The Hindu Business Line : Possession, execution and registration

Title to immovable property can pass only on registration. The document requiring registration may be executed earlier than the date of registration. The normal rule is that registration dates back to the date of execution. These established rules of law regarding transfer of property underwent a radical change when the provisions of Section 53A of the Transfer of Property (ToP) Act, 1882 were incorporated into the Income-Tax Act, 1961 w.e.f. April 1, 1988, by amending th e definition of ‘transfer’ under Section 2(47) of the Act so as to lay down that even part-performance of the sale agreement by handing over possession will result in the passing of title.

Transfer defined

Under Section 2(47), ‘transfer’ includes not merely sale, exchange, relinquishment, etc. It also covers any transaction involving the allowing of the possession of any immovable property to be taken or retained in part-performance of a contract of the nature referred to in Section 53A of the ToP Act.

The term ‘capital asset’ in Section 2(14) refers to property of any kind ‘held’ by an assessee. There is no reference to ‘owner’ or ‘owned’. Section 53A of the ToP Act allows the doctrine of part-performance to be applied to the agreement which, though required to be registered, is not registered.

Section 53A applies to transfers not completed in the manner prescribed by the Registration Act. Where the transferor handed over the possession of the property pursuant an agreement for sale, the person receiving possession is entitled to receive the income from the property.

Section 27 of the Income-Tax Act, 1961 was amended by the Finance Bill, 1987 so as to incorporate the new law about possession entitling the transferee to be deemed to be the owner of property for purposes of Section 22 in relation to income from property. This amendment is common to Section 2(47) also.

In the context of considering the assessability of income from property in the hands of the person who was in possession, the apex court held that the amendment introduced by Finance Bill, 1987 was declaratory or clarificatory in nature and was retrospective in operation. That was in the well-known Podar Cement (P) Ltd (226 ITR 625) case.

Can this view of the law be applied in considering questions relating to capital gains tax? Long back, the Supreme Court had ruled in the Alapati Venkataramaya (57 ITR 185) case that capital gains arose in the year in which the deal was registered.

At that time, in 1965, the new definition of ‘transfer’ in Section 2(47) was not in the statute book.

The Supreme Court ruling was rendered under Section 12B of the Indian Income-Tax Act, 1922. Specifically the Supreme Court held: “Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.”

This was the view taken by the Madras High Court in the earlier Meccane Industries Ltd (254 ITR 175) case. If the amendment made by the Finance Bill, 1987 with regard to Sections 27 and 2(47) can be considered only declaratory in nature, the impact of the amendment should be of a major nature.

Capital gains will have to be assessed on the basis of the date of the agreement under which possession was handed over. This will apply to cases where possession was given even long before 1987. Registration may take place long after. That will have no effect.

The requirements

To amount to ‘transfer’ within the meaning of Section 2(47), the minimum requirements are:

There has to be an agreement between the parties signed by them;

It should be in writing;

It should pertain to transfer of property; and

The transferee should have taken possession of the property.

The decisions rendered in the Alapati Venkatramia (supra) and Meccane Industries Ltd (supra) cases are no longer good law. It is the date of handing over of possession that is material.

The Madras High Court has clarified the law on the subject in the Madathil Brothers vs DCIT (301 ITR 345) case.

The case considered by the High Court related to the nature of the capital gains, that is, whether long term or short term. The party was in possession of property under agreement of sale entered in 1976. Sale deed was executed in July 1986 and was registered in September 1986.

The High Court held that the property was held from 1976 onwards and gains on sale were assessable as long-term capital gains. Similar view was expressed by the Punjab and Haryana High Court, the Rajasthan High Court and the Andhra Pradesh High Court.

It is, however, necessary that the handing over of possession of the property should be clear and categorical, leaving no option to the parties to accept or reject the agreement.

(The author is a former Chief Commissioner of Income-Tax.)

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