Introduction

The Income Tax Appellate Tribunal (ITAT) has held in the case of Sukhwant Singh v. Income-tax Officer – [2023] 154 taxmann.com 369 (Chandigarh – Trib.) that the sum received for giving up rights to buy a property is taxable under the head of “Capital Gains.” This decision is significant because it clarifies the taxability of this type of transaction. Prior to this case, there was some uncertainty about the taxability of the sum received for giving up rights to buy a property.

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What is a Capital Asset?

Section 2(14) of the Income Tax Act, 1961 defines a capital asset as any property held by an assessee, whether or not connected with the assessee’s business or profession, and includes:

  • Any building or land
  • Any shares, securities, or other intangible assets
  • Any jewelry or other articles of value
  • Any right to receive money or other assets in future
  • Any other property, of whatever nature, which is not stock-in-trade of the assessee or a personal asset of the assessee

Is the Right to Buy a Property a Capital Asset?

The ITAT has held that the right to buy a property is a capital asset within the meaning of Section 2(14) of the Income Tax Act, 1961. This is because the right to buy a property is a valuable right that can be transferred for a consideration.

When is the Sum Received for Giving Up Rights to Buy a Property Taxable?

The sum received for giving up rights to buy a property is taxable under the head of “Capital Gains” when the following conditions are satisfied:

  • The right to buy a property is a capital asset within the meaning of Section 2(14) of the Income Tax Act, 1961.
  • The right to buy a property is transferred for a consideration.

Calculation of Capital Gain

The capital gain arising from the transfer of the right to buy a property is calculated by subtracting the cost of acquisition of the right from the sale price. The cost of acquisition of the right to buy a property is the amount paid by the assessee to acquire the right. The sale price is the amount received by the assessee for giving up the right.

Examples

Here are some examples of situations where the sum received for giving up rights to buy a property may be taxable:

  • A person books a flat in a new housing project and pays a booking amount. However, the person later decides not to buy the flat and gives up their booking rights for a consideration. The sum received for giving up the booking rights would be taxable as capital gains.
  • A person enters into an agreement to purchase a land parcel. However, the person later decides not to buy the land parcel and gives up their rights under the agreement for a consideration. The sum received for giving up the rights under the agreement would be taxable as capital gains.
  • A person has a first right of refusal to purchase a property owned by their relative. However, the person decides not to exercise their right of refusal and gives up their right for a consideration. The sum received for giving up the right of refusal would be taxable as capital gains.

Exemptions

There are certain exemptions available for capital gains arising from the transfer of the right to buy a property. For example, if the assessee reinvests the capital gains in certain specified assets, such as Capital Gains Bonds or Infrastructure Investment Trusts (InvITs), within six months of the transfer, they may be eligible for an exemption from capital gains tax.

Conclusion

The ITAT’s decision in the case of “Sum Received for Giving Up Rights to Buy a Property is Taxable under Head Capital Gains | ITAT” is significant because it clarifies the taxability of this type of transaction. Assessees should keep in mind that if they receive a sum of money for giving up their right to buy a property, the sum received may be taxable under the head of “Capital Gains.”

Case Study

Mr. A had booked a flat in a new housing project and paid a booking amount of Rs. 10 lakhs. However, Mr. A later decided not to buy the flat and gave up his booking rights for a consideration of Rs. 15 lakhs. The question is whether the sum of Rs. 5 lakhs received by Mr. A for giving up his booking rights is taxable.

The answer is yes. The right to buy a property is a capital asset within the meaning of Section 2(14) of the Income Tax Act, 1961. When Mr. A gave up his booking rights for a consideration of Rs. 15 lakhs, he essentially transferred a capital asset. Therefore, the sum of Rs. 5 lakhs received by Mr. A for giving up his booking rights is taxable under the head of “Capital Gains.”

Tax Planning Tips

  • If you are planning to give up your right to buy a property, you should consult with a tax advisor to determine whether you are eligible for any exemptions from capital gains tax.
  • If you are eligible for an exemption from capital gains tax, you should ensure that you comply with all of the conditions of the exemption.
  • If you are not eligible for an exemption from capital gains tax, you should minimize your taxable capital gain by calculating your cost of acquisition of the right to buy a property accurately.

Conclusion

The sum received for giving up rights to buy a property is taxable under the head of “Capital Gains”. Assessees should be aware of the tax implications of this type of transaction and take necessary steps to minimize their tax liability.

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