Section 2(47)(v) of Income Tax Act Explained: When Does Capital Gain Arise in Property Transactions?

Determining the correct Financial Year (FY) for computing Capital Gain or Capital Loss on the transfer of immovable property can be complex, especially when payments are made in parts over a long period. Understanding the exact point of "transfer" is crucial not only for tax assessment but also for the purpose of indexation for the buyer.

This article explores the nuances of "staggered payments" and how to identify the definitive transfer point.

Case Study: Agreement vs. Possession

Consider a scenario where an Agreement for Sale of a property was made on 30.03.2013 and advances were exchanged. However, the formal conveyance was executed and possession was transferred on 30.06.2014.

The key question is: Should the Capital Gain be assessable in AY 2014-15 or AY 2015-16?

Section 2(47)(v) and the Definition of "Transfer"

Capital Gain is triggered by the "transfer" of a capital asset. Section 2(47)(v) of the Income Tax Act, read with Section 53A of The Transfer of Property Act, 1882, makes it clear that a transaction is treated as a transfer only when possession has been taken or retained by the buyer.

In this specific case:

Possession Date: FY 2014-15 (corresponding to AY 2015-16).
Tax Impact: Capital gain or loss must be calculated in AY 2015-16.

This principle was upheld in the case of M/s ARCHEAN REALTY P. LTD. Vs THE DY. COMMISSIONER OF INCOME TAX (2023-VIL-809-ITAT-CHE).

Determining the Base Year for Indexation

If the buyer subsequently transfers the property, which Assessment Year should be considered the base year for indexation?

Following the same legal principles, since the transfer is only recognized upon possession, the base year for the purpose of indexation shall be AY 2015-16 itself.

Impact of Full Payment and TDS u/s 194IA

A common question arises: If the entire consideration was paid by the buyer on 30.03.2013 and TDS u/s 194IA was deducted, does the transfer date shift to FY 2013-14?

The answer remains No. Even if full payment is made and TDS is deducted, the transaction is only treated as a transfer once possession is handed over. Since, possession in this example was handed over in FY 2014-15 (AY 2015-16), the transfer is legally deemed to have taken place in AY 2015-16 only.

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