When an immovable property is transferred, the date of such transfer becomes critical for various reasons. The first issue to be considered is whether the transfer has taken place in a financial year and, therefore, capital gains become chargeable under section 45 of the Income-Tax Act, 1961 in such year. The second reason for the date being important is to find out whether the asset transferred is long-term in nature. In case, capital gains have to be invested within a specified time for securing exemption, the issue of date of transfer again becomes relevant.
Section 45 is the charging section in regard to capital gains. It lays down that any profits or gains arising from the transfer of a capital asset effected in the previous year will be deemed to be the income of the previous year in which transfer takes place. The section applies in the following circumstances:
(a) Transfer of a capital asset is effected in the previous year,
(b) Resultant profits or gains arise from such transfer,
(c) Profits or gains would constitute the income of the assessee who is the transferor, and
(d) Such gains are deemed to be the income of the previous year in which the transfer has taken place.
The expression used is ?arising? which is not to be equated with the expression ?received?. Both these expressions and the expression ?accrue? are used in the Act either collectively or separately according to the context and the nature of charging provision. The second point which deserves notice is that by a deeming provision, the profits or gains that have arisen would be treated as the income of the previous year in which the transfer takes place. The legal position does not admit of any doubt that the actual receipt of the entire sale consideration during the year of transfer is not necessary for the purpose of computing capital gains.
The other crucial provision is section 2(47) which contains the definition of the term ?transfer? in relation to a capital asset. It is an inclusive definition, which takes within its fold not only the transfers that are recognised or understood under the general law governing the transfer of property but also other transactions that are alien to the normal concept of transfer. The definition of ?transfer? was widened with effect from April 1, 1988. Two sub-clauses (v) and (vi) were added to the inclusive definition of transfer which pertain to transactions in immovable property.
The purpose of introducing sub-clause (v) in conjunction with sub-clause (vi) was to widen the net of taxation so as to include transactions that closely resemble transfers but are not treated as such under the general law. In order to be ?transfer? within the meaning of sub-clause (v), there must be a transaction under which the possession of immovable property is allowed to be taken or allowed to be retained. Secondly, such taking or retention of possession is a facet of the equitable doctrine of part performance of contract falling within the scope of section 53-A of the Transfer of Property Act, 1882. Section 53-A is not a source by which title to immovable property could be acquired but it only serves as a shield to defend one?s lawful possession obtained pursuant to a contract for transfer of immovable property for a consideration.
There is no doubt that the agreement to transfer the entire right, title and interest of the owners for a consideration specified in the agreement and in accordance with the terms thereof answers the description of a contract falling within the scope of section 53-A of the Transfer of Property Act. The critical question then arises – at what point of time had the transaction allowing the taking of possession in part-performance of such contract taken place? Incidentally it raises the question as to how the expression ?transaction? is to be understood.
One view that could possibly be taken is that the execution of the agreement under the terms of which the purchaser is enabled to take possession even before the execution of conveyance deed is itself the ?transaction? contemplated by section 2(47)(v). It is enough if the agreement/contract falling within the description of section 53-A provides for taking possession at some stage before the ownership is transferred in a manner known to law. This interpretation has no doubt the merit of certainty.
Possession is an abstract concept. It has different shades of meaning. It is variously described as ?a polymorphous term having different meanings in different contexts? and as a word of “open texture”. On a fair and reasonable interpretation and on adopting the principle of purposive construction, it can be said that possession contemplated by sub-clause (v) need not necessarily be the sole and exclusive possession. So long as the transferee is, by virtue of the possession given, enabled to exercise general control over the property and to make use of it for the intended purpose, the mere fact that the owner has also the right to enter the property to oversee the development work or to ensure performance of the terms of agreement does not introduce any incompatibility.
The concurrent possession of the owner, who can exercise possessory rights to a limited extent and for a limited purpose and that of the buyer/developer, who has general control and custody of the land, can very well be reconciled. Section 2(47)(v) will have its full play even in such a situation. There is no warrant to postpone the operation of sub-clause (v) and the resultant accrual of capital gains to a point of time when the concurrent possession will become exclusive possession of developer/ transferee after he pays the full consideration.
Further, if ?possession? referred to in sub-clause (v) is to be understood as exclusive possession of the transferee/ developer, the very purpose of the amendment expanding the definition of ?transfer? for the purpose of capital gains may be defeated. The reason is this: the owner of the property can very well contend that the developer will have such exclusive possession in his own right only after the entire amount is paid to the owner. There is then a possibility of staggering the last instalment of a small amount to a distant date when the entire building complex gets ready.
Further, what is stated in section 2(47)(v) is the ?transaction? which involves allowing the possession to be taken. By means of such transaction, a transferee like a developer is allowed to undertake development work on the land by assuming general control over the property in part performance of the contract. The date of that transaction determines the date of transfer. The actual date of taking physical possession is not relevant.
The ascertainment of such date, if called for, leads to complicated inquiries, which may frustrate the objective of the legislative provision. It is enough if the transferee has, by virtue of that transaction, a right to enter upon and exercise acts of possession effectively pursuant to the covenants in the contract. That tantamount legal possession.
To summarise, where the agreement for transfer of immovable property does not provide for immediate transfer of asset, the date of entering into the agreement may be considered to be the date of transfer within the meaning of section 2(47). To attract section 2(47), it is not necessary that the entire sale consideration up to the last instalment should be received by the seller.
The author is advocate, Supreme Court