Section 54F exemption and indexation turn on actual acquisition and holding of flats, not tentative booking payments.

Section 54F exemption is unavailable where the asset transferred is not a long-term capital asset and the assessee also owned two residential houses at the relevant time; the tentative allotment did not amount to transfer or acquisition of the flats, and the claim failed. Indexation under section 48 runs from the year the capital asset is actually acquired or first held, so payments made before the purchase agreement for flats not yet in existence could not be used to claim an earlier indexation base. The commentary states that exemption was denied and prior indexation was not allowable.

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Issues: (i) Whether the assessee was entitled to exemption under section 54F of the Income-tax Act, 1961 on transfer of the two flats; (ii) whether indexation of cost of acquisition was available from the dates of tentative bookings and instalment payments made prior to the purchase agreement.

Issue (i): Whether the assessee was entitled to exemption under section 54F of the Income-tax Act, 1961 on transfer of the two flats.

Analysis: The entitlement to section 54F depends on transfer of a long-term capital asset other than a residential house. The flats were not in existence when the tentative allotment was made, no possession was handed over, and the tentative allotment letter did not amount to transfer of a capital asset. The relevant acquisition arose only on the agreement dated 22-11-2001, and the flats were sold on 28-1-2003, so the asset transferred was not a long-term capital asset. The assessee was also found to be owning two residential houses at the relevant time, which independently disentitled the claim under the proviso to section 54F.

Conclusion: The exemption under section 54F was not allowable and the finding was against the assessee.

Issue (ii): Whether indexation of cost of acquisition was available from the dates of tentative bookings and instalment payments made prior to the purchase agreement.

Analysis: For indexation under section 48, the relevant year is the year in which the asset was first held or acquired. Since the flats were not in existence at the time of tentative booking and the assessee acquired substantive rights only under the agreement dated 22-11-2001, payments made before that date did not relate to ownership of an existing asset. Therefore, prior payments could not be taken as the base for earlier indexation benefits.

Conclusion: Indexation prior to the date of the purchase agreement was not allowable and the finding was against the assessee.

Final Conclusion: The assessee failed on the claim for exemption, while the revenue succeeded on the challenge to the grant of indexation; the overall result was adverse to the assessee.

Ratio Decidendi: Section 54F applies only where a long-term capital asset other than a residential house is transferred, and indexation under section 48 runs from the year in which the capital asset is actually acquired or first held.

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