Introduction: While purchasing an immovable property in the
form of land or building, generally an agreement to purchase/ sell is
entered into between the parties stipulating the conditions or terms of
the transaction and thereafter actual conveyance deed or sale deed is
executed. An Agreement to Sell is a formal legal document and has legal
implications under the General Law. Under the Income-tax Act, the income
under the head capital gains pertaining to such transaction is
considered under clause (v) of section 2(47) which refers to Part
Performance u/s. 53A of the Transfer of Property Act. The capital gains
implications are therefore seen with reference to possession as against
an agreement to sell. Recently, the Supreme Court in the case of Sanjeev
Lal vs. CIT reported in 365 ITR 389, had an occasion to deliberate on
the question as to transfer u/s. 2(47) as also exemption u/s. 54 and in
the process, the Apex Court has made certain observations in connection
with the “Agreement to sell”. The observations of the Supreme Court are
vital and give rise to further questions as to the implications of
‘Agreement to sell’ for tax purposes. It is therefore felt necessary to
analyse the concept of “Agreement to sell” under the Income-tax Act in
the light of the decision of Supreme Court.
Position under Transfer of Property Act, 1882:
Before
discussing the position under the Income-tax Act, it would be
imperative to understand the implications under the General Law i.e.
Transfer of Property Act. Section 54 of Transfer of Property Act
provides that ‘A contract for the salel of immovable property is a
contract that a sale of such property shall take place on terms settled
between the parties. It does not, of itself, create any interest in or
charge on such property.’ As the section expressly provides, an
agreement to sell is merely a contract for sale on agreed terms and the
agreement itself does not create any right or interest in the property.
It is therefore considered as a contract between the parties with
ensuing respective contractual obligations. In so far as the property is
concerned, no right in the property is affected. The parties to the
contract however get a right of specific performance of contract under
Specific Relief Act. This right of specific performance is a right
independent of the right in the property. This right is also construed
as right to obtain conveyance.
Further, section 40 of Transfer
of Property Act provides that where a third person is entitled to the
benefit of an obligation arising out of contract, and annexed to the
ownership of immovable property, but not amounting to an interest
therein or easement thereon, such right or obligation may be enforced
against a transferee with notice thereof or a gratuitous transferee of
the property affected thereby, but not against a transferee for
consideration and without notice of the right or obligation, nor against
such property. E.g., A sells Sultanpur to C. C has notice of the fact
that there is a contract of sale between A and B. B may enforce the
contract against C who is a third person and stranger to contract just
as he could enforce it against A. This provision is based on equity.
Accordingly, although a contract for sale does not create any interest
in land or charge upon it yet, it does create an obligation annexed to
ownership of property. However, it is to be seen that this obligation is
not enforceable against a transferee for consideration who had no
notice of the earlier contract.
Part Performance:
It
would also be necessary to appreciate the provisions of Part Performance
u/s. 53A of the Transfer of Property Act. As the provisions of section
53A where any person contracts to transfer for consideration any
immovable property by writing signed by him or on his behalf from which
the terms necessary to constitute the transfer can be ascertained with
reasonable certainty, and the transferee has, in part performance of the
contract taken possession of the property or part thereof, or the
transferee, being already in possession, continues in possession in part
performance of the contract and has done some act in furtherance of the
contract and the transferee has performed or willing to perform his
part of the contract, then notwithstanding that the contract, though
required to be registered, has not been registered, or, where there is
an instrument of transfer, that the transfer has not been completed in
the manner prescribed therefore by the law for the time being in force,
the transferor or any person claiming under him shall be debarred from
enforcing against the transferee and persons claiming under him any
right in respect of the property of which the transferee has taken or
continued in possession, other than a right expressly provided by the
terms of the contract:
Provided that nothing in this section
shall affect the rights of a transferee for consideration who has no
notice of the contract or the part performance thereof.
This
doctrine is a step subsequent to the execution of agreement to sell. It
applies where the transferee is in possession of the property in
pursuance of agreement for transfer of the property and he is willing to
perform his obligation under the agreement, then transferor is debarred
from claiming any right against the transferee. This doctrine gives a
right to the transferee to protect his possession and does not create a
title in the property. This right can be used as a shield but not as a
sword. This is based on the principle of equity However, the proviso to
section 53A further makes it clear that the right under this section
does not affect the right of a transferee who is different than the one
with whom the agreement to sell is made.
Thus it can be seen
that under both the situations above, there is no transfer of any right
in the property to the transferee but they give some other rights in
different forms. In case of Agreement to sell, the purchaser gets right
of specific performance of the agreement and in case of part
performance, the purchaser is entitled to protect his possession. The
transferor can transfer the property to third person and the new
transferee for a consideration who has no notice of such earlier
agreement gets proper title.
Position under Income-tax Act:
The right arising fromthe agreement to sell has been explained in various decisions. Since, the agreement to sell does not create rights in the assets, there have been instances where the assessee claimed specific performance of the contract and in that process, the amount received by assigning the right of specific performance was claimed to be capital receipt. While dealing with such question, the hon. Bombay high Court in case of CIT vs. Tata Services 122 ITR 594 held a contract of salel of land is capable of specific performance. It is also assignable. therefore, such right to obtain conveyance was ‘property’.
As contemplated by section 2(14). in that case, the assessee entered into an agreement with Seth Anandji Haridas for purchase of 5,000 sq. yards of land situated at Bombay, @ Rs. 175 per sq. yard and paid earnest money of Rs. 90,000. the vendor was to obtain requisite permission from municipal and other authorities at his cost. the agreement of purchase was to be completed within 6 months of its execution. if the permission was not obtained on any account whatsoever, the vendor was entitled to cancel the agreement and the earnest money was to be refunded. the vendor could not obtain requisite permission and wanted to cancel the agreement. this was not accepted by the assessee. finally, a tripartite agreement was entered into among Seth anandji haridas, the assessee and m/s advani & Batra. in consideration, the assessee received a sum of Rs. 5,90,000 from m/s. advani & Batra, consisting of rs. 5 lakh as consideration for transfer and assigning its rights, etc., and Rs. 90,000, being the earnest money paid to Seth anandji haridas. the tribunal held that it was a case of transfer of a capital asset. the case of the assessee was that the agreement for sell did not create any interest or right in land in favour of the assessee as per section 54 of the transfer of property act. the amount of Rs. 5,90,000 was merely compensation and not consideration of transfer of any right, etc. in the land as the assessee did not own any asset as contemplated by section 2(14) of the act. the hon’ble Court pointed out that as per section 54 of the transfer of property act, a contract for sell of immovable property does not by itself create any interest in such property. However, it was difficult to see how the aforesaid provisions were applicable to the facts of the case. It was nobody’s case that the aforesaid agreement gave rise to a right in the land which was agreed to be sold by Seth anandji haridas and purchased by the assessee. the case of the revenue was that under the agreement to sell, the assessee had a right to obtain a conveyance of the immovable property. This right of conveyance either get extinguished or was assigned in favour of m/s. advani & Batra for a consideration, of rs. 5,90,000. the hon’ble Court referred to the definition of ‘capital asset’ given in section 2(14) of the act and pointed out that it has a wide ambit. The hon’ble Court also referred to the provisions of section 2(47) of the Act, which defines the term ‘transfer’ to include the sell, exchange, relinquishment of asset or extinguishments of any right therein, etc. It was also pointed out that a contract of sell of land is capable of specific performance. It is also assignable. Therefore, such right to obtain conveyance was ‘property’ as contemplated by section 2(14). This right was assigned in favour of m/s. advani & Batra and, therefore, it amounted to transfer of right by way of extinguishment of any right therein. a similar view has been taken in the following cases–
CIT vs. Vijay Flexible containers 186 ITR 693 Bom,
K. R. Shrinath vs. ACIT 268 ITR 436 Mad CIT vs. H. Anil Kumar 237 CTR 537 Kar
The above decisions imply that the right acquired under agreement to Sell is a right which is a capital asset since the definition of Capital asset u/s. 2(14) provides property of any kind. it further implies that this right is different than the property itself. The agreement to Sell gives rise to a right which is separate and independent right than the right in the property itself. Applying this principle of law, in cases where the assessee enters into agreement to sell with the intention to purchase a flat to be constructed in a scheme by a builder, and if the rights are sold before possession and conveyance, the capital gains are chargeable on account of transfer of rights arising out of the agreement to sell.
Right to sue:
The right to obtain specific performance or right to obtain conveyance is further distinguished from right to sue. in a given case, if after agreement to sell, one of the party refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages. there is no other right flowing from the contract except the right to complain about breach and sue for damages or specific performance of the contract with or without injunction as well as restitution of the benefit which the defaulting party has received from the injured party. Once there is a breach of contract by one party and the other party does not keep it alive but acquiesces in the breach and decides to receive compensation therefor, the injured party cannot have any right in the capital asset which could be transferred by extinguishment to the defaulter for valuable consideration. That is because a right to sue for damages not being an actionable claim, a capital asset, there could be no question of transfer by extinguishment of the assessee’s rights therein since such a transfer would be hit by section 6(e) of the transfer of property act. Section 6(e) provides for exceptions to property that can be transferred. it provides in clause (e) that a mere right to sue cannot be transferred. in such situation, the amount received an account of damages would not be chargeable under the head capital gains. Gujrat high Court in case of Baroda Cement & Chemical Ltd vs. CIT 158 ITR 636 has adopted this line of proposition. In order to find out the exact nature of amount received by the assessee as to whether it is from assignment of right attracting capital gains or purely damages for breach of contract to be treated as capital receipt, it would be essential to refer to the agreement minutely and determine the exact transaction.
Period of holding:
The next question is as to the period of holding. for the purpose of determining the nature of capital gains as to long term or short term, the period of holding is relevant. the question arises as to which date, the capital asset was acquired, the date of agreement to sell or the date of possession or actual conveyance. Section 2(42a) defines short term capital asset as a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. as per this section, the period for which the asset was held by the assessee is to be seen. the interpretation of the word ‘held’ requires attention. the term can be understood to mean held as a legal owner in which case the date of acquiring the legal title would be relevant or the term ‘held’ can be interpreted to include beneficial ownership as well without the legal title. the Bombay high Court in case of CIT vs. R. R. Sood 161 ITR 92 held that it is well-settled in law that a mere agreement to purchase a land does not convey any title to the said land or create any interest in the said land. all that the intended purchaser acquires under such an agreement is an equity to obtain specific performance. the fact that she was put in possession of the said plot does not in any way confer on the assessee a title to the land in question. at best, such possession might give the assessee a right to claim the benefit of part performance, but it is clear that the fact of being put in possession in part performance of the agreement cannot confer any title on the assessee to the land in question. It was only on the execution of the conveyance that the assessee acquired title to the said plot and it was only from the date of conveyance that it can be said that the assessee held the said plot as the owner thereof. However, the punjab & haryana high Court in case of CIT vs. Ved Parkash & Sons (HUF) 207 ITR 148 has taken a different view on the question. in the case before the punjab & haryana high Court, the assessee entered into an agreement for sell and was put into possession on the same day. the consideration was to be paid in installments. When the last installment was paid, the same day the property was sold. the capital gains was assessed as short term by ao. the high Court held that from the bare reading of section 2(42A) of the act, word `owner’ has designedly not been used by the legislature. The word `held’ as per dictionary meaning means to possess, be the owner, holder or tenant of (property, stock, land. ). Thus, person can be said to be holding the property as an owner, as a lessee, as a mortgagee or on account of part performance of agreement, etc. Conversely, all such other persons who may be termed as lessees, mortgagees with possession or persons in possession as part performance of the contract would not, in strict parlance, come within the purview of an `owner’. As per Shorter oxford dictionary, edition 1985, `owner’ means one who owns or holds something; one who has the right to claim or title to a thing. the assessee in terms of agreement to sell having been put in possession, remained in its occupation as of right and thus for all intents and purposes was its beneficial owner from the start. the capital gain was a long-term capital gain. the meaning of beneficial ownership was also adopted in case of decision of itat in A. Suresh Rao vs. ITO 144 ITD 677 (Bang). The decision of the Bombay high Court in case of r. r. Sood was before the amendment to Section 2(47) by which the concept of part performance u/s. 53a of transfer of property act was recognised for the purpose of transfer. The meaning of beneficial ownership may be possible and if the assessee is in possession of the property as a beneficial owner and is beneficially enjoying it, such date can be suitably adopted for computing the period of holding. Other relevant and supporting factors for claiming beneficial ownership could be the municipal bill, the electricity connection or income from the property if assessed in his hands. On the other hand, if the rights to obtain conveyance are transferred, the date of agreement would be the date relevant for computing period of holding as held in Gulshan Malik vs. CIT 102 DTR 354 (Del) in which case the booking rights were transferred.
Nature of Transaction of sale: The transaction of sale of property may involve two stages. first, the stage of agreement to sell. if the agreement is entered into and thereafter it becomes matured for conveyance by fulfillment of the respective obligations from both sides, it would be a transaction of sell of property i.e land or building. the agreement to sell gives rise to right of specific performance but if the conditions are fulfilled, the right thereafter gets merged or converted into ownership after the purchase of the property. if however, the terms are not fulfilled; either party has option to use their right of specific performance under Specific Relief Act. The suit for specific performance may have various outcomes. The Court may direct for specific performance in a given case or the parties may arrive at the settlement involving assignment of this right to someone else or the party may accept pure damages. in such cases where the right is assigned, it would be a transfer of right to obtain specific performance liable for capital gains u/s.
45. It is essential to carefully identify in a given situation as to whether is it transaction of sale of property itself or transfer of right of obtaining conveyance in pursuance of agreement to sell.
Transfer u/s. 2(47):
In both the situations, the point at which the transfer u/s. 2(47) needs to be determined. In the case where the right is surrendered, the transfer u/s. 2(47) would arise at a time when the agreement for surrender of such right is entered into. in other case where the agreement to sell is to be acted upon by fulfilling the obligations, section 53A would be applicable. Section 2(47) was amended in 1987 which enlarged the scope of transfer to transaction contemplated u/s. 53A of transfer of property act. the CBDT’s Circular no. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] provides an insight into the background and objective of the said clauses :
“11.1 The existing definition of the word ‘transfer’ in section 2(47) does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or aop or by way of any agreement or any arrangement whereby such person acquires any right in any building which is either being constructed or which is to be constructed. transactions, of the nature referred to above are not required to be registered under the registration act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in multi- storeyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract, of the nature referred to in sectiosssssn 53A of the transfer of property act, 1882. now sub-cls. (v) and (vi) have been inserted in section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above.”
The above amendment makes it clear that earlier, there was no transfer unless conveyance deed was executed. To prevent avoidance of capital gains liability to indefinite period, the scope of transfer was widened and the event of transfer was preponed to the stage of contemplated under part performance u/s. 53a of transfer of property act. This goes to show that the mere execution of agreement to sell did not trigger transfer u/s. 2(47) of the property. Specifically in the context of purchase of property, the transfer has to be seen with reference to clause (v) of section 2(47) dealing with part performance. The necessary event would therefore be the obtaining of possession by the transferee in pursuance of agreement to sell.
Decision of The supreme court in The case of Sanjeev Lal:
in the case before the Supreme Court, the agreement to sell was made in 2002. the assessee received Rs. 15 lakh out of total consideration of rs 1.32 crore. the assessee purchased new house on 30-4-2003. thereafter, there were suits filed challenging the will document by which the assessee had acquired the property. Because of the interim order of the court of civil suit restraining the parties to deal with the property, the sell deed could not be executed. the dispute was resolved and then the sell deed was executed on 24-9-2004. The assessee claimed the capital gains to be exempt since the gain was invested in new house. the claim was rejected on the ground that the transfer took place in 2004. Since the new house was purchased before one year prior to the date of transfer, the exemption was held to be not allowable by the learned ao. the matter reached upto the Supreme Court. in dealing with the question of transfer the Supreme Court held that-
1. An agreement to sell gives rise to a right in personam in favour of transferee. It gives right of specific performance if vendor is not executing sell deed.
2. Some right in respect of capital asset had been transferred in favour of vendee which got extinguished because after agreement to sell as it was not open to the appellants to sell the property to some one else in accordance with law. There was a transfer u/s. 2(47) on agreement to sell.
3. Purposive interpretation should be given while considering a claim of exemption. Since the amount was invested in new house, the assessee was entitled to exemption u/s. 54.
The immediate question that is raised in one’s mind is that does it lay down the law that transfer of property u/s. 2(47) gets triggered on agreement to sell. As discussed earlier considering the provisions of section 2(47), the amendment in 1987 so as to insert clause (v) thereby encompassing the situation of part performance within the meaning of transfer, the reading of the decision to that effect may not be appear to be in consonance with the existing or prevailing provisions of the act. The provisions of transfer of property also do not provide for any express bar for the transferor to sell the property to third person. the agreement to sell gives rise to independent right of Specific Performance without affecting the title of the owner or transferor. Even the obligation attached to the property in view of section 40 of the transfer of property act does not bind the third person is he has no knowledge of the contract.
In view of this inconsistency between the above interpretation of the decision and the prevailing law, the decision could not be understood to be laying down the law on transfer u/s. 2(47) for agreement to sell in general. the Supreme Court’s verdict was on the whole question as to the transfer of property u/s. 2(47) as also the exemption u/s. 54. Since the assessee had invested the capital gain in new asset, the Supreme Court proceeds to adopt purposive interpretation and did not hesitate to hold that the transfer was effected u/s. 2(47) on agreement to sell appreciating that ultimately the legislature did not want to burden the tax payer if he invested in prescribed asset. If one looks at the decision as a whole question, it can be said that the decision is in the specific context of facts and law before them. The obvious reason for such view is that the Supreme Court decides not to go into the law on transfer in general but restricts itself to question of exemption rws transfer u/s. 2(47). In the context of general law, the Supreme Court makes a categoric observation in para 20 of the decision that the question as to whether the entire property can be said to have been sold at the time when agreement to sell is entered into, in normal circumstances has to be answered in the negative. The entire discussion of the Supreme Court in connection with transfer u/s. 2(47) is in the background of exemption u/s. 54 which appears expressly in the judgement.
In the context of general law, section 52 of transfer of property act is based on a doctrine called “Lis Pendens” meaning during the pendency of any suit regarding title of a property, any new interest in respect of that property should not be created. in essence, the provision prohibits transfer of property pending litigation. This aspect though crucial in general law could not prevail the mind of the Supreme Court as it did not find relevant for deciding the question before them.
Similar situation arose before Supreme Court in case of CIT vs. Sun Engineering Works P. Ltd. 198 ITR 297 in which the Supreme Court had to interpret the judgement of Supreme Court in case of V. Jaganmohan Rao vs. CIT reported in 75 ITR 373. it was urged before the Supreme Court that in case of jaganmohan rao, the Supreme Court has taken a view that in reassessment proceedings, the entire assessment is reopened and the original assessment is wiped off. The Supreme Court in case of Sun engineering held that to read the judgment in V. jaganmohan rao’s case (supra), as laying down that reassessment wipes out the original assessment and the reassessment is not only confined to “escaped assessment” or “underassessment” but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to re-agitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete “law” declared by this Court. the judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. in Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned :”it is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.” The above observations thus help us in interpretation of the decision in Sanjeev lal’s case.
Conclusion:
Agreement to sell in the literal as also in legal sense means, a contract or agreement to transfer property on agreed terms. It needs to be perceived as a contractual arrangement to be fulfilled in future. The taxability on transfer of property may not be guided by the agreement to sell. The verdict of Supreme Court needs to be interpreted being restricted to the question before it in light of the discussion above. However, the agreement to sell is an essential document to find out and determine the exact nature of property that is transferred and its chargeablity to capital gains.
