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Section 2(47)(v) may hit by change in 53A of the TP Act

Vaiyapuri kannan 
on 11 February 2014

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The real impact of the amended provision of the Registration & other Relevant Laws (Amendment)  Act ‘2001 on taxation of transfer of capital assets under the circumstances referred to in clause (v) of section 2 ( 47) of the income tax Act.

The existing provision of section 2(47)(v) of the  income tax Act is mainly focusing on taxability of transfer of capital assets of  the nature  referred to in  section 53 A of  the Transfer of property Act . If we consider the provisions  contained  in sec. 53A of the Transfer of property Act,1882  ( TP Act,1882 )  as subordinate or explanatory one to interpret  the real intention  of the income tax law as to levy capital gain tax on all genuine  transfer / sale  of capital assets  irrespective of registration of backup documents ,  the mere shifting  the  possession from one to other as part performance of nature referred to in section 53A of the TP Act  will  be deemed as transfer / sale of capital asset in the Income tax Act irrespective of the amendment made subsequently in the subordinate Act as  referred  above.    Whether the reference  of section  53 A of  the TP Act  made in the Income tax Act , particularly in section 2 ( 47) (V ) , is  acting  as subordinate or explanatory provision  in the overall picture of capital gain taxation  is debatable one . 

There was an amendment made  in section 17 (1A) of  the Registration Act ‘1908 in the year 2001 in such a manner that  the documents  containing contracts to transfer for consideration any immovable property for the purpose of section 53 A of the Transfer of property Act ,1882 shall be registered if they have been executed on or after the commencement of the Registration and other Related laws (Amendment  ) Act , 2001 and if such documents are not registered on or after such commencement ,then ,they shall have no effect for the purpose of section 53A of TP Act  subject to one safeguard  that unregistered agreement of sale executed earlier would be taken as a tool  to enforce part performance of the  contract by other part   ,and  hence we may partially conclude that  GPA for sale , agreement to sale , contract  to sale  etc. should be compulsorily registered  as per the amended provisions of the registration Act  , otherwise the transferee  would not get clear title on the property involved therein . But  the question of taxability of capital assets as per provisions contained in section 2 ( 47) ( v ) based on unregistered documents   after considering   the  amendment made in the Registration and other Related laws  in the year 2001 is still  debatable issue

The hot question that to be answered  is that whether the deemed transfer of  capital  asset of the nature referred to in the amended section 53 (A ) of TP Act supported by  an unregistered sale agreement  / contract of sale or other similar document  is  considered as transfer under  the existing  provision of section 2 (47(v) of Income tax Act  and taxable accordingly, one more debatable and contentious issue  that also need to be discussed is that whether an unrestricted & unconditional registered GPA executed  by the property owner  would amount to agreement of sale in the absence of registered agreement of sale so as to make the legal owner of property responsible for  capital gain tax as per provisions contained in section 2 (47) (v)  ,  if not  whether  the  GPA holder would be  responsible for capital gain tax  as per sec. 2 (47) (vi) of  the Income tax Act .

Questioning  the taxability of deemed transfer after the amendment made in the Registration Act ‘1908

If  we read out the provisions contained in section 2 ( 47) ( v) of the Income tax Act  and section  53A of the Transfer of property Act  by  having in mind the amendment made in  the Registration Act as to compulsory registration of all documents , the taxability of deemed transfer of capital assets by applying  the  existing provisions contained in  section 2 ( 47) (v) of income tax act would  be questioned  because of the fact that the agreement of sales or contracts of sale  or any other  supporting documents  ( acting as documentary evidences  in support of  transfer of  possession of immovable property as part performance of  the contact of nature referred to in section 53A of Transfer of property Act )  without getting registered under the amended provisions of registration act  would  not be taken as valid documents towards  the  deemed  transfer /sale of  immovable property   . Now we may examine in the subsequent paragraphs   the taxability of deemed transfer by interpreting the intended purposes   aimed to be achieved  by  the income Tax Law .           

Inherent necessity behind referring Sec 53 A of TP Act while drafting provision in sec. 2( 47) (v) of Income Tax Act 

It is accepted that there is  a  reference made in  clause  (v) of  section  2 ( 47) of the Income tax Act in such a manner that transactions of the nature referred to in  section 53A of transfer of property will be considered as deemed transfer to levy tax on deemed transfer  but  it does not mean that capital gain tax would be levied on the deemed transfers as explained above subject to  strict compliance of the relevant provisions of the Transfer of property Act, particularly with reference to the provisions that  now emphasizing on compulsory registration of documents in support of transfer of legal title of immovable properties from transferor to transferee. The underlying principle which emerged from section 53A of Transfer of property Act is that the transferor or any other person claiming under him shall be debarred from enforcing against the transferee and person claiming under him any right in respect of the property of which the transferee has taken or continued in possession ,and hence we may  infer that provision contained in section 53A of transfer of property is mainly to protect the interest of the transferee who has already performed / is  right to perform  his part of  job as per the terms of contract agreed and not to decide about the validity and taxability of deemed transfer under the income tax Act . Hence the inherent necessity of referring   sec .53A of TP Act in the income tax Act while drafting  the provisions under section 2(47) (v) was  to levy tax on transfer made  in a peculiar  circumstances wherein  the actual purpose of transfer of capital assets from  the transferor to transferee might be served  whereas  the registration of backup documents  such as agreement of sale /contact of sale would take place at later stage . Now we may partly conclude that Section 53 A is acting subordinate or explanatory provision to interpret section 2 (47) (v) of the Income tax Act,1962 .

Legal pronouncement & understanding  by the Court of Law

Once we try to get into the legal understanding  arrived at by  the  court  of law on the failure of compulsory registration of  supporting documents  such as GPA , agreement of sale  or other similar documents  pertaining  to  sale or transfer of  immovable property, we may partially conclude that  the  transfer of possession of immovable property as part performance of the  contact of nature referred to in section 53 (A) of TP Act without having registered agreement of sale  is taxable even after the date of  amendment made in the Registration Act ‘1908.  In a leading case, M/s .Suraj Lamps  & Industries Pvt .Ltd  Vs. State of Haryana  and  Anr.183 (2011)DLT 1 (SC)  , the Supreme court has observed the below  facts  while expressing its final verdict  on the issue of validity of  transfer or sale of immovable property   without going for registration of backup documents immediately  in support of genuinely concluded  deal.

- Unregistered  sale agreement , GPA and  will transfers  do not convey title and  do not amount to a transfer of immovable property

- Further held that such transactions cannot be recognized  as a valid mode of transfer

- the  validity of genuine agreement of sale  and power of attorney  would not be affected on the basis of above observation        

- Transactions  effected  through an unregistered   agreement of sale , GPA and will  would not get affected if these were executed before the date of  amended made in the Registration Act  which makes it clear that compulsory registration of all documents  is  necessary w.e.f  24th Sep,2001 . 

- Also observed that  the unregistered sale agreement, GPA  and will transfers could also be used to obtain specific performance or to defend possession under section 53A of the Transfer of property Act .

- It was also finally clarified that any genuine or good faith transactions would not be invalidated by this decision   

Since the Supreme court  has protected the  genuine transactions , those were executed previously ( before the date of making compulsory registration of all transfer documents under the registration Act 1908 ) and supported by unregistered documents ,  by providing an option to  get  it registered  and  claim better title on the property involved therein,  we may infer  that transfer or sale of capital assets took place  under the category of deemed concept as per section 2 (47)( v)  prior to  the amendment made in the Registration and other Relevant laws in the year 2001 through unregistered  agreement of sale /contract of  sale as back up document would be considered  as transfer for capital gain taxation. But the taxability of deemed transfer of capital assets as per section 2 (47)(v) after the amendment made in the Registration and other Relevant Act including the Transfer of property Act is debatable issue irrespective of a safeguard provided in the amended Act in such manner that the amendment made in the Registration and other Relevant Act in the year 2001 would not affect the genuine transaction under section 53A of TP Act       

The limited purpose of applying the provisions of other statutes woud not defeat the intended purpose of  the Income tax Law                                     

The  limited purpose of application of the provisions  contained in section  53A of Transfer of property Act in the Income tax law  is to interpret the implied meaning of deemed transfer of property as explained in  the existing provision of section 2(47) (v) of Income tax Act  and not to decide about  the taxability of transfer of capital assets concerned  ,that is , the limited application of provisions of other statutes would not defeat the intended or implied  purpose build in the relevant laws  , and hence we may infer that the change in the Transfer of property Act as to compulsory registration of transfer / sale of immovable properties   to claim better title on the property concerned   would not have any direct  impact on the existing provision of income tax laws which is focusing to levy  capital gain tax on  deemed transfer of capital assets concluded by unregistered documents subject to fulfilling other conditions referred  in the relevant section , and this fact was  impliedly  accepted by ITAT Bench of Tribunal in case of Sreenivasan Vs. DCIT 28 Taxmann .com 200 ( Cochin) and ITAT Pune Bench in the case of Mahesh Nemichandra  Ganesh wade Vs.ITO 21 Taxmaan .com136 (Pune)           

Whether the General power of attorney  ( GPA ) to effect sale of immovable property would amount to back up document for transfer /sale of capital assets 

Now another relevant question is that whether the person having power of attorney would be considered as transferor or not  in the circumstance wherein  one who granted or executed  power  in favor of GPA  holder  failed to meet out his obligation of paying  capital gain tax on transfer /sale of property  which   was concluded and registered by the  grantee or holder of  power.  The answer would be based on the type of the  GPA  as explained bellow

If a registered irrevocable unconditional & unrestricted  GPA  executed in favor of power holder or grantee of power by  the legal owner of the property  empowering  the former to act on behalf  latter    in  all aspects with reference to  sale transaction without any specific  restrictions and conditions as to conclude the end deal and make registration accordingly ,  we may  infer that  the legal owner of property had transferred the  possession of property in the circumstances narrated and explained in section 53A of TP Act ion which  resulted in transfer  of capital assets  as per the provisions clearly outlined in the section 2 (47) ( v) of the Income tax Act .  

Now we would think about the method of taxing capital gain accrued on the first deemed  transfer that  took place between the legal owner and  GPA  holder having  registered irrevocable unconditional GPA which might be treated as transfer documents  . The legal owner would be responsible for capital gain tax that to be computed on the basis of guideline value of  property prevailed on the date of execution of unconditional GPA  .  The registered irrevocable & unconditional GPA would   be considered as implied  transfer document  to confirm  the implied  transfer /sale take place between the legal owner & GPA holder . The reason for  treating the irrevocable unconditional  GPA as transfer document in support of  the implied sale  is that the legal owner is responsible to pay out  tax on transfer /sale of immovable property after considering the provisions stated in section 50C of the Income tax Act  if the actual sale  price of the property involved is less than guideline value prevailed on the date of transfer  ( in the given case of deemed transfer ,  it is date of execution of unconditional GPA ) , and in the given case the  actual price of  the property on the date of execution of this unconditional GPA would not be  ascertainable so that full guideline value would be taken as deemed consideration or sale value for the implied transfer between the legal owner & holder of unconditional  GPA  .   

The second  transfer that would take place later between  the GPA holder  and  the  buyer of the property which is referred in the GPA  would be treated as another transfer of capital assets notwithstanding the fact that the power holder acted on behalf of legal owners of the property  and  the question of taxability of this second transfer would  be based on the actual transfer price or guide line value prevailed on the date of second transfer . If there is no change between the  guideline value prevailed on the date of execution of unconditional GPA and the date of actual sale effected by holder of GPA  , the power holder will not be liable for capital gain tax .  If the  actual price of last sale concluded by GPA  holder is higher than the guideline value prevailed on date of final sale ,  GPA holder  will be responsible for capital gain tax on the differential value arrived at after deducting  the guideline value prevailed on the date of execution of GPA  from the actual sale  price  of last sale concluded by GPA holder subject to confirmation of  fact that the person /grantee   ( owner of property ) who executed unconditional GPA in favor of grantor has paid his portion of capital gain tax by taking guideline value prevailed on the date of execution of GPA as sale consideration .   

If the legal owner of the property has executed  a restricted / conditional / specific / revocable registered power of attorney empowering  the  power holder to  carry out the well  defined  jobs   that are clearly narrated in the power documents as to complete the sale transaction as per law and  the  power holder has done his part of duty strictly as per the terms & conditions referred to in the power  , then , the  legal owner of  the property / grantee of power  is the only person liable for capital gain tax payable on the value of  property sold or transferred  subject to compliance of  the provisions contained in section 50C of Income tax Act . As unlike the registered unrestricted & unconditional  GPA  as explained in the previous paragraph  acted as agreement of sale ,  the restricted or specific power of attorney executed  here would not be taken as agreement of sale as to make the power holder  responsible for capital gain tax in case the grantee of the power failed to meet out his obligation of paying capital gain tax on the property involved herein.               

At the concluding stage of this article, we may end up with the below understanding  on the subject matter of  our discussion the amended provision of the Registration Act ‘1908 is mainly cautioning  the transferee of immovable property  ( the persons  who have acquired  or purchased immovable property without opting for immediate registration ) and also aiming to reduce circulation of black money by invalidating the  sale or transfer of immovable property  if not registered as per the  provisions stated therein.

We cannot simply  say that all transfer of capital assets under the  deemed provision of  section  2 (47) (v) of  the  Income tax Act  ( after considering the amendment made in  the Registration Act’ 1908 ) is invalid if  not  supported  by registered  sale documents , because of the fact  that  the transferee  who  got  the possession  of immovable property under the circumstances  of part performance of  the contract of nature referred to in section 53 (A )of  the  Transfer of property Act has right to force  the transferor  to do his part of contract on the basis of unregistered agreement of sale if the transaction is genuine  .

The limited application of provision of other statutes   to interpret the  income tax law  would not defeat the intended purpose of tax laws , and hence we may infer  that  the transactions of genuine nature as defined in 53 ( A) of TP Act will be treated as transfer under the deemed provisions of income tax law   even after the amendment made in the Registration and other Relevant Acts including the Transfer of Property Act ,1882 if the transactions are genuine and supported by relevant supporting  documents ,whether registered or not ,  but subject to fulfilling other conditions specified in  section 53A of the TP Act .                  

The author of above Article -  

R.Vaiyapuri Kannan , B.Com, FCA,ACS, ACMA , Chennai

Practicing member of the Institute of Chartered Accountant of India 

Mail id : rvkfca@yahoo.co.in


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