Reg capital gain & legal documentation

Chetan (Querist) 27 August 2013 This query is : Resolved
Dear Friends,

One of my clients had given Rs. 5 Lacs advance to a builder (as a booking amt for a flat) in the year 2010. Since builder was a close friend of my client, they did not enter into any legal documents.

Later on, in the year 2013, due to some disputes, builder cancelled the orally agreed terms of sale of flat, and paid Rs. 10 Lacs to the client in good faith.

All these receipts & payments were done through Bank.

Capital gain tax will gets attracted on this transaction (Relinquishment of Rights). However, my client has immediately invested the amount in new house, so as to get exemption from capital gain tax.

Now my question is - will there be any problem in claiming exemption - since the parties did not have any legal documentation (on paper) for this case?

What are the ways to avoid any future litigations / queries from tax department?

Please guide with the best possible solution.

Follow Query

Report Abuse

M V Gupta (Expert) 27 August 2013
In my view as there are no written and registered agreement for sale the question of capital gains does not arise. But ur client may have to treat the difference in the amount paid and amount received as income from other sources or interest and pay tax thereon at normal rates.

Chetan (Querist) 28 August 2013
Thanks a lot Mr. Gupta.

I also came across few case laws, wherein same view was taken.

However, is there any way out to treat this transaction as Capital Gain?, since transaction was genuine. Only mistake done by the client is that he did not enter into any legal documents in writing.

M V Gupta (Expert) 28 August 2013
Although it was intended to result in sale of the property,it was not completed and the money paid was returned to u with a premium or interest. In order to treat the gain as CG u have to satisfy the provisions of Section 45 of the IT Act,in terms of which the profit or gain should have arisen from the transfer of a capital asset. There was no transfer of capital asset. Hence there is no way of treating the gain as CG.