Category: Laws And Business

(a) It is an instrument;
(b) The instrument must be executed by some person, known as the donor of the power;
(c) It must empower a person specified in the instrument, known as the donee of the power; and
(d) The donee must be empowered to act for and in the name of the donor.

The Bombay Stamp Act, 1958, defines a power-of-attorney includes any instrument empowering a specified person to act for and in the name of the person executing it and includes an instrument by which a person, not being a lawyer, is authorised to appear on behalf of any party in any proceeding before any Court, Tribunal or authority. However, it does not include a vakalatnama given to an advocate which is stamped with the court-fees.

Effect

(a) executes any instrument or does any act;
(b) under his own name, signature and seal, if seal is required;
(c) but under the ambit of the authority conferred on him by the donor of the power-of-attorney; then such instrument or act would be treated in law as if it had been execution or done in the name, signature and seal of the donor. The legal effect of the power is that the acts of the donee, when done under proper authority, are treated as if they were done by the donor. This is an important provision of the Act, which gives legal sanctity to all acts done by a donee on behalf of the donor.

Thus, the position of the donee-donor is similar to that of an agent and his principal. A power-of-attorney’s origins may be traced to the legal maxim qui facit alium facit per se, i.e., what one can do directly he can also do through an agent. But one crucial difference as compared with an agent-principal relationship is that an agent must sign in the principal’s name while the power-of-attorney holder signs his own name.

The object of the aforesaid section and of the Act is to effectuate instruments executed by an agent, but not in accordance with the rule of the Contract Act. It does not confer on a person a right to act through an agent. It presupposes that the agent has the authority to act on behalf of the principal and protects acts done by him in exercise of that authority but in the agent’s own name — Rao Bahadur Ravulu Subba Rao v. CIT, 30 ITR 163 (SC).

In the case of Suraj Lamp & Industries P. Ltd. v. State of Haryana, (2012) 1 SCC 656, the Supreme Court has held that a power-of-attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. The power-of-attorney is creation of an agency whereby the grantor authorises the grantee to do the acts specified therein, on behalf of the grantor, which when executed will be binding on the grantor as if done by him. It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee.

In State of Rajasthan v. Basant Nehata, (2005) 12 SCC 77, the Apex Court held that a grant of power-of-attorney is essentially governed by the Contract Act. By reason of a deed of power-of-attorney, an agent is formally appointed to act for the principal in one transaction or a series of transactions or to manage the affairs of the principal generally conferring necessary authority upon another person. A deed of power-of-attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power-of-attorney is, as is well known, a document of convenience.

Execution of a power-of-attorney in terms of the provisions of the Contract Act as also the Powers of- Attorney Act is valid. The donee in exercise of his power under such power-of-attorney only acts in place of the donor subject of course to the powers granted to him by reason thereof. He cannot use the power-of-attorney for his own benefit. He acts in a fiduciary capacity. Any act of infidelity or breach of trust is a matter between the donor and the donee and does not affect an outsider.

Revocation of a power

(a) The donor expressly revokes all powers given by him;
(b) The donor dies;
(c) The donor becomes of unsound mind; or
(d) The donor becomes insolvent.

In any of the above situations, the power comes to an end. In Prahlad v. Laddevi, AIR 2007 Raj 166 it was held that a power comes to an end on the demise of the donor. Any acts done by the donee thereafter in pursuance of such a power are invalid.

However, if the donee not being aware of the above situations, does any act or makes any payment in good faith pursuant to the power-of-attorney, then he shall not be liable in respect of such payment or act. But any person interested in the money so paid shall continue to have a right against the recipient and he will have the remedy against the recipient as he would have had against the payer, if the payment had not been made by him.

According to the Indian Contract Act where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Thus, in cases where the power-of-attorney is coupled with interest it is irrevocable. For instance, A gives authority to B to sell A’s land, and to pay himself out of the proceeds, the debts due to him from A. This power cannot be revoked by A. In State of Rajasthan v. Basant Nehata, (2005) 12 SCC 77, the Apex Court held that except in cases where power-of-attorney is coupled with interest, it is revocable.

Evidence of power-of-attorney

The Indian Evidence Act, 1872 provides that any Court shall presume that every power-of-attorney executed before and authenticated by a Notary Public, Court, Judge, Magistrate, Indian Consul or Vice-Consul was so executed and authenticated. This is the reason why powers-of-attorney are notarised. The presumption about the authenticity is a mandatory provision. The Delhi High Court in the case of Kamala Rani v. Texamco Ltd., AIR 2007 Del. 147 has held that the onus lies on the other side to prove that the power-of-attorney is not genuine.

A power-of-attorney holder cannot depose and be cross-examined in Court on matters which only the principal is expected to have knowledge of — Janki V. Bhojwani v. IndusInd Bank Ltd., 2005 Vol. 107 Bom. LR 28 (SC).

Power-of-attorney of married woman

A married woman who is not a minor has powers, as if she were unmarried to appoint an attorney on her behalf.

Can a donee sign under Income-tax Act for donor?

If the Income-tax Act or the rules made thereunder specifically require the personal signature of the assessee, then the same cannot be delegated by way of a power-of-attorney. This is would be a circumcision of the field of operation of the Power-of-Attorney Act and such a curtailment of powers is not ultra vires — Rao Bahadur Ravulu Subba Rao v. CIT, 30 ITR 163 (SC). All that section 2 of the Act provides is that there can be a delegation of powers and the manner of doing so. However, if any other enactment requires a personal presence or signature, then the two Acts operate in separate fields. The Court laid down this principle under the 1922 Income-Tax Act in relation to signing an ap-plication for registration of a firm. The rules required the partner to personally sign the application. It may be noted that Rule 22(5) now expressly permits such an application to be signed by a power-of-attorney holder in the case of a person absent from India.

Stamp Duty

Under the Bombay Stamp Act, 1958, a power-of-attorney is liable to be stamped as follows:

(a)    When executed for the sole purpose of registering documents — Rs.100. Most of the builders give a power-of-attorney in favour of their employees for registering the agreements for sale/flat ownership agreements with buyers.

(b)    When authorising a person to act in a transaction — Rs.100.

(c)    When given without consideration authorising specified relatives to sell or transfer immovable property — Rs.500.

(d)    When any person other than cases covered by (c) above authorising to sell or transfer immovable property — the same duty as on a conveyance on the market value of the immovable property, e.g., 5% on the stamp duty ready-reckoner value. One of the ways to avoid payment of stamp duty was to give a power-of-attorney to a person authorising him to sell the property and receive consideration equal to the market value of the property for such a power. This method is very prevalent in Northern India. In 2008, the Bombay Stamp Act was amended to increase the duty on such a power from 1% to 5%. Thus, now such powers are at par with a conveyance of immovable property.

A power-of-attorney given to manage and sell an immovable property and hand over the consideration to the owner cannot be treated as a conveyance for consideration and hence, charged with stamp duty as on a conveyance — Suman Kumar Sinha v. State of Jharkhand, AIR 2009 Jharkand 53.

It is not necessary that every power-of-attorney ex-ecuted abroad must be presented before the Collector for adjudication of stamp duty. Only those powers which have been executed abroad and on which no stamp duty has been paid need to be adjudicated. If proper duty has already been paid, then nothing further needs to be done — Anitha Rajan v. Revenue Divisional Officer, AIR 2010 Kerala 153.

A power-of-attorney is to be compulsorily registered only if it creates an interest in immovable property and not otherwise — B. Maragathamani v. Member Secretary, Chennai Metropolitan Development, AIR 2010 Madras 61.

Transfer of property by power of attorney

A very popular mode of transferring immovable property in Northern India was by adopting a combination of a sale agreement, general power-of-attorney and a will. This facilitated the avoidance of a conveyance and thereby saving on stamp duty for the buyer. The modus operandi in such transactions was for the owner to receive the agreed consideration, deliver possession of the property to the purchaser and execute the following documents or variations thereof:

(a)    A sale agreement by the vendor in favour of the purchaser.
(b)    An irrevocable general power-of-attorney by the seller in favour of the purchaser authorising him to manage, deal with and dispose of the property without recourse to the seller.
(c)    A will bequeathing the property to the purchaser (as a safeguard against the consequences of death of the seller before the transfer is effected).

The Supreme Court had in the case of Suraj Lamp & Industries Pvt. Ltd. v. State of Haryana, (2009) 7 SCC 363 referred to the “ill effects of what is known as general power-of-attorney sales”.

In its latest decision in the case of Suraj Lamp & Industries P. Ltd. v. State of Haryana, (2012) 1 SCC 656, the Court has held that there cannot be a sale of immovable property by execution of a power-of-attorney, nor can there be a transfer by execution of an agreement of sale and a power-of-attorney and will. It held that these kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest black money’ and to avoid payment of ‘unearned increases’ due to Development Authorities on transfer.

It also held that the observations of the Delhi High Court, in Asha M. Jain v. Canara Bank, 94 (2001) DLT 841, that the “concept of power-of-attorney sales have been recognised as a mode of transaction” when dealing with transactions by way of sale agreement/ general power of attorney/will are unwarranted, unjustified and unintendedly misleading the general public into thinking that such transactions are some kind of a recognised or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognise or accept transactions by way of by way of sale agreement/ general power-of-attorney/will as concluded transfers are not good law.

The Apex Court however, carved out a niche for genuine transactions where the owner of a property grants a power-of-attorney in favour of a family member or friend to manage or sell his property, as he is not able to manage the property or execute the sale, personally. It also held that a power-of-attorney holder may however execute a deed of conveyance in exercise of the power granted under the power-of-attorney and convey title on behalf of the grantor.

It only clamped down upon transactions, where a purchaser pays the full price, but instead of getting a deed of conveyance gets a sale agreement/general power-of-attorney/will as a mode of transfer, either at the instance of the vendor or at his own instance.

Registering a property under a power

The Sub-Registrar of Assurances permits a power-of-attorney holder to register an instrument on behalf of the donor. However, the power must first itself be registered before the Sub-Registrar. For this purpose the donor and the donee must both go to the Sub-Registrar. Further, the Sub-Registrar insists that both the donor and the donee sign the power before him.

Conclusion

To sum up, a simple power-of-attorney has been the subject matter of great controversy and litigations. Chartered Accountants would be well advised to consider whether the power-of-attorney relied upon by their clients is valid or not. When in doubt, they should consider obtaining an opinion. One is reminded of the quote by W. H. Auden which ended as follows:

“……There is always another story, there is more than meets the eye.”

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“the Code”) provides for the insolvency resolution process of corporate debtors. The Code gets triggered when a corporate debtor commits a default in payment of a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code, may be done by a financial creditor (in respect of default in respect of financial debt) or an operational creditor (in respect of default in respect of an operational debt) or by the corporate itself (in respect of any default).

An interesting question has arisen as to whether the National Company Law Tribunal (NCLT) is bound to admit a plea for a Corporate Insolvency Resolution Process (“CIRP”) filed by a financial creditor against a corporate debtor or does it have the discretion to refuse to admit it, if the debtor is otherwise financially healthy? The Supreme Court in the case of Vidarbha Industries Power Ltd vs. Axis Bank Ltd, [2022] 140 taxmann.com 252 (SC) has given a very interesting reply to this very crucial question. A subsequent review petition has upheld the earlier decision of the Apex Court. Now, once again in an appeal filed before the Supreme Court, this decision has been questioned. This shows the importance of this decision to matters under the Code. Let us examine the issue at hand.

FINANCIAL CREDITOR’S APPLICATION

To refresh, the following terms are important under the Code:

a)    A corporate debtor is a corporate person (company, LLP, etc.,) who owes a debt to any person. Here it is interesting to note that defined financial service providers are not covered by the purview of the Code. Thus, insolvency and bankruptcy of NBFCs, banks, insurance companies, mutual funds, etc., are not covered by this Code. However, if these financial service providers are creditors of any corporate debtor, they can seek recourse under the Code.

b)    A debt means a liability or an obligation in respect of a claim and could be a financial debt or an operational debt. Financial debt is defined as a debt along with an interest, if any, which is disbursed against the consideration for the time value of money. An operational debt is defined as a claim for the provision of goods or services or employment dues or Government dues.

c)    It is also relevant to note the meaning of the term default which is defined as non-payment of debt when the whole or any part has become due and payable and is not repaid by the debtor.

The process for a CIRP filed by a financial creditor is as follows:

(a)    Financial creditors can file an application before the NCLT once a default (for a financial debt) occurs for initiating a corporate insolvency resolution process against a corporate debtor.

(b)    The NCLT would decide within 14 days whether or not a default has occurred.

(c)    Section7 (5)(a) of the Code provides that -if the NCLT is satisfied that a default has occurred and the application filed by the financial creditor is complete, it may, by order, admit such an application.

SUPREME COURT’S VERDICT IN VIDARBHA

In the case of Vidarbha (supra), the corporate debtor was a power-generating company which due to a fund crunch defaulted in its dues to a bank. It had however, received an Order from the Appellate Tribunal for Electricity in its favour which when implemented would result in an inflow of Rs.1,730 crores and would take care of its liquidity position. The NCLT admitted the application of the bank and held that all that was required to check whether there was a default of debt and whether the application, was complete. This Order was upheld by the Appellate Tribunal (NCLAT). Both the forums held that they were not concerned with the abovementioned favourable order which the debtor had received.

A Two-Judge Bench of the Supreme Court observed that the objective of the Code was to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time-bound manner, inter alia, for maximization of the value of the assets of such persons, promoting entrepreneurship and availability of credit, balancing the interest of all the stakeholders and matters connected therewith or incidental thereto.

It held that both, the NCLT and the NCLAT proceeded on the premises that an application must necessarily be entertained under section7(5)(a) of the Code, if a debt existed and the corporate debtor was in default of payment of debt. In other words, the NCLT found section 7(5)(a) of the IBC to be mandatory.

Thus, the Supreme Court framed the question before it as whether section 7(5)(a) was a mandatory or a discretionary provision. In other words, could the expression ‘may’ be construed as ‘shall’?

It proceeded to answer the question by holding that there was no doubt that a corporate debtor who was in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor were not extraneous matters. When the corporate debtor had an Award of Rs. 1,730 crores in its favour, such a factor could not be ignored by the NCLT in considering its financial health. It laid down a principle that the existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was required to apply its mind to relevant factors and the overall financial health and viability of the Corporate Debtor under its existing management.

It strongly relied upon the fact that the Legislature had, in its wisdom, chosen to use the expression “may” in section 7(5)(a) of the IBC and had it been the legislative intent that section 7(5)(a) of the IBC should be a mandatory provision, the Legislature would have used the word ‘shall’ and not the word ‘may’.

It compared the position of a financial creditor with that of an operational creditor. Section 8 of the Code provided for the initiation of a resolution by an operational creditor. There were noticeable differences between the procedure by which a financial creditor could initiate resolution and the procedure by which an operational creditor could do so. The operational creditor, on occurrence of a default, was required to serve on the corporate debtor, a demand notice of the unpaid operational debt. If payment is not received within 10 days of this Notice, the operational creditor could file a petition before the NCLT. The Supreme Court observed the wordings of s.9(5)(i) of the Code in this respect

“9(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order

(i) admit the application……………..”

The Court concluded that the Legislature had used the word ‘may’ in section 7(5)(a) of the Code in respect of an application initiated by a financial creditor against a corporate debtor but had used the expression ‘shall’ in an otherwise almost identical provision of section 9(5) relating to the initiation of insolvency by an operational creditor. The Court gave an explanation on when the word “may” could be construed as “shall” and when it remained “may”.

The Legislature intended section 9(5)(a) to be mandatory but section 7(5)(a) to be discretionary. The rationale for this dichotomy was explained and it held that the law consciously differentiated between financial creditors and operational creditors, as there was an innate difference between financial creditors, in the business of investment and financing, and operational creditors in the business of supply of goods and services. Financial credit was usually secured and of much longer duration. Such credits, which were often long-term credits, on which the operation of the corporate debtor depends, could not be equated to operational debts which were usually unsecured, of shorter duration and of a lesser amount.

The financial strength and nature of business of a financial creditor were not comparable with that of an operational creditor, engaged in the supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an operational creditor than on a financial creditor.

In the case of financial debt, there was flexibility. The NCLT was conferred the discretion to admit the application of the financial creditor. If facts and circumstances so warranted, it could keep the admission in abeyance or even reject the application. A very telling statement was that it was certainly not the object of the Code to penalise solvent companies, temporarily defaulting in repayment of their financial debts, by the initiation of insolvency.

It however, concluded that the discretionary power of the NCLT could not be exercised arbitrarily or capriciously.

REVIEW PETITION

A review petition was filed before the Supreme Court in the case of Axis Bank Ltd vs. Vidarbha Industries Power Ltd, Review Petition (Civil) No. 1043 of 2022. It was contended that the above judgment was rendered per incuriam since it ignored an earlier Two-Judge Decision in E. S. Krishnamurthy vs. Bharath Hi-Tech Builders Pvt Ltd (2022) 3 SCC 161. In that case, the Court had held that NCLT must either admit or reject an application. These were the only two courses of action which were open to the NCLT in accordance with s. 7(5).

The NCLT could not compel a party to the proceedings before it to settle a dispute. Thus, it was contended that the NCLT had no discretionary power. The Supreme Court rejected the Review Application by holding that the question of whether section7(5)(a) was mandatory or discretionary was not an issue in the above judgment. The only issue was whether the NCLT could foist a settlement on unwilling parties. That issue was answered in the negative.

In the Review Application, the Solicitor General also contended that Vidarbha’s decision could be interpreted in a manner that might be contrary to the aims and objects of the Code and could render the law infructuous. The Apex Court held that such an apprehension appeared to be misconceived. Hence, the review petition was dismissed.

FOLLOWED BY NCLAT

Subsequently, Vidarbha’s decision was followed by the NCLAT in Jag Mohan Daga vs Bimal Kanti Chowdhary, CA (AT) (Insolvency) No. 848 of 2022. The NCLAT held that the dispute was a family dispute which was given the colour of a financial creditor’s dues.

The NCLAT set aside the admission of the plea by the NCLT on the grounds that the Supreme Court in Vidarbha has clearly laid down that it was not mandatory that s. 7 applications were to be admitted merely on proof of debt and default. Petitions should not be allowed to continue when the financial creditor proceeded under the Code not for the purposes of resolution of insolvency of the corporate debtor but for other purposes with some other agenda. The NCLAT held that the NCLT should not permit such an insolvency petition to go on which had been initiated to settle an internal family business dispute.

APPEAL AGAINST NCLAT / VIDARBHA AGAIN QUESTIONED

An appeal was filed before the Supreme Court (Maganlal Daga HUF vs. Jag Mohan Daga, CA 38798/2022) against the above-mentioned NCLAT decision. The matter was heard by a Three-Judge Bench and it noted that the NCLAT relied on Vidarbha’s decision against which the review petition was rejected. Once again the Petitioners contended that Vidarbha’s decision ran contrary to the settled position of law. The Solicitor General again pleaded that the principle which was enunciated in Vidarbha was liable to dilute the substratum of the Code. This appeal is still pending.

MCA’S DISCUSSION PAPER

Realising the gravity of the decision in Vidarbha’s case, the Ministry of Corporate Affairs (MCA) issued a Discussion Paper on 18th January, 2023 highlighting the proposed changes to the Code. One of the key changes is a proposed amendment to s. 7(5)(a) making it mandatory to admit the application if other conditions are met. Thus, the disparity between section 7(5) and section 9(5) is sought to be removed.

The MCA has stated that Vidarbha’s decision has created confusion and hence, to alleviate any doubts, it was proposed that section 7 may be amended to clarify that while considering an application for initiation of the insolvency process by the financial creditors, the NCLT was only required to be satisfied about the occurrence of a default and fulfilment of procedural requirements for this specific purpose (and nothing more). Where a default was established, it would be mandatory for the NCLT to admit the application and initiate the insolvency process.

CRITIQUE

It is submitted that the Supreme Court’s analysis in Vidarbha’s case is spot on and cannot be faulted. The objective of the Code must be to create and enhance value for all stakeholders and not merely send an otherwise sound company to the gallows. A discretionary power to the NCLT would empower it to provide for other remedial measures in case of a default on a debt. Rather than making the powers mandatory under section7(5)(a), the MCA could provide for alternative remedies which the NCLT can suggest in case of a default. It is true that several unscrupulous promoters have hoodwinked the financial system under the earlier laws, but it is also true that an overzealous law may in fact harm otherwise good companies.

If the MCA proposals are implemented then this discretionary power would be taken away from the NCLT. Also, the outcome of the Supreme Court appeal would be interesting. It could impact several NCLT cases, including the recent insolvency plea of IndusInd Bank against Zee Entertainment Ltd.

In conclusion, the words of the Supreme Court sum up the situation aptly ~ “It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP.”

The Income-tax Act at several places makes references to any transaction allowing the possession of any immovable property in part performance of a contract. The concept of part performance of a contract is found in s. 2(47) relating to the definition of ‘transfer’ for capital gains, s. 27 relating to the definition of ‘owner’ under House Property Income and the erstwhile s. 269UA relating to ‘transfer’ for Form 37-I. Thus, it becomes important to understand the meaning of this concept.

DEFINITION
The Supreme Court in  Shrimant Shamrao Suryavanshi vs. Pralhad Bhairoba Suryavanshi [2002] 3 SCC 676 has stated that certain conditions are required to be fulfilled if a transferee wants to defend or protect his possession under s. 53A of the Act. The necessary conditions are:

(1)    there must be a contract to transfer for consideration of any immovable property;

(2)    the contract must be in writing, signed by the transferor, or by someone on his behalf;

(3)    the writing must be in such words from which the terms necessary to construe the transfer can be ascertained;

(4)    the transferee must in part-performance of the contract take possession of the property, or of any part thereof;

(5)    the transferee must have done some act in furtherance of the contract; and

(6)    the transferee must have performed or be willing to perform his part of the contract.

If the above mentioned elements are present, then the transferor is debarred from enforcing against the transferee any right in respect of the property in possession of the transferee other than a right expressly provided by the contract. Thus, this section protects certain types of transferees from any action by the transferor. The principle laid down has been explained by the Supreme Court in Sheth Maneklal Mansukhbhai vs. Messrs. Hormusji Jamshedji, AIR 1950 SC 1 as follows:

“The s. is a partial importation in the statute law of India of the English doctrine of part performance. It furnishes a statutory defence to a person who has no registered title deed in his favour to maintain his possession if he can prove a written and signed contract in his favour and some action on his part in part-performance of that contract.”

Let us examine each of the above key elements.

CONTRACT
The starting point of s. 53A is that there must be a contract that must relate to the transfer of specific immovable property. Without a contract, this section has no application. Since a contract is a must, it goes without saying that all the contract prerequisites also follow. Thus, if the contract has been obtained by fraud, misrepresentation, coercion, etc., then it is void ab initio, and the section would also fail – Ariff vs. Jadunath (1931) AIR PC 79.

WRITTEN CONTRACTS
Another important requirement is that the contract must be in writing. Oral contracts are valid under the Indian Contract Act but not for the purposes of s. 53A. The transfer must be by virtue of a written contract. If the contract merely refers to a previous oral understanding, then the same would not fall within the purview of s. 53A – Kathihar Jute Mills Ltd. vs. Calcutta Match Works, AIR 1958 Pat 133.

In Sardar Govindrao Mahadik vs. Devi Sahai, 1982 (1) SCC 237, it was held that to qualify for the protection of the doctrine of part performance it must be shown that there is an agreement to transfer immovable property for consideration and the contract is evidenced by a writing signed by the person sought to be bound by it and from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty. In Mool Chand Bakhru vs. Rohan, CA 5920/1998 (SC), letters were written by a landowner offering to sell half his property in exchange for money which he needed. The Supreme Court letters denied the benefit of s. 53A to the transferee by observing that the letters written could not be termed as an agreement to sell, the terms of which had been reduced into writing. At the most, it was an admission of an oral agreement to sell and not a written agreement. Statutorily the emphasis was not only on a written agreement but also on the terms of the agreement as well which could be ascertained with reasonable certainty from the written document. There was no meeting of minds. The letters did not spell out the other essential terms of an agreement to sell, such as the time frame within which the sale deed was to be executed and who would pay the registration charges etc.

REGISTRATION
Earlier, s. 53A provided that the section would take effect even if the agreement for the transfer of the immovable property had not been registered. However, the Registration and Other Related Laws (Amendment) Act, 2001 modified this position. Now for s. 53A to operate, the agreement must be registered. Hence, registration has been made mandatory, and in its absence, the section would be inoperative. Since the agreement is to be in writing, stamp duty would also follow. Accordingly, if the agreement is inadequately stamped, it would not be admissible as evidence in a Court.

In a recent judgment of Joginder Tuli vs. State NCT of Delhi, W.P.(CRL) 1006/2020 & CRL.M.A. 8649/2020, the Delhi High Court has stated that it is well settled that in order to give benefits of s. 53A, the document relied upon must be a registered document. Any unregistered document cannot be looked into by the court and cannot be relied upon or taken into evidence in view of s. 17(1A) read with s. 49 of the Registration Act. Thus, the benefit of s. 53A would be given, if and only if the Agreement to Sell cum Receipt satisfied the provisions of s. 17(1) A of the Registration Act. It relied upon an earlier decision in the case of Arun Kumar Tandon vs. Akash Telecom Pvt. Ltd. & Anr. MANU/DE/0545/2010.

Another decision of the Delhi High Court, Earthtech Enterprises Ltd. vs. Kuljit Singh Butalia, 199 (2013) DLT 194, has observed that a person can protect his possession under s. 53A on the plea of part performance only if it is armed with a registered document. Even on the basis of a written agreement, he cannot protect his possession.

The decision of the Supreme Court in the case of CIT vs. Balbir Singh Maini, (2017) 398 ITR 531 (SC) under the Income-tax Act has succinctly summed up the relationship between registration of the instrument and s. 53A. It held that the protection provided under s. 53A is only a shield and can only be resorted to as a right of defence. An agreement of sale which fulfilled the ingredients of s. 53A was not required to be executed through a registered instrument. This position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in s. 53A of the Transfer of Property Act and sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words ‘the contract, though required to be registered, has not been registered, or’ in s. 53A of the 1882 Act have been omitted. Simultaneously, sections 17 and 49 of the Registration Act have been amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of s. 53A) is registered, it shall not have any effect in law other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

The effect of the aforesaid amendment was that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the Joint Development Agreement in the impugned case, was not registered, then it had had no effect in law for the purposes of s. 53A. In short, there was no agreement in the eyes of the law which could be enforced under s. 53A of the Transfer of Property Act. Accordingly, in order to qualify as a ‘transfer’ of a capital asset under s. 2(47)(v), there must be a ‘contract’ which could be enforced in law under s. 53A of the Transfer of Property Act.

IMMOVABLE PROPERTY ONLY
The contract must pertain to the ‘transfer of an immovable property’. The Act defines this phrase as an act by which a living person conveys property, in present or in future, to one more other living persons or to himself, and one or more other living persons. This is also known as transfer inter vivos. The Act then proceeds to deal with various types of transfer of immovable property – a sale, an exchange, a mortgage and a lease. All these transfers would be covered within the scope of s. 53A. A gift of an immovable property is also a transfer but is not covered within the purview of s. 53A as explained below. Anything which is not a transfer is not covered by s. 53A. For instance, a leave and licence is an easement / personal right and hence, would be outside the purview of this section. Similarly, various Supreme Court decisions have held that a family arrangement is not a transfer, and hence, a family arrangement would be outside the scope of this section.

A movable property would be out of the purview of this section – Bhabhi Dutt vs. Ramlalbyamal (1934) 152 IC 431. The Act defines the term immovable property in a negative manner by stating that it does not include standing timber, growing crops or grass. The General Clauses Act defines it to include land, benefits to arise out of land, and any anything attached to the earth or permanently fastened to anything attached to the earth. The Maharashtra Stamp Act, 1958, defines the term to include land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth. The scope of this section even applies to agricultural properties – Nakul Chand Polley vs. Kalipada Ghosal, AIR 1939 Cal 163.

The Supreme Court has held in UOI vs. M/s. KC Sharma & Co., CA No. 9049-9053 /2011 that the defence under s. 53A was even available to a person who had an agreement of lease in his favour though no lease had been executed and registered. It also protected the possession of persons who have acted on a contract of sale but in whose favour no valid sale deed was executed or registered. The benefit was available, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed by the law for the time being in force. In all cases where the section was applicable, the transferor was debarred from enforcing against the transferee any right in respect of the property of which the transferee had taken or continued in possession.

CONSIDERATION
The transfer of immovable property must be for consideration. Hence, gratuitous transfers or gifts of immovable property would be outside the purview of s. 53A – Hiralal vs. Gaurishankar (1928) 30 Bom LR 451. As is the norm in India, adequacy of consideration is immaterial. For instance, in the USA, not only is consideration a must for a valid contract, it must also be adequate. In India, all that is necessary, both for a valid contract as well as for s. 53A, is that there must be consideration.

SIGNATURE
The contract must be signed by the transferor or any person on his behalf, say the power of attorney holder.

TERMS OF CONTRACT
The terms of the contract must be ascertainable with reasonable certainty. If they are ambiguous or cannot be ascertained with reasonable certainty, then the contract cannot be enforced u/s. 53A – Bobba Suramma vs. P Chandramma 1959 AIR AP 568.

POSSESSION
The transferee must take possession of the property for this section to apply – Sanyasi Raju vs. Kamappadu (1960) AIR AP 83. Alternatively, if he is already in possession of the property, then he must continue with such possession. Possession of a part of the property is also enough – Durga Prasad vs. Kanhaiyalal (1979) AIR Raj 200. Further, the possession of the property must be pursuant to part performance of the agreement to sell the property. The onus of proof is on the defendant – Thakamma Mathew vs. Azamathulla Khan 1993 Suppl. (4) SCC 492.

In the case of Roop Singh (Dead) Through Lrs vs. Ram Singh (Dead) Through Lrs, JT 2000 (3) SC 474, the plaintiff pleaded that he owned certain agricultural land. As the land was in illegal possession of the defendant, he filed a suit. The defendant submitted that 14 years prior to the date of institution of the suit, he had purchased the suit land for consideration, had paid full sale consideration to the plaintiff, and since then, he was in possession of the suit land. He contended that his possession is protected under s. 53A. He also pleaded that he had acquired the title by adverse possession (adverse possession is a means of acquiring title to a property by physically occupying it for a long period of time. A person can acquire property if one possesses it long enough and meets the legal requirements). The Supreme Court held that the plea of adverse possession and retaining the possession by operation of s. 53A were inconsistent with each other. Once it was admitted by implication that the plaintiff came into possession of the land lawfully under the agreement and continued to remain in possession till the date of the suit, then the plea of adverse possession would not be available to the defendant.     

WILLINGNESS OF TRANSFEREE
The transferee must be willing to complete his part of the contract. Failure on his part to complete his contract, e.g. payment of monthly instalments, would not entitle him to the defence of part performance – Jawaharlal Wadhwa vs. Chakraborthy 1989 (1) SCC 76.

In Ranchhoddas Chhaganlal vs. Devaji Supadu Dorik, 1977 SCC (3) 584, the purchaser paid a portion of the consideration and claimed shelter u/s.53A. Despite demands from the plaintiff, he failed to pay the balance sum. The Supreme Court held that the defendant was never ready and willing to perform the agreement as alleged by the appellant. One of the ingredients of part performance under s. 53A was that the transferee had taken possession in part performance of the contract. In the case on hand there was no performance in part by the respondent. The true principle of the operation of the acts of part performance required that the acts in question must be referred to some contract and must be referred to the alleged one; that they proved the existence of some contract and were consistent with the contract alleged. S. 53A was a right to protect his possession against any challenge to it by the transferor contrary to the terms of the contract.

Again in Ram Kumar Agarwal vs. Thawar Das, (1999) (1) SCC 76, it was held that a plea under s. 53A of the Transfer of Property Act raised a mixed question of law and fact and therefore could not be permitted to be urged for the first time at the stage of an appeal. Further, performance or willingness to perform his part of the contract was one of the essential ingredients of the plea of part performance. The defendant, having failed in proving such willingness, protection to his possession could not have been claimed by reference to s. 53A.

The section does not create a title in the defendant. It only acts as a deterrent against a plaintiff asserting his title. It does not permit the defendant to maintain a suit on title – Ram Gopal vs. Custodian (1966) 2 SCR 214.

NULL AND VOID TRANSACTIONS
The section has no application to transactions which are null and void for any reason. The Supreme Court held in Biswabani (P.) Ltd vs. Santosh Kumar Dutta, 1980 SCR (1) 650 that if a lease was void for want of registration, neither party to the indenture could take advantage of any of the terms of the lease. No other terms of such an indenture inadmissible for want of registration can be the basis for a relief u/s. 53A.

Again in Ligy Paul vs. Mariyakutti, RSA No. 79/2020, the Kerala High Court has reiterated that s.53A is applicable only where a contract for transfer is valid in all respects. It must be an agreement enforceable by law under the Indian Contract Act, 1872.

EXCEPTION
This section does not impact the rights of a buyer who has paid consideration and who has no notice of the contract or the part performance of the contract.

CONCLUSION
The doctrine of part performance is a concept with several important cogs in the wheel. Each of them is vital for the doctrine to be applied correctly. Although it is one of the fundamental tenets in the field of conveyancing, its importance under the Income-tax Act also cannot be belittled!

REGULATORY REGIME
Instead of multiple financial services regulators such as SEBI, RBI and IRDA, the GIFT City is regulated by only one body – the International Financial Services Centres Authority set up under the Finance Ministry. The IFSC Authority is based in Gujarat. The unified IFSC Authority aims to ease the business environment for the intermediaries. However, multiple legislations continue to impact the GIFT City.

Units set up in the IFSC are treated as SEZ Units set up under the Special Economic Zones Act, 2005. Accordingly, units set up in an IFSC must conform to the provisions of the SEZ Act and its regulations.

Some of the key regulations pertaining to the setting up of financial institutions in the GIFT City are:

•  Special Economic Zones Act, 2005

•  Foreign Exchange Management (International Financial Services Centre) Regulations, 2015

•  International Financial Services Centres Authority Act, 2019

•  International Financial Services Centres Authority (Banking) Regulations, 2020

•  Securities and Exchange Board of India (International Financial Services Centre) Guidelines, 2015

•  SEBI’s Operating Guidelines for Alternative Investment Funds in International Financial Services Centres of 2018

•  IFSCA’s Guidelines of 2020 for AIFs in IFSCs.

PERSON RESIDENT OUTSIDE INDIA
One of the most salient features of the GIFT City is that any entity set up here would be treated as a Person Resident Outside India under the Foreign Exchange Management Act, 1999. Thus, even though the unit is physically incorporated in India, it would be treated as if it is a non-resident under the FEMA. A financial institution is an entity engaged in rendering financial services or carrying out financial transactions and includes banks, NBFCs, insurance companies, brokerages, merchant bankers, securities exchanges, mutual funds, etc. On the other hand, a financial service is defined to mean any activity allowed to be carried out by SEBI / RBI / IRDA or any authority empowered to regulate the financial institution.

Consequently, a financial institution set up in the GIFT City must conduct business only in foreign currency and not in Indian Rupees. This feature has certain unique consequences which are explained below.

Any SEBI-registered intermediary may provide financial services relating to the securities market in the IFSC without forming a separate company.

FOREIGN PORTFOLIO INVESTORS
SEBI has liberalised the regime for foreign investors operating in the GIFT City as well as for FPIs to operate in it. Any applicant incorporated in the GIFT City shall be deemed to be appropriately regulated for the purposes of being registered as an FPI with SEBI. Hence, such an entity can apply for registration as a Category-I FPI.

Eligible Foreign Investors (EFIs) operating in IFSCs / GIFT City shall not be treated as entities regulated by SEBI. Further, SEBI-registered FPIs shall be permitted, without undergoing any additional documentation and / or prior approval process, to operate in the IFSC. The following are eligibility and KYC norms for EFIs:

Eligibility norms: EFIs are those foreign investors who are eligible to invest in IFSCs by satisfying the following conditions:
a) the investor is not resident in India,
b) the investor is not resident in a country identified in the public statement of the Financial Action Task Force as a deficient jurisdiction, and
c) the investor is not prohibited from dealing in the securities market in India.

KYC norms: An intermediary operating in an IFSC needs to ensure that the records of its clients are maintained as per the Prevention of Money-Laundering Act, 2002 and the rules made thereunder. The following KYC norms may be made applicable to EFIs:

•  In case of participation of an EFI, not registered with SEBI as an FPI but desirous of operating in the IFSC, a trading member of the recognised stock exchange in the IFSC may rely upon the due diligence carried out by a bank which is permitted by RBI to operate in the IFSC during the account opening process of the EFI.

•  In case of EFIs that are not registered with SEBI as FPIs and also not having bank accounts in the IFSC, KYC as applicable to Category-II FPI as per the new FPI categorisation shall be made applicable. However, PAN shall not be applicable for KYC of EFIs in the IFSC.

•  In case of participation of FPIs in the IFSC, due diligence carried out by a SEBI-registered intermediary during the time of account opening and registration shall be considered.

Segregation of accounts: FPIs who operate in the Indian securities market and also propose to operate in the IFSC shall be required to ensure clear segregation of funds and securities. The custodians shall, in turn, monitor compliance of this provision for their respective FPI clients. Such FPIs shall keep their respective custodians informed about their participation in the IFSC.

AIFs IN THE GIFT CITY
Alternative Investment Funds (AIFs) are investment vehicles set up in India which privately pool funds / monies from domestic as well as foreign investors and invest such funds / monies in securities as per a defined investment policy. In India, an AIF along with its constituents is regulated by SEBI under the SEBI (AIF) Regulations, 2012 (SEBI AIF Regulations). SEBI has provided several incentives for setting up an AIF in the GIFT City / IFSCs. The IFSC Authority has further liberalised the framework for setting up AIFs in the GIFT City. The combined regulations for setting up an AIF are explained below.

Incorporation of the AIF
Any trust / LLP / company set up in the IFSC can be registered with SEBI as an AIF. If the sponsor / manager of an Indian AIF wishes to set up an AIF in the IFSC, it must first set up a branch / company in the IFSC which will act as the sponsor / manager of the AIF. Thus, the Indian sponsor cannot directly sponsor the IFSC AIF. It must first set up a foreign branch / foreign company in the IFSC. The investment in the IFSC sponsor would be treated as an overseas direct investment in a Joint Venture / Wholly-Owned Subsidiary under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (FEMA No. 120/RB-2004). Since this would be an investment in the Financial Services Sector, the provisions of Regulations 6 and 7 of these Regulations would need to be adhered to.

The SEBI IFSC guidelines along with the SEBI AIF Regulations recognise the following types of AIFs:
(a) Category-I AIF: Funds which invest in startups, early-stage ventures, social ventures, small and medium enterprises, infrastructure sector, etc. These include Venture Capital Funds.
(b) Category-II AIF: Residual category, i.e., other than Category I and III AIFs and which do not undertake leverage other than to meet day-to-day operational requirements as per SEBI AIF Regulations. These include Private Equity Funds / Debt Funds.
(c) Category-III AIF: Funds which employ diverse or complex trading strategies and leverage including through investments in listed or unlisted securities / derivatives. These would include Hedge Funds.

Each scheme of the AIF shall have a corpus of at least US $3 million. The manager or sponsor shall have a continuing interest in the AIF of not less than 2.5% of the corpus or US $750,000, whichever is lower, in the form of investment in the AIF and such interest shall not be through the waiver of management fees. Further, for Category-III AIFs the continuing interest shall be not less than 5% of the corpus or US $1.5 million, whichever is lower. The AIF must raise money only in foreign currency and not in Indian Rupees.

Investments permissible by the AIF
SEBI has harmonised the provisions governing investments by AIFs incorporated in IFSCs with the provisions regarding investments applicable for domestic AIFs. Accordingly, AIFs set up in the IFSC can invest in

•  Securities which are listed in the IFSC

•  Securities issued by companies incorporated in the IFSC

•  Securities issued by companies in India or belonging to foreign jurisdictions

•  Units of other AIFs located in India as well as in the IFSC

•  Any company, Special Purpose Vehicle or Limited Liability Partnership or body corporate or Real Estate Investment Trust or Infrastructure Investment Trust in which a domestic AIF can make an investment

•  It can also co-invest in a portfolio company through a segregated portfolio by issuing a separate class of units. However, the investments by such segregated portfolios shall, in no circumstances, be on terms more favourable than those offered to the common portfolio of the AIF and appropriate disclosures must be made in the placement memorandum regarding creation of the segregated portfolio.

AIFs operating in India are subject to leverage restrictions under the SEBI Regulations. Accordingly, AIF Category-I cannot borrow, while Category-II can only borrow for meeting daily expenses. However, these restrictions have been removed for AIFs set up in the GIFT City. An AIF in an IFSC may borrow funds or engage in leveraging activities without any regulatory limit, subject only to the following conditions:
(a) The maximum leverage by the AIF, along with the methodology for calculation of leverage, shall be disclosed in the placement memorandum;
(b) The leverage shall be exercised subject to consent of the investors;
(c) The AIF employing leverage shall have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the fund.

Further, AIFs operating in India have a maximum investment diversification rule. Thus, under the SEBI Regulations a Category-I AIF can invest a maximum of  25% of its investible funds in one investee company. Similarly, a Category-II AIF can invest a maximum of 10% of its investible funds in one investee company. The guidelines for AIFs in the IFSC have removed these diversification rules. Accordingly, they shall not apply to AIFs in IFSCs, subject to the conditions that appropriate disclosures have been made in the placement memorandum and the investments by the AIFs are in line with the risk appetite of the investors.

Most offshore financial centres do not have restrictions on leveraging or diversification guidelines. This is a very welcome move since now AIFs in IFSCs can set up tailor-made schemes for investing in a very select pool of companies. These guidelines should encourage more foreign institutions to set up AIFs in India.

Lastly, Indian AIFs are subject to a monetary limit when they want to invest abroad. AIFs set up in the IFSC are exempt from this limit since they are treated as set up in an offshore jurisdiction.

Nature of Indian investments by the AIF
Under the FEM (Non-Debt Instruments) Rules, 2019 an AIF is treated as an Investment Vehicle. If the control and management of the sponsor and manager of the AIF are ultimately with resident Indian citizens, then the entire investment made in India by such an AIF is treated as a domestic investment. It does not then matter whether the corpus of the scheme is foreign or Indian. Thus, if the AIF in the GIFT City is set up by and managed by another Indian entity which in turn is ultimately controlled and managed by resident Indian citizens, then the downstream investment by such an AIF in Indian entities would be treated as domestic investment. Such investment would then be outside the purview of the FEMA Regulations and would not be subject to pricing / sectoral conditions / sectoral caps under the FEM (Non-Debt Instruments) Rules, 2019 even if the entire corpus is raised from non-residents.

Eligible investors in the AIF
The following persons can make investments in an AIF operating in the IFSC:

•  A person resident outside India;

•  A non-resident Indian;

•  Institutional investor resident in India who is eligible under FEMA to invest funds offshore, to the extent of outward investment permitted;

•  A person resident in India having a net worth of at least US $1 million during the preceding financial year who is eligible under FEMA to invest funds offshore, to the extent  allowed in the LRS (US $250,000) of RBI. The minimum investment by an investor in an AIF is US $40,000 for employees or directors of the AIF or its manager and US $150,000 for all other investors.

The RBI has recently expressly allowed resident individuals to make remittances under LRS to IFSCs set up in India. Resident individuals may also open non-interest-bearing Foreign Currency Accounts (FCAs) in IFSCs for making the above permissible investments under LRS. Any funds lying idle in the account for a period up to 15 days from the date of receipt into the account shall be immediately repatriated to the domestic Rupee account of the investor in India. This is an example of express round-tripping being permissible by the RBI ~ Indian money under LRS would go abroad to an offshore AIF (although physically the AIF is in India) and could be routed back into India since such an AIF can invest in Indian companies!

Under the International Financial Services Centres Authority (Banking) Regulations, 2020 Qualified Resident Individuals (meaning an individual who is a person resident in India having net worth not less than US $1 million or equivalent in the preceding financial year) are permitted to open, hold and maintain accounts in a freely convertible foreign currency, with a banking unit, for undertaking transactions connected with or arising from any permissible transaction specified in the Liberalised Remittance Scheme of the Reserve Bank of India. The IFSCA has clarified that the net worth criteria shall not be applicable for an individual, being a person resident in India who opens an account with the bank for the purpose of investing in securities under the LRS. This is because of the fact that the purpose of such remittance under the LRS is investment in securities and the opening of a bank account with a banking unit is incidental to the same.

Triple role of the AIF
The AIF set up in the IFSC can also invest in India under the FDI Route, the FPI Route or the Foreign Venture Capital Investor (FVCI) Route. If it desires to come under the FPI or the FVCI Route, then it must get a separate registration for the same with SEBI. All such investments would be subject to the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 administered by the RBI and the relevant SEBI Regulations.

CONCLUSION
The GIFT City at Gujarat is an excellent idea to attract foreign investment and foreign financial institutions to set up shop in India. Along with the regulatory concessions provided to AIFs, there are several income-tax benefits which are also afforded to AIFs established in the IFSC. While the Government has given a strong impetus to the GIFT City, it remains to be seen whether financial institutions actually set up shop.