Written in : May 1998

You enter into an agreement to sell your property to another person. The 'buyer' is often a speculator who is interested in making money in the short term by holding on to the property for some time and selling it away to another interested party for profit. Since he is not an investor, he is not keen to have the property legally transferred in his name. This will entail huge stamp duty and registration charges. He, therefore, suggests that he pays the entire consideration to you, takes possession of the property and perhaps a power of attorney from you to transfer the property to anyone of his choice. Since you have received the entire consideration, it is okay by you whether he gets the property conveyed in his name or not. Besides, you would have another advantage of postponing capital gains if transfer is to take place only on execution and registration of the sale deed. The property then gets transferred in fact, but in law remains in your name with the buyer holding only a power of attorney. It is not uncommon that property remains held under a mere agreement to sell with or without a power of attorney for years together without a sale deed being executed.

Government felt that this has led to much avoidance of tax - both of stamp duty and registration charges for the state government and of income tax for the centre. Both governments, therefore, amended their respective laws to plug such holes.

You owned an asset which you have agreed to introduce as your capital in a partnership which you have agreed to join with some other persons. On your introduction of the asset into the firm, it stops being your property and the firm owns it. When you so introduce an asset into the partnership, you receive no consideration but a share in the firm. This, however, is not a direct consideration for the asset. As such, there would be no capital gains levied in your hands. Moreover, after such introduction if you had retired from the firm there again was no transfer of the asset - it remained with the firm. This was the legal position a few years back which led many people to enter into partnerships, even if not real, and then retire later on. Capital gains tax got avoided legally and surely.

Stamp and Registration laws were amended to ensure that people don't get away without paying duties merely on agreement and powers of attorney. This has led to substantial amendments which harm many a genuine transaction. Sometime during the course of our discussion, I intend to take up and discuss these amendments in some detail.

Tax laws were amended to artificially extend the meaning of the term transfer. Transfer, therefore, now also means allowing possession of property in part performance of a contract. What does this really mean?

It does cover the transaction we discussed in the example above where the buyer pays the entire consideration and takes over possession of the property. But it does not cover every case where possession is given.

This law of possession in part performance of contract originates in transfer of property law. That law can loosely be explained like this. You enter into a written agreement to sell immovable property to someone. The buyer takes possession of the property as a part of the agreement. The buyer has paid the consideration or has performed his part of the contract, or is willing to pay or perform his part. In such an event, for all practical purposes so far as you are concerned, he is the virtual owner. You are not allowed to put up claims against him with respect to the property.

So far as our issue is concerned, we need to understand two issues. One is that the possession should be taken by the buyer in part performance of the agreement. (If he is already in possession, say as a tenant, he should retain it as a buyer.) Then he should have fulfilled his part of the agreement. This is often payment of consideration. If he has not fulfilled his part of the agreement, he should unconditionally be willing to do so.

Once these two conditions are fulfilled, delivery of possession will be considered to be 'transfer' for tax laws. Even if all other conditions of the agreement are not fulfilled. Even if the sale deed has not been executed and registered. Otherwise, mere delivery of possession will not result in transfer.

Now, does the property get transferred in development agreements? This depends, to a very, very large extent, on how the agreement is structured and drafted. Extraordinary care should go into this to ensure that the expected objectives are met.

According to another extension, transfer means any transaction resulting in transferring, or enabling the enjoyment of immovable property. This may be by way of becoming a member or taking shares in a society, company etc or by way of any agreement or arrangement or in any other manner.

This is to cover up cases where transfer of property is done by transferring shares or rights in companies, societies etc. For instance, it is quite common that apartments or houses are owned by societies or companies and shareholders have the right to occupy and enjoy them. Such shareholders do not own the property but only shares. The shares can be transferred from one person to another by registering them with the company or society. This does not result in direct transfer of property but only indirectly. This extended definition also now makes sure that such indirect transfers result in payment of capital gains tax.

However, it must be remembered that transfer or enjoyment of property by the buyer should be as an owner and not otherwise, say as a tenant or licensee

These definitions ensure that most transactions do get covered by transfer and result in payment of capital gains.

In development and property deals, it is structuring the agreement and drafting the documents that is very critical. It is just not enough that you take into consideration merely (non-tax) legal issues.

Tax should be a major consideration.

There is no escape if you want to avoid unexpected tax consequences which are quite heavy in such deals. By good and careful structuring agreements and drafting the documents it should be possible for you to minimise tax and time it such that you are comfortable in paying them.

For example, you give property on development and are to receive the consideration as built up area which you wish to sell. All this may easily take two to three years. Only after that will you have the liquidity to pay taxes. If enough care is taken in structuring the agreement and drafting the documents, it should be possible for you for capital gains to be payable only in the year when you have liquidity and not before. But, being careless and negligent can as well have capital gains accrue immediately when you do not have the money to pay it.

The importance of tax as a major issue in land deals can never be over emphasised