Real estate is, undoubtedly, one of the most expensive investments that you make in your lifetime. Thus, it requires associated legal knowledge, for mistakes can prove to be very costly. Besides, there are aspects related to income tax reliefs or payment of tax linked with the dates and the amount of investment in the property.
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In our earlier post, we discussed the differences between Agreement to Sale and the Sale Deed. In a similar context, there was a recent ruling by the Income Tax Tribunal and the Bombay High Court regarding what constitutes a transfer of property – the agreement to sale or the final payment.
Agreement to sale and sale deed
These are two critical agreements generally entered during a process of buying a property. The agreement to sale stands as an agreement that the transaction to sell /buy has been entered into between the buyer and seller for sale to happen. While the sale deed is executed to mark the registration of the property that occurs in favour of the buyer.
When the agreement to sale and final payment happens over two different years
There are also cases where the agreement to sale happen in one financial year, but the final payment happens in another fiscal year. There was also a prominent case involving a fitness club in Mumbai, which had agreed to sell the property in a particular financial year against an advance of an agreed sum, while the final transfer was to happen the next year on the payment of the final amount.
As both these transactions fell over different financial years, the Income Tax department and the taxpayer had different views over the taxability on the profit of the transaction.
In such cases, the Income Tax Tribunal ruled that the final payment and the execution of sale deed are actually when the transfer of property rightfully happens. The earlier agreement (if registered or not) is only an Agreement to Sale and cannot be considered as an act of actual sale. The Bombay High Court also upheld the decision passed by Income-tax Tribunal.
Further, Section 54 of the Transfer of Property Act, 1882 defines a sale as a transfer of ownership for an immovable property exceeding the value of Rs 100 can be made only using a registered document which will be the sale deed. The agreement to sell is not mandatory to be registered under the said act.
Therefore, the actual transfer of property will happen only on the execution of the sale deed and its subsequent registration by the parties involved and not just by agreeing to sell.
