TRANSFERRING AN IMMOVABLE PROPERTY
There are five main categories of property transfers namely sale / purchase, mortgage, lease, gift and exchange. These five categories are covered by the Transfer of Property Act, 1882 (TPA Act). The other type of transfers such as property development, partition, settlement, sale agreement cum special power to deal properties etc. are fall under one or more of these categories. The TPA Act is contemplating the transfer inter vivos i.e. transfer between two or more living persons.
Ignorance of relevant law, negligence, amateur legal advice or mass mind-set are resulting into many issues including taxation, regulatory (FEMA), improper documentation, incomplete title, incomplete gifts, sale agreement cum special power of attorney documents are void on the death of principal, seemingly legitimate title deeds that are not in reality legitimate, etc.
MODERN ERA A GENESIS TO INTENSIFY PROPERTY TRANSFERS
In the modern times science, engineering, technological revolution, healthcare, information technology etc. are providing a high-income employment opportunities much better than traditional family business sources. These opportunities are dislocating and making families into micro-families with or without formal partition of joint families. Moreover, rapid industrialisation, urban / rural infrastructure, etc. are gobbling large sectors of inherited joint family properties by way land acquisition or through transfer. On the other hand, business and commercial entities, non-residents Indians, software professionals, property developers are offering lucrative prices to the landholders.
This is resulting into depletion of joint families, thus large holdings of property are transforming into small and micro holds. For example, the developer of a property may acquire twenty acres of farm land held by a joint family to construct a few high rise apartments consisting of 5,000 plus flats on that land. Consequently, the government is earning disproportionate income in the form of stamp duty and capital gains on such transformation. The stamp value of 5,000 flats is much higher than 20 acres. This benefits receipt of higher stamp duty as well as higher amount of income tax on capital gains on further transfers.
THE PROBLEMS ASSOCIATED WITH PROPERTY TRANSFERS
It is very common that when a property conveyed, it associates several matters such as taxation, FEMA compliance, pending property taxes, revenue law issues, existing mortgages, lease rights, zoning requirement as per town planning etc. While purchasing a property the vendee needs to study by himself or through an expert, all the risk factors associated to that property and if found in order, he may go ahead of acquiring the same. Even after a cautious deal, a problem may pop-up in the future but the chances are less.
Violation of FEMA regulations
Acquisition: There are regulations on acquisition of immovable property in India by the persons resident outside India (foreign national) in terms of section 6(3)(i) of the Foreign Exchange Management Act, 1999 (FEMA) and vide notification FEMA 21/2000-RB dated May 3, 2000. The Notifications also covers a person resident in India who is not a citizen of India.
Non-Resident-Indians (NRIs) and Persons-of-Indian-Origins (PIOs) have general permission to purchase residential and commercial property in India. NRIs and PIOs prohibited to acquire agricultural land or plantation property or farm house in India. These properties cannot be acquired by way of gift also. However, NRI or PIO or a foreign national of non-Indian origin can inherit immovable property from a person resident in India or a person resident outside India subject to FEMA regulations in force applicable at the time of inheritance of the property.
Transfer or mortgage: Non-Resident-Indians (NRIs) and Persons-of-Indian-Origins (PIOs) can transfer or mortgage property in India subject to FEMA regulations and relevant notifications in force.
Payment for acquisition of immovable property: Payment can be made by NRI / PIO out of funds remitted to India through normal banking channels or out of funds held in NRE / FCNR(B) / NRO account maintained in India
No payment can be made either by traveller’s cheque or by foreign currency notes or by other mode except those specifically mentioned above.
Non-compliance of certain laws
Quoting of permanent account number (PAN): As per Rule 115B of the Income Tax Rules, 1962 permanent account number (PAN) has to be quoted by both Vendor and Vendee on the sale deed for transactions of sale or purchase of any immovable property if document value is exceeding rupees ten lakhs or valued by stamp valuation authority referred to in section 50C of the Income Tax Act, 1961 at an amount exceeding rupees ten lakhs.
Please note, attaching a PAN copy is not sufficient. The PAN has to be quoted in the sale deed next to their respective names of the parties or under each “description of parties to the deed”.
Tax deduction for : As per section 195 read with section 115E of the Income Tax Act, 1961 the vendee of a property purchased from a non-resident vendor has to compute tax on investment or long term capital gains, deduct and deposit with the government.purchase of property from a non-resident
Tax deduction on : As per section 194-IA of the Income Tax Act, 1961 the transferee of an immovable property making payment to resident transferor is liable to deduct one per cent tax on total consideration if the consideration is exceeding rupees fifty lakhs.transfer of certain immovable property other than agricultural land
Payment of advance tax on capital gains: Certain transfer namely sale, exchange, relinquishment of the asset, extinguishment of rights therein, compulsory acquisition, sale or transfer after conversion of capital asset into stock-in-trade, handing over of possession of property against an agreement, handing of possession against property development, transfer of membership in a society, receipt of insurance compensation or other asset against damaged property, transfer of property by a partner of a firm to the firm as a capital contribution, distribution of capital assets to partners on dissolution of a firm etc. may result into a capital gain or loss. In case of capital gain, the assesse has to deposit necessary amount of income tax with the government after considering the tax deduction (TDS) if any deducted by the payer.
The assessees are ignorant paying tax except on sale i.e. on all non-financial transactions of transfers. The assessee should consult an expert tax advisor in advance i.e. at time of conception of transfer.
Payment through : The provisions of section 269SS and section 269T made it obligatory on vendee and vendor of a property to pay or receive only through banking channels if the payment is exceeding rupees twenty thousand.bank
Disallowance of expenditure: The property is a stock-in-trade to the assessees dealing them. Hence, the provisions of section 40A(3) read with Rule 6DD of Income Tax law are applicable.
Collection of tax against cash payments: The provisions of section 206C(1D) read with Rule 114B of Income Tax law made it obligatory to collect tax on sale consideration @ 1%. Since, the property is goods to the assessees dealing them, he may be obligatory to collect 1% tax on cash receipts. However, an expert opinion is awaited to construe property as goods or not. Though, the assesse complied this provision by collecting the tax on receipt of cash, it amounts to violation of provisions of section 269SS and Section 269T of Income Tax Act, 1961.
Service tax on property leases: Renting of immovable property has been mentioned as declared service in the Finance Act. However, the service tax is not chargeable in the following cases:
- Renting of vacant land, with or without a structure incidental to its use, relating to agriculture;
- Renting of residential dwelling units for use as residence;
- Renting of the property by RBI; and
- Renting of any property by a Government or a local authority to a non-business entity.
Please Note: Only residential units let-out for use as residential purposes are exempted.
However, a threshold of rupees ten lakhs exemption is available if the total value of all services provided by the service provider is less than rupees ten lakhs. In such a case the Lessor is not mandatorily liable to pay service tax.
Service tax on entering into development agreement or construction agreement:
Development agreement: The deeds of development agreement of a property needs to be studied carefully as the service tax authorities are slapping with notices on the landowners, those entered into certain type of development agreements with the property developers for payment of service tax on the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade.
Construction agreement: The service tax on construction service provided by the builder / developer is payable @ 3.75% on the value of land as well as on construction agreement. The charging rate 3.75% is arrived after abatement of 75% on service tax rate of 15%.
In case the flat carpet area is above 2,000 square feet or the land value as well as value of construction agreement exceeds rupees one crore the abatement available is only 70%. So, the effective rate of service tax will be 4.5% [i.e. 15% less (100-70)%].
Improper document writing
Deeds of transfer include sale, exchange, mortgage, lease, gift etc. These deeds effect a transfer of property (conveyance) or create interest in the property. A deed is divided into different paragraphs and clauses. The typical components of a deed are provided below and the irrelevant components according to the nature of deed may be omitted:
- Description of the Title of the deed;
- Date and place of execution of the deed;
- Description of the parties to the deed with permanent account number (PAN) wherever necessary;
- Receipt clause (mention particulars of payment and acknowledgement of receipt);
- Operative clause;
- Description of the property;
- Parcels clause;
- Exceptions and reservations;
- Premises and Habendum (quantity of the interest conveyed);
- Covenants and undertakings;
- Testimonium clause;
- Signature and attestation;
- Endorsements and supplemental deeds;
- Annexures or Schedules; etc.
These clauses are absent in most of the documents prepared in vernacular languages by amateur document writers. People failing to take proper care on preparation of deeds professionally. Such negligence or ignorance of document writers may create many problems to the parties of the transaction in the future.
These amateur document writers are mingling the deed to be executed by parties with the papers of registration. This is very alarming situation with no hopes of improvement, unless the Registrars object for such deeds harshly. Most of the Registrars’ office as well lack the knowledge of property laws and documentation, hence are blindly depending on the document writers.
Transfer must be in the prescribed manner (section 9 of the Transfer of Property Act, 1882): The transfer of property must be made in the manner and form prescribed by the Act.
Gift of immovable property. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument (deed) signed by or on behalf of the donor, and attested by at least two witnesses (Testimonium clause) is mandatory. This attestation is required in addition to attestation on registration papers.
The Gift deed shall contain the details of transfer of ownership, property identification, voluntary transfer, without consideration and acceptance by the donee. The gift must be accepted by the donee otherwise it is not valid. Acceptance may be given during the lifetime of the doner. If the donee dies before acceptance, the gift is void. Hence, it better to include an ‘acceptance’ clause signed by donee in the gift deed itself.
External acceptance may also be proved by an application by donee to change the name in the records local authority for property tax records, revenue authorities, electricity authorities etc. Even this external acceptance may also be given during the lifetime of the doner.
All the transactions of conveyancing property are recorded at both consideration amount and market value as per stamp valuation authority. If consideration amount is more than the market value, the stamp duty as well as consideration for capital gains are to be computed based on the higher value of consideration amount or market value. In the same way if the consideration for the property is less than the market value, the vendee shall pay income tax as “income from other sources” under section 56 of the Income Tax Act, 1961. However stamp duty is payable on market value.
Hence, the parties to the transaction are tend to record the market value and consideration as same. This is resulting into unauthorised settlements between the parties.
The below is the example of taxation implications on such unauthorised settlements:
Ahalya holding a plot of land admeasuring 500 square yards sold to Indra during the previous year 2015-16 for rupees fifty lakhs only. The market value as per the stamp value authority is rupees 1,000 per square yard. The consideration recorded in the document is rupees five lakhs which is equivalent to the market value.
Ahalya acquired this plot in the previous year 2014-15 through a gift from his husband Gouthama who purchased this in the same previous year 2014-15 for rupees five lakhs (market value also rupees five lakhs) and incurred rupees forty thousand as stamp duty. Ahalya also incurred rupees twenty thousand as stamp duty and registration fee.
She returned her short term loss of rupees sixty thousand for the assessment year 2016-17 with the help of a tax consultant. However, the Income Tax authorities slapped a notice on her asking for payment normal tax on rupees forty-five lakhs that she deposited with the bank plus additional tax @ 30% plus education cess etc. as other income under section 115BBE.
She went to an expert chartered accountant to resolve the issue. On hearing the facts from her, the expert also convinced with the notice and explained her the provisions of the income tax and her liability towards such transactions. As there is no other option she was forced to pay the tax as demanded by the Income Tax department.
Please note: The notice and hearing procedure has shortened for brevity
Benefits of an expert advice
If she could have consulted the expert prior to entering into the transaction, he would have advised her properly with various alternatives.