Clause (v) and (vi) Part Performance Under Transfer in Relation to a Capital Asset

Clause (v) and (vi) Part Performance Under Transfer in Relation to a Capital Asset Under Income Tax in India

This article delves into the intricacies of clauses (v) and (vi) of Section 2(47) of the Income Tax Act, 1961, focusing specifically on how they relate to the concept of “transfer” of a capital asset under the principle of part performance. Understanding these clauses is crucial for determining tax liability arising from transactions involving immovable property, particularly when the legal ownership is not immediately transferred.

Understanding the Concept of "Transfer" under Section 2(47)

Section 2(47) of the Income Tax Act defines "transfer" in relation to a capital asset. This definition is broad and encompasses several scenarios beyond the traditional sale of property. It is crucial to understand what constitutes a transfer because capital gains tax is levied only when a transfer has occurred. The clauses relevant to this discussion are:

• (v) Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882; or
• (vi) Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

These clauses essentially capture situations where the beneficial ownership of the property is transferred, even if the legal title remains with the original owner. This is particularly important in cases of part performance, where the buyer has taken possession and is enjoying the property, but the sale deed has not yet been executed.

Section 53A of the Transfer of Property Act, 1882: The Foundation of Clause (v)

Clause (v) directly refers to Section 53A of the Transfer of Property Act, 1882. This section protects the rights of a buyer who has taken possession of a property based on a written contract, even if the sale deed hasn’t been registered. For Section 53A to apply, the following conditions must be met:

1. There must be a contract for the transfer of immovable property. The contract must be in writing, signed by the transferor (seller) or someone on their behalf.
2. The transferee (buyer) must have taken possession of the property. They must be in actual physical possession.
3. The transferee must have performed or be willing to perform their part of the contract. This means they must have paid the agreed-upon consideration or be ready and willing to do so.
4. The contract must be for consideration: This means there must be some sort of payment being exchanged between the transferor and the transferee.

How Clause (v) Works in Relation to Section 53A:

If all the conditions of Section 53A are met, and the buyer is allowed to take or retain possession of the property, then clause (v) of Section 2(47) comes into play. This means, for income tax purposes, a "transfer" has occurred, even if the sale deed hasn't been registered. The date of the transfer would generally be the date on which possession was handed over, or the date of the agreement fulfilling Section 53A requirements, whichever is later.

Implications of Clause (v):

• Capital Gains Tax Liability: The seller becomes liable to pay capital gains tax on the difference between the sale consideration and the cost of acquisition/improvement.
• Holding Period: The holding period of the asset, which determines whether the gains are short-term or long-term, is calculated from the date of acquisition to the date of transfer (i.e., the date when possession was given).
• Indexed Cost of Acquisition: The benefit of indexation (adjusting the cost of acquisition for inflation) is available until the date of transfer under clause (v).

Clause (vi): Enabling Enjoyment of Immovable Property

Clause (vi) is broader than clause (v) and encompasses transactions that, in effect, transfer the enjoyment of immovable property. This clause is designed to capture transactions that might be structured to avoid the strict requirements of a sale but achieve the same result: giving someone the right to use and enjoy the property as if they were the owner.

Key Aspects of Clause (vi):

• Broader Scope: It covers a wider range of transactions than Clause (v), including those involving co-operative societies, companies, associations of persons, agreements, or arrangements.
• Emphasis on Enjoyment: The key element is whether the transaction "has the effect of transferring, or enabling the enjoyment of, any immovable property." This means the focus is on the practical outcome, not just the legal form.
• Examples:
  • Becoming a member of a co-operative society that owns a building, thereby acquiring the right to occupy a flat.
  • Acquiring shares in a company that owns land, where the shareholding gives the right to use a portion of that land.
  • Entering into an agreement that grants exclusive rights to use and enjoy a property for a significant period, even if legal ownership remains with someone else.
• Transfer of Development Rights: Even the transfer of development rights can constitute a transfer under clause (vi) as this could be enabling the enjoyment of the property.

Implications of Clause (vi):

Similar to clause (v), when a transaction falls under clause (vi), a "transfer" is deemed to have occurred for income tax purposes, triggering capital gains tax liability for the transferor.

• Capital Gains Tax: The person transferring the right to enjoyment is liable to pay capital gains tax.
• Valuation: Determining the "sale consideration" can be challenging under clause (vi). It may involve valuing the membership fee, the value of the shares, or the consideration paid under the agreement that enables enjoyment.
• Intention: Courts often consider the intention of the parties involved to determine whether the transaction was designed to transfer the enjoyment of the property.

Distinguishing Between Clause (v) and Clause (vi)

While both clauses deal with situations where possession or enjoyment of a property is transferred without a registered sale deed, there are key differences:

Case Laws and Judicial Interpretations

Several case laws provide further clarification on the application of clauses (v) and (vi):

• CIT v. Balbir Singh Maini (2017) 398 ITR 531 (SC): This landmark case emphasized that for clause (vi) to apply, the transaction must have the effect of transferring or enabling the enjoyment of immovable property. The Supreme Court held that merely entering into a Joint Development Agreement (JDA) does not automatically constitute a transfer under clause (vi) unless the developer is given the right to possess and enjoy the property.
• Chaturbhuj Dwarkadas Kapadia v. CIT (2003) 260 ITR 491 (Bom): This case highlighted the importance of considering the intent of the parties and the surrounding circumstances to determine whether a transaction falls under clause (vi).
• Pradeep Kumar Malhotra v. CIT (2011) 336 ITR 449 (Del): This case illustrated the application of clause (v) in a situation where possession was given under a sale agreement, and the buyer had performed their part of the contract. The court held that a transfer had occurred, even though the sale deed was not registered.

These case laws underscore the need for a case-by-case analysis, considering the specific facts and circumstances of each transaction, to determine whether a transfer has occurred under clauses (v) or (vi) of Section 2(47).

Practical Considerations and Precautions

• Documentation is Key: Maintaining detailed records of all transactions, agreements, and payments is crucial for establishing the facts and defending against potential tax liabilities.
• Professional Advice: Consulting with a tax advisor or legal professional is recommended before entering into transactions involving immovable property, especially when possession or enjoyment is being transferred without a formal sale deed.
• Registration: While these clauses operate even in the absence of registration, registering the sale deed provides legal certainty and avoids potential disputes in the future.
• Valuation Challenges: Determining the "sale consideration" under clause (vi) can be complex. Obtaining a valuation report from a qualified professional may be necessary.

Conclusion

Clauses (v) and (vi) of Section 2(47) are vital provisions in the Income Tax Act that broaden the scope of "transfer" to include situations where possession or enjoyment of immovable property is transferred without formal legal ownership. Understanding these clauses, their connection to Section 53A of the Transfer of Property Act, and relevant case laws is crucial for ensuring compliance with income tax regulations and avoiding potential tax disputes. Careful planning, meticulous documentation, and professional advice are essential when dealing with transactions involving the transfer of possession or enjoyment of immovable property. These clauses are especially relevant in today's real estate market where Joint Development Agreements, transfer of development rights and other nuanced transactions are gaining popularity. A clear understanding of the implications of these clauses is therefore essential for all stakeholders.