A taxpayer was allotted three flats on the 17th floor of a proposed building vide an allotment letter dated 20 June 2008. The taxpayer had paid an advance of Rs 50 lakh on the allotment of the said flat. The construction of the building was yet to commence as on the date of allotment. Due to the delay in regulatory approvals, the developer could not obtain permission to construct the building up to the 17th floor. In the view of these circumstances, the taxpayer surrendered the right to receive the flats and the developer cancelled the allotment of the above flats and agreed to pay compensation for an amount of Rs 1.10 crore towards the said surrender. In addition to this, the developer transferred the advance of Rs 50 lakh towards a new flat in the same project for a total consideration of Rs 1.53 crore. The agreement for the same was registered on 29 February 2012. The taxpayer was of the opinion that these facts resulted in the extinguishment of his rights in flats. Under the relevant provisions of the Income Tax Act, 1961 ('the Act'), extinguishment of any right in relation to a capital asset results in capital gains chargeable tax. Since the above right was held for more than 3 years, the taxpayer treated the gain on extinguishment of the right as long-term. Further, he claimed exemption u/s 54 of the Act on account of the investment made in the new flat in February 2012. During the course of assessment, the tax officer did not accept this claim and was of the opinion that as the builder had not even built the flats, it cannot be considered as the extinguishment of rights. Accordingly, the tax officer treated the compensation of Rs 1.10 crore as the taxpayer's income under the head of income from other sources. Before the first appellate authority, the taxpayer argued that both, the advance payment and the allotment letter prove that he has acquired the right to the property, which in turn is a capital asset. The taxpayer challenged the taxman's argument of the developer not building the flats and hence cannot be claimed as the extinguishment of rights under the Act. The taxpayer relied on the CBDT's circular no 471 dated 15.10.1986 wherein it has been held that property acquired by an allotment letter was considered as the capital asset for the purpose of exemption from capital gains. Further, the taxpayer relied upon a case decided by the Delhi High Court which held that even booking rights or rights to obtain title to property are capital assets. The first appellate authority, based on facts of the case and the judicial precedents relied upon by the taxpayer, agreed with the taxpayer and allowed his claim for capital gains and the resulting deduction u/s 54. The addition of Rs 1.10 crore under the head 'other sources' was also deleted. Unhappy with the judgment, the taxman appealed before the Tribunal. On hearing both sides, the Tribunal was of the opinion that the extinguishment of rights in the flats allotted vide allotment letter is indeed extinguishment of rights in relation to capital assets and hence will result in capital gains. Consequently, the investment made towards the new flat is also eligible for a claim of deduction u/s 54 of the Act.