Introduction
Facts
Applicable law
Decision
Comment
Introduction
There has been an increasing trend in India for transfers of immovable property to be concluded without the execution of formal instruments of transfer in compliance with mandatory provisions of law. These transactions usually involve a transferor simultaneously executing some or all of the following:
- a contract for transfer recording the terms of a proposed transfer;
- a side letter or affidavit recording completion of the transfer, payment of the agreed price and possession;
- a power of attorney favouring the transferee or his or her nominees, containing detailed powers to manage, deal with and transfer the property; and
- a will bequeathing the property to the transferee, or his or her nominees.
A transaction of this nature was the subject of a petition filed before the Supreme Court of India.(1) Treating this as a basis for considering the wider and more serious issues involved, the Supreme Court recently passed an order in the petition, containing detailed observations on clandestine transactions generally.
Facts
Suraj Lamp & Industries Private Limited claimed that in 1991 it had acquired land at Gurgaon, Haryana under an agreement for sale, general power of attorney and a will. Suraj later orally agreed to sell part of the land. However, the prospective transferee surreptitiously obtained from the original owners a registered general power of attorney purporting to convey the land, and caused the cancellation of Suraj's power of attorney. Suraj filed a criminal complaint against the owners and the transferee, but failed to obtain substantive relief. It thereafter applied for information on the status of the complaint under the Right to Information Act 2004. However, being unsatisfied both with the response and with orders subsequently passed in a writ petition that it filed before the High Court of Punjab and Haryana in respect of its right to information application, Suraj filed the petition.
The Supreme Court passed interim orders in the petition, commenting on the ill-effects of clandestine transactions, and directed the central government and certain state governments to consider the extent and effect thereof and the steps taken (or proposed) to deal with them. After receiving responses, it passed the order, which will serve as a basis for its final order in Suraj's case.
Applicable law
Before dealing with the order, it is necessary to outline the following provisions of law.
The Transfer of Property Act 1882 provides that an inter vivos transfer of immovable property valued at more than Rs100 must be effected by a registered instrument of transfer, coupled with delivery of possession. In addition, the Indian Registration Act 1908 mandates compulsory registration of documents creating, declaring, assigning, limiting or extinguishing, immediately or in future, any right, title or interest, whether vested or contingent, with a value in excess of Rs100 to or in property. A non-registered document will not affect the property and will be inadmissable as evidence.
The Transfer of Property Act recognises the concept of 'part performance' of a contract of sale - that is, if a prospective transferee enters into possession of all or part of the property, in part performance of the contract, and carries out some act in furtherance thereof, the transferee can protect such possession, although title does not pass. Such contract must be registered.
Indian law does not recognise 'living wills' - that is, a will operating only on the death of its author.
Registration of a will is not compulsory. Certain instruments, including those recording sales, gifts, leases and mortgages, attract stamp duty (a state tax) and registration charges, which are usually a percentage of the value of the property transferred. Stamp duty rates vary from state to state and can be as high as 12.5% on an instrument of sale. Non-payment of stamp duty is usually a prosecutable offence and attracts penalties or interest, recoverable as arrears of land revenue, or by attachment. Non-stamped documents are inadmissible in evidence. A power of attorney is generally revocable and is the creation of an agency. However, given in a commercial transaction for consideration, it may be held to be irrevocable. Some states therefore equate, for the purpose of stamp duty, powers of attorney that have been granted to unrelated parties and contain powers of sale or development of property with instruments of sale.
Decision
The Supreme Court, in describing the method employed in clandestine transfers, commented that they are principally undertaken to:
- avoid prohibitions or conditions on transfer including transfer charges or premiums;
- avoid stamp duty and registration charges;
- avoid capital gains taxes on transfer; and
- invest unaccounted money.
Based on its observations and the applicable law, the Supreme Court broadly held as follows:
- Other than a part performance contract, a contract for sale does not create an interest in, or charge on, a property and will not confer title or interest.
- A power of attorney is not an instrument of transfer with respect to any right, title or interest in property, and even if it is irrevocable, it does not transfer title.
- Immovable property can be lawfully transferred only by registered instrument of transfer.
- Such transfers cannot be recognised or relied upon, or be a basis for transfer by municipal or revenue authorities.
However, the Supreme Court clarified that its observations do not affect the validity of agreements or powers of attorney executed in the course of genuine transactions, including the development rights granted to developers under appropriate agreements coupled with powers of attorney. Passing of title must, however, be effected under a stamped and registered instrument.
Comment
Although, while the order is a welcome step, it may not entirely curtail clandestine transactions, as they are resorted to primarily for financial considerations and not necessarily because of a lack of understanding of law. In the long term, while laws should be reviewed and strengthened, states that impose higher stamp duty, and government and public corporations or authorities that levy substantial transfer premiums and/or stipulate onerous transfer restrictions, should review and relax them. This progressive approach would further encourage compliance, which, in turn, would:
- facilitate a robust due diligence process;
- safeguard good-faith purchasers who would ordinarily have no notice of prior rights arising from clandestine transactions; and
- perhaps generate greater revenue by increasing the number of legitimate transactions.
For further information on this topic please contact Viren Miskita or Mani M Miskita at MT Miskita & Company by telephone (+91 22 2204 4238), fax (+91 22 2282 8456) or email ([email protected] or [email protected]).
Endnotes
(1) Suraj Lamp & Industries Private Limited v State of Haryana, 2011(6) ALT1 (SC).