For the sale of an immovable property, generally two types of agreements are made – an agreement for sale and a sale deed or sale agreement. The agreement for sale is required to be stamped and registered, as per the law of registration. There may be a delay between the date of registration and execution of the agreement. It is generally believed that on registration of an agreement, the rights in the property always get transferred from the vendor to the purchaser. However, this perception is not always right. The Bombay High Court recently had an occasion to deal with this question, in the case of The Principal Commissioner of Income Tax-25 Vs M/s Talwalkars Fitness Club, which was decided on October 29, 2018.
Agreement for sale versus final payment: Decision of the Income Tax Tribunal
M/s Talwalkars fitness club had agreed to sell a flat for Rs 2.2 crores and had received an advance of Rs 20 lakhs against the deal. The agreement to sell was executed on February 14, 2011 and was duly registered. The agreement had a clause to the effect that the sale/transfer would take effect, on the full consideration of Rs 2.2 crores being paid. As per the terms of payment in the agreement, the final payment was to be made by May 26, 2011, i.e., in the next financial year. As per the terms of the agreement, the possession of the property was also to be handed over on full payment of the sale consideration. The vendor was also required to pay for the maintenance charges and other charges, till the possession was handed over. As the date of agreement and the date of final payment/possession fell in two different financial years, a dispute arose between the tax authorities and the tax payer, as to the year in which the profit on sale of this property would become taxable. The Income Tax Department treated the date of registration of the property, as the date on which the transfer took place and had, accordingly, taxed the capital gains in the assessment year 2011-2012. The dispute went to the Income Tax Tribunal.
On reading the agreement in its entirety, the Income Tax Tribunal came to the conclusion that the sale or transfer was not complete on the date of execution of the agreement and that the transfer of the property took place, when the balance payment was made and possession handed over to the buyer, which happened during the financial year 2011-2012. Hence, the capital gains were taxable in the assessment year 2012-2013 and not in the assessment year 2011-2012, as was done by the assessing officer erroneously. The tribunal also observed that the agreement which was registered, was an agreement to sell and not a sale agreement.
Decision of the Bombay High Court
The Bombay High Court, while deciding the case on October 29, 2018, held that the conclusion arrived at by the Income Tax Tribunal was correct and the sale/transfer of the property in question, was complete only during the financial year 2011-2012. The court also observed that the tribunal was right in its conclusion that on facts, the agreement executed on February 14, 2011, was an agreement for sale of immovable property. The law then prevailing, required such an agreement to be registered. In any event, merely because it is registered, it does not partake the character of a conveyance or a sale deed automatically.
Implications of the Bombay HC decision, on capital gains computation and income tax
The decision of the Bombay HC has wider implications for taxation of capital gains on sale of properties. With respect to the year in which the profits from the sale of a particular property will become taxable, this decision will have no impact as long as the date of registration and date of final transfer fall in the same financial year. However, it may have implications for determining the period for which a particular asset has been held by the seller, on the date of sale/transfer. It will be the date on which all the conditions, as enumerated in the agreement for sale, are complied with. Presently, for qualifying an immovable property as long-term capital asset, profits whereof are eligible for exemptions and concessional rate of tax, the date of transfer as intended on the basis of the agreement, will have to be taken into account.
Likewise, there are provisions in the law, where an assessee is required to invest in another residential property within a particular period. For example, under Section 54 and 54F, an assessee can claim exemption from long-term capital gains, if he buys a residential house within one year before and two years after the date of sale of such long-term asset. He can also construct a house or book a house within three years, for availing of the above exemption. So, for computing the period of one year, two years and three years, the actual date on which the assessee became the owner of the property will be relevant, to decide whether he has complied with the conditions within the time prescribed.
Likewise, a tax payer is required to hold the residential house, purchased with a home loan, for a minimum period of five years, failing which the tax benefits availed of under Section 80 C, for repayment of principal amount of the home loan, are reversed in the year in which the house is transferred. Here also the actual date of transfer will be taken into account and not the date of execution/registration of the agreement.
It may be noted that merely because the full consideration is not received, the agreement will not result into transfer of the ownership. There may be various other terms and conditions, which may be imposed on buyer and seller, to make the sale complete. In case the vendor agrees to treat the sale consideration, partly or fully, as loan to the buyer and where no other conditions are needed to be complied with further, the date of agreement and registration will be taken as the date of transfer and other consequences will follow.
(The author is a tax and investment expert, with 35 years’ experience)