What is the difference between a selling agreement and a final payment?
When selling an immovable property, two kinds of agreements are often made: an agreement for sale and a sale document or sale agreement. According to registration legislation, the agreement for sale must be stamped and registered. There might be a lag between the date of registration and the date of completion of the transaction. It is often assumed that when an agreement is registered, the rights to the property are immediately moved from the vendor to the purchaser. This impression, though, may not always be correct. The Bombay High Court has addressed this issue in the matter of The Principal Commissioner of Income Tax-25 Vs M/s Talwalkars Fitness Club, pronounced on October 29, 2018.
Sale agreement versus final payment: Income Tax Tribunal ruling
M/s Talwalkars fitness club decided to sell an apartment for Rs 2.2 crores and got a Rs 20 lakh advance as part of the arrangement. The sale agreement was signed and registered on February 14, 2011. The agreement stated that the sale/transfer will enter into force upon payment of the entire value of Rs 2.2 crores. The last payment was due by May 26, 2011, i.e., in the next fiscal year, according to the agreement’s payment conditions. The Income Tax Department considered the date of registration of the property to be the time of transfer and, as a result, taxed the capital appreciation in the evaluation year 2011-2012. The case was heard by the Income Tax Tribunal.
The Income Tax Tribunal concluded after reading the agreement in its totality that the sale or transfer was not completed on the date of execution of the agreement and that the transfer of the property occurred when the balance payment was made and possession was passed over to the buyer, which occurred during the fiscal year 2011-2012. As a result, the capital gains were taxable in the assessment year 2012-2013 rather than from the assessment year 2011-2012, as the auditor general had performed improperly. The tribunal further noted that the registered agreement was a purchase agreement rather than a selling agreement.
Implications of the Bombay High Court judgement on capital gains calculation and income tax
The Bombay High Court’s judgement has far-reaching repercussions for the taxation of capital gains on property sales. This choice has no bearing on the year in which the gains from the sale of a specific property become taxable, as long as the dates of registration and final transfer occur within the same fiscal year. It may, therefore, have ramifications for calculating the duration for which a certain item was held by the seller on the date of sale/transfer.
It should be emphasised that just because the entire compensation is not obtained does not result in the transfer of ownership. Other terms and restrictions may be placed on the buyer and seller to complete the transaction. If the vendor agrees to regard the sale consideration as a loan to the buyer, and no other requirements are required to be met, the date of agreement and registration will be considered the date of transfer, and further repercussions will follow.
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