This article has been written by Prachi Gupta , pursuing B.A. LL.B (Hons) from Institute of Law Nirma University, Ahmedabad.
The term “transfer” has been used under Income Tax Act, 1961 at varied places to determine the tax liability of the assesses when there is capital gain from transfer of property. In the past decade or so, there has been tussle between the assesses and department as to the interpretation of trigger point of transfer of property – the date of registration of the sale deed or when the possession of the property is transferred to the buyer and registration. In this article, the author critically examines the definition of transfer under the income tax act and it’s interpretation by various courts and tribunal across the country.
Definition of Transfer under S. 2(47) of the Income Tax Act, 1961
Typically, in property law, transfer of ownership is complete when the sale deed is executed and fully registered. However, under the definition of transfer under the Income Tax Act, it appears that when there is "sale, exchange or relinquishment of the asset" or "extinguishment of any right therein" then the property is transferred. Further, the section also provides when the property is transferred when there is part-performance of the deed within the meaning of S. 53A of the Transfer of Property Act.
Execution of Registered Sale Deed v. Registration of Sale Deed
It is first important to distinguish between the treatment of execution and registration sale deed for triggering date of transfer of immovable property under S. 2(47) of the IT Act. This can be appraised under the case of the case of Smt. Madhu Gangwani v. CIT, where the ITAT, Delhi was to determine the year of transfer of property to determine both the taxable year of capital gain and jurisdiction of the AO for re-reassessment notice.
Interestingly, the date of transfer of property and registration of the sale deed were apart in only 1 day which made a difference of the assessment year there were to be taxable under. The court examined the S. 53A of the Transfer of Property Act, 1982 read with S. 2(47) of the IT act and interpreted that transfer of property also includes possession taken in part performance of a contract.
The assesses had registered the sale agreement which stipulated the condition that that there will be part payment and part possession of the property will be handed to the buyer. The court concluded that conditions under s. s(47)(v) are satisfied when the part possession of the property has been handed over to the purchaser, subject to part payment. The court concluded that the date of transferred is triggered when there is execution of the sale agreement and there was part possession of the property handed to the buyer.
This view of the court is also in consonance with Section 47 of the Registration Act, 1908 which stipulates that a registered document will operate from the time when it was executed and not from the date of the registration. This shows that if there is defacto transfer of the property which enables the buyer to enjoy the property, then transfer is done within the meaning of s. 2(47). The fact the agreement to sale and the execution of the sale deed were in the same assessment year made the court decide that the relevant assessment year was 2009-10 and not 2010-11. However, the court still did not answer the question when is the date of transfer exactly triggered- at the execution of agreement to sale or execution of sale deed when the possession is given.
Agreement to Sale v. Sale Deed
In the case of Sanjeev Lal v. CIT, the Supreme Court was posed with the question when is the date of transfer for the assessee to exempt capital gains under s. 54 of the IT Act. It was argued by the assessee that the date of transfer of the original residential house was on the date of agreement of sale, which is within the prescribed 1 year limit of s. 54 to attain exemption of capital gain. On the other hand, the CIT argued that mere execution of agreement to sale cannot be considered as relinquishment of rights under the meaning of transfer under s. 2(47) of the act.
Inter alia, the Supreme Court held that a right-in-personam is created in favour of the vendee of the property as the remedy of specific performance is available when there is no execution of sale deed on behalf of the vendor and there is relinquishment of the right within meaning of transfer under s. 2(47).Consequently, the court held that the date of sale agreement would be considered as date of transfer of the property within the meaning of s. 2(47) of the Act.
Analysis of the Provision
From pursuing the definition of s. 2(47), it clear that the legislative intent was to cover all the cases and transaction which are not within the ambit of definition of transfer of immovable property. The objection of the provision was to ensure that when a transferee was receiving profit or gain on transfer of capital asset, those gains would be taxable. The modus operendi of doing so is by increase the scope of transfer under the IT act to include not only the transfers which are within the meaning of Transfer of Property Act but also transfer of interest or right in the property.
Under s. 54 of the Transfer of Property Act, an explicit proviso is given that Agreement to Sale does not create any right or interest in the property. Dishonour of the agreement to sale will only entail damages on the part of the transferor and not create an conveyance upon the property. Although, S. 2(47) of the IT Act encompasses all those transfer of rights or interest which transferred or extinguished. However, considering the TP Act, it would be incongruous to say that agreement to sale creates a right or interest in the property.
Notably, the court in the case of Sanjeev Lal did upheld the position that date of execution of agreement to sale becomes the date of the transfer by saying it created a right in personam. However, the court did so by purposively interpretating the legislation and harmoniously construing s. 54 read with s. 2(47) of the IT act. It recognised that legislative intent under s. 54 was not to burden the assessee with taxing capital gain when he is purchasing or constructing a residential home within the time limit prescribed. By looking at the facts of the case, it was only when an earnest money of Rs. 15 lakhs was transferred in favour of the vendor during the execution of the agreement and the execution of the deed was pending due to circumstances beyond the control of the assessee. Only in this limited circumstance, can it be said that there is an right in personam created in favour of the vendee and there is a transfer within the meaning of S. 2(47).
In the opinion of the author, it cannot be said that the law laid down in the case can be followed as a general rule of law. Otherwise, every case involving part-performance of the sale deed without possession of the property would be triggering transfer under the act. As such part performance would also be creating an interest in the property and there would be relinquishment of right in favour of the vendee.
This is not the case as so has been held in the various judgements that part performance without handing over the possession would trigger transfer of property. Pertinently, in cases where is construction of transfer within meaning of s. 2(47)(v), the date of execution of the sale deed and possession is looked upon. If the date of the case of Sanjeevi Lal were to be applied to these cases, then the legislative intent would have been clear to not add s. 2(47)(v) after the amendment of 1985.
Therefore, only in limited circumstances when from the intention of the parties it is clear that there is extinguishment of right in favour of the transferee, it can be there is transfer of property. Otherwise, as a general rule, agreement to sale would not constitute the triggering date of transfer.