Question And Answer
Subject: Is section 54 benefit available for property bought by unregistered deed?
Category:  Income Tax
Asked by: Mukeshbhai
Answered by:
Tags:
Date: September 14, 2018
Query asked by Mukeshbhai

I bought property by unregistered deed. the AO says that title has not passed and so section 54 benefit is not available.

The residential house was transferred by the assessee vide sale deed registered on 27.12.2011.

The sale deed has been executed in pursuance of an agreement to sell which had been executed on 16.09.2011.

Out of the total sale consideration of Rs. 30 lacs, Rs. 1 lac has been received by the assessee by way of advance/earnest money (cheque dated 16.09.2011 though encashed on 21.11.2011).

When the agreement to sale has been executed a new residential flat had been purchased by the assessee on 04.10.2010 within one year from the date of agreement to sell the old asset.

Please advice with reference to the provisions of the Act and case laws.

In order to avail the benefit of section 54 of the Act, the assessee must purchase a residential house/new asset within one year before or two years after the date on which transfer of the old residential house in respect of which the long term capital gain had arisen.

As per sec. 2(47) of the Act which defines the word ‘transfer’ in relation to a capital asset it can be said that if a right in the property is extinguished by an agreement to sell, the capital asset can be deemed to have been transferred.

In the instant case, the residential house was transferred by the assessee vide sale deed registered on 27.12.2011.

The sale deed has been executed in pursuance of an agreement to sell which had been executed on 16.09.2011 and out of the total sale consideration of Rs. 30 lacs, Rs. 1 lac has been received by the assessee by way of advance/earnest money (cheque dated 16.09.2011 though encashed on 21.11.2011).

So when the agreement to sale has been executed a new residential flat had been purchased by the assessee on 04.10.2010 within one year from the date of agreement to sell the old asset.

As per sec. 2(47) of the Act which defines the word ‘transfer’ in relation to a capital asset it can be said that if a right in the property is extinguished by an agreement to sell, the capital asset can be deemed to have been transferred.

Section 2(47) of the Act defines the word ‘transfer’ is as under:

“2(47) ‘transfer’, in relation to a capital asset includes

(i)…………………….

(ii) the extinguishment of any rights therein, or …..”

In the light of the definition of ‘transfer’ as defined u/s. 2(47) of the Act it is clear that when any right in respect of any capital assets is extinguished and that right is transferred to someone, it would amount to transfer of a capital asset.

In Sanjiv Lal in Civil Appeal No. 5899-5900 of 2014 (SC), it was held that some right in respect of capital asset (old asset) in question had been transferred in favour of the vendee and, therefore, some right which the assessee had in respect of the capital asset in question had been extinguished because after execution of the agreement to sell, it would not open to the assessee to sell the property to someone else in accordance with law.

The Supreme Court held that a right in personam had been created in favour of the vendee in whose favour the agreement to sale had been executed and who had also paid Rs. 1 lac by way of advance/earnest money.

Once an agreement to sale is executed in favour of vendee, the said vendee gets a right to get the property transferred in his favour by filing a suit under Specific Performance Act and, therefore, some right in respect of the said property (old residential property) belonging to the assessee had extinguished and some rights have been created in favour of the vendee/transferee when the agreement to sale has been executed.

Thus, a right in respect of the capital asset (old residential property in question) has been transferred by the assessee in favour of the vendee/transferee on 16.09.2011 and, therefore, since purchase of the new property on 04.10.2010 the purchase of the property is well within one year from the date of transfer as per sec. 2(47) of the Act, therefore, we allow the appeal of the assessee.

An agreement to sell is an unregistered document. An unregistered document is not admissible in evidence in a suit for specific performance in the light of the provision of sec. 17(1)(a) of the Registration Act, 1908.

While an unregistered agreement to sell cannot be looked into for seeking benefit of part performance u/s. 53A of Transfer of property Act, 1882 in view of Amendment of sec. 53A by Act 48 of 2001 with effect from 24.09.2001, an unregistered agreement to sell can always be a basis for a suit for specific performance in view of sec. 49 of Registration Act.

The Hon’ble Supreme Court in the case of S. Kadevi Vs. V. R. Somasundaram 2013 (4) MPHT has held in para 11, 12 and 16 of the said decision in particular, which reads thus

“11. The main provision in Section 49 provides that any document which is required to be registered, if not registered, shall not affect any immovable property comprised therein nor such document shall be received as evidence of any transaction affecting such property.

Proviso, however, would show that an unregistered document affecting immovable property and required by 1908 Act or the Transfer of Property Act, 1882 to be registered may be received as an evidence to the contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by registered instrument.

By virtue of proviso, therefore, an unregistered sale deed of an immovable property of the value of Rs. 100/- and more could be admitted in evidence as evidence of a contract in a suit for specific performance of the contract. Such an unregistered sale deed can also be admitted in evidence as an evidence of any collateral transaction not required to be effected by registered document. When an unregistered sale deed is tendered in evidence, not as evidence of a completed sale, but as proof of an oral agreement of sale, the deed can be received in evidence making an endorsement that it is received only as evidence of an oral agreement of sale under the proviso to Section 49 of 1908 Act.

The Supreme Court also noted in K.B. Saha and Sons Private Limited v. Development Consultant Limited1, (2008) 8 SCC 564 the following statement of Mulla in his Indian Registration Act, 7th Edition, at page 189:-

“……The High Courts of Calcutta, Bombay, Allahabad, Madras, Patna, Lahore, Assam, Nagpur, Pepsu, Rajasthan, Orissa, Rangoon and Jammu & Kashmir; the former Chief Court of Oudh; the Judicial Commissioner’s Court at Peshawar, Ajmer and Himachal Pradesh and the Supreme Court have held that a document which requires registration under Section 17 and which is not admissible for want of registration to prove a gift or mortgage or sale or lease is nevertheless admissible to prove the character of the possession of the person who holds under it……”

The Supreme Court then culled out the following principles:-

“1. A document required to be registered, if unregistered is not admissible into evidence under Section 49 of the Registration Act.

2. Such unregistered document can however be used as an evidence of collateral purpose as provided in the proviso to Section 49 of the Registration Act.

3. A collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration.

4. A collateral transaction must be a transaction not itself required to be effected by a registered document, that is, a transaction creating, etc. any right, title or interest in immovable property of the value of one hundred rupees and upwards.

5. If a document is inadmissible in evidence for want of registration, none of its terms can be admitted in evidence and that to use a document for the purpose of proving an important clause would not be using it as a collateral purpose.”

To the aforesaid principles, one more principle may be added, namely, that a document required to be registered, if unregistered, can be admitted in evidence as evidence of a contract in a suit for specific performance.
……………
The Court also held that the argument with regard to Section 3(b) of 1963 Act has to be rejected.

It was held all that the said provision provides is that nothing in 1963 Act shall be deemed to affect the operation of 1908 Act, on documents.

By admission of an unregistered sale deed in evidence in a suit for specific performance as evidence of contract, none of the provisions of 1908 Act is affected; rather court acts in consonance with proviso appended to Section 49 of 1908 Act.

The Hon’ble Supreme Court has opined that when an unregistered document is tendered in evidence, not as evidence of a completed sale, but as proof of an agreement of sale, the deed can be received in evidence making an endorsement that it is received only as evidence of an oral agreement of sale under the proviso to Section 49 of the Act of 1908.

The Hon’ble Apex Court went on to observe that admission of an unregistered sale deed by the Court in such cases would be in consonance with the proviso appended to Section 49 of the Act of 1908.

This law has been followed by the Hon’ble ITAT in Gautam Jhunjhunwala Vs. Income-tax Officer, Wd-25(4), Kolkata Assessment Year: 2012-13

Accordingly, even though the agreement to sell is not registered, the vendee can seek decree of specific performance on the basis of unregistered agreement to sell in accordance to law as laid by the Hon’ble Delhi High Court in Devinder Singh Vs. Hari Singh (decision on 26.04.2017) and Hon’ble M.P. High Court in Akshay Doogad Vs. Dr. Laxmanrao Dhole (decision on 18.08.2015).

So the assessee is entitled to exemption u/s. 54 of the Act.



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3 thoughts on “Is section 54 benefit available for property bought by unregistered deed?

  1. Can someone please explain whether capital gains tax is payable when property is transferred by an unregistered sale deed. Conveyance deed is not executed.

    1. Yes capital gains is payable. Even an unregistered deed constitutes transfer u/s 2(47)(iv) and (v) if it results in the enjoyment of property.

  2. If we want to use our Long Term Capital Gains in buying an unregistered flat where agreement to sell will be executed and transfer of property will take place through builder. But the property wont be registered as builder’s some amount is due on Noida Authority.
    Can we do that to avoid capital gains?

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