act, while defining the term Transfer. Taking note of this in the case of CIT vs C Shakuntala [TS-5878-HC-2007(Karnataka)-O], the Honourable Karnataka High Court distinguished its own decision in Mody’s case and held that a combined reading of Sec.2(47) and  Sec.53A of Transfer Of Property Act would show that date of lease-cum-sale followed by delivery of possession by part performance is the date of transfer of property in favour of the assessee. Following the decision of the Punjab HC in the case of CIT vs Ved Prakash (207 ITR 148), it further held that subsequent execution of sale deed executed by the development authority after expiry of lease period, is immaterial for the purpose of determining LTCG or STCG.  

Thus from the various judicial pronouncements, the law appears to be moving towards the position that for the limited purposes  of tax laws, the legal ownership of the asset is immaterial for computing the period of holding of the asset.