As a rule, two types of agreements are concluded for the sale of real estate – a purchase agreement and an instrument of sale or a contract of sale. The sales contract must be stamped and registered in accordance with the Registration Act. There may be a delay between the date of registration and the performance of the contract. It is generally accepted that, when registering a contract, the rights to the immovable property are always transferred from the seller to the buyer. But this perception is not always correct. The Bombay High Court recently had the opportunity to look into this issue in the case of The Principal Commissioner of Income Tax-25 Vs M/s Talwalkars Fitness Club, which was decided on 29 October 2018. In other words, the validity of an unreg registered agreement was not challenged in order to provide it as proof of the benefit derived from such a contract. But to protect property, an unregreg registered contract could not be enforced. The `transfer` within the meaning of Article 2(47) would be concluded if the property is protected. In many places in India, when buying a property, it is seen that a sale agreement is concluded and a deed of sale is concluded between the parties, thus confiscating the ownership of the property. However, the time between these two agreements can take considerable time.
Because of this considerable delay, the Income Tax Act 1961 (Act) may raise problems with specific provisions such as sections 43 A, 50C and 56(2)(x) of the Act. Let`s take a brief look at these paragraphs and the impact of these two agreements on income tax. Like Section 43CA &50C of the Act, where the valuation of stamp duty is greater than the contract value, the difference between the value of stamp duty and the contractual value of income tax under the heading “Income from other sources” is debited in the hands of the buyer. A contract of sale is a contract for the sale of land. To have a valid contract, the law requires that an offer, acceptance and consideration for the contract be made. In the case of a real estate transaction, the offer is made by the buyer if he wishes to acquire the property at a specific price. Acceptance is made when the seller accepts the buyer`s offer by agreeing to sell the property at the fixed price. The consideration for the contract then comes from both parties.
The seller`s consideration is the agreement not to sell the property to anyone else for the duration of the sales contract. The buyer`s consideration is the acompt. M/s Talwalkars Fitness Club had agreed to sell an apartment for Rs 2.2 Crores and received an advance of Rs 20 Lakhs against the deal. The sale agreement was concluded on 14 February 2011 and duly registered. The agreement contained a clause stating that the sale/transfer takes effect if the full consideration of Rs 2.2 crores is paid. In accordance with the terms of payment of the agreement, the final payment should be made before 26 May 2011, i.e. in the following financial year. In accordance with the contractual conditions, ownership of the property was also transferred upon full payment of the consideration for the sale.
The seller also had to pay maintenance and other fees until the property was handed over. Since the date of the agreement and the date of payment/final ownership were paid in two different financial years, a dispute arose between the tax authorities and the taxpayer in the year in which the profit from the sale of this property would become taxable. The Income Tax Department considered the date of registration of the property as the date on which the transfer took place and therefore taxed the capital gains during the 2011-2012 investment year. The dispute was brought before the Income Tax Tribunal. .