Supreme Court clarifies rules on transfer of immovable property - International Law Office

International Law Office

Litigation - India

Supreme Court clarifies rules on transfer of immovable property

February 14 2012

Introduction
Facts
Decision
Comment


Introduction

In Suraj Lamp & Industries Pvt Ltd v State of Haryana(1) the Supreme Court of India recently observed that it has become common practice to effect transfers of immovable property by way of either general power of attorney (GPA) sales or sale agreement, GPA or will transfers in order to evade, among other things, the payment of duties, taxes and other fees payable on transfer and registration (eg, stamp duty or registration fees).

Although it held that such transactions are illegal and cannot be recognised as valid under law, the Supreme Court further sought to distinguish these illegal transactions from genuine transactions entered into by parties in good faith. While referring to Sections 53A and 54 of the Transfer of Property Act and its decisions in Narandas Karsondas v SA Kamtam(2) and Rambhau Namdeo Gajre v Narayan Bapuji Dhotra,(3) the Supreme Court further observed that a transfer of immovable property by way of sale can be effected only by a deed of conveyance. In the absence of a deed of conveyance (which must be duly stamped and registered as required by law), no right, title or interest in an immovable property can be transferred. The court further dealt with the importance of registering documents that record transactions of sale or transfer and the need for all states to take steps to curb malpractice, thereby reducing the circulation of unaccounted wealth (or 'black money') in society.

Facts

The petitioner, a public limited company based in Haryana, had bought land through a power of attorney. The owner subsequently tried to transfer the same property by another power of attorney deed. This led to the institution of criminal proceedings and an application to the government under the Right to Information Act.

In order to formulate rules to curb misuse of the power of attorney mode in the sale of immovable property, the Supreme Court had summoned, among others, the chief secretaries and revenue secretaries of Delhi, Haryana, Punjab and Uttar Pradesh to provide their views and suggestions on the case before the court.

Earlier order
Through an earlier order dated May 15 2009,(4) the Supreme Court had noted how sale agreement, GPA and will transfers are widely misused for effecting the transfer of immovable property in order to:

  • avoid prohibitions or conditions regarding certain transfers;
  • avoid the payment of stamp duty and registration charges on deeds of conveyance;
  • avoid the payment of capital gains on transfers;
  • invest black money; and
  • avoid the payment of 'unearned increases' due to the development authorities on transfer.

While referring to this order, the court stated that persons who resort to such practices include:

  • vendors with imperfect title;
  • purchasers that do not wish to disclose such transfer in public records; and
  • purchasers that seek to avoid the payment of stamp duty.

The adverse consequences of such transactions include:

  • the evasion of taxes and duties and loss of revenue for the government;
  • the circulation of black money and growth of corruption; and
  • the rise of a real estate 'mafia' and criminalisation of real estate transactions.

Another disadvantage of such transactions is that title verification and certification becomes tough, leading to problems for good-faith purchasers and consequent litigation.

Observations
The Supreme Court observed that measures taken by states in order to curb these practices included:

  • the amendment of the Registration Act 1908, to require the registration of documents that contain a contract to transfer for consideration (eg, agreements of sale) relating to any immovable property for the purpose of Section 53A of the Transfer of Property Act; and
  • the amendment of the stamp laws, to subject agreements of sale with delivery of possession and/or irrevocable powers of attorney, in favour of non-family members authorising a sale, to the same stamp duty as deeds of conveyance.

However, while these measures have succeeded to some extent, they have not addressed the larger issues relating to black money and the real estate mafia. The court further noted that the state of Haryana has even reduced the rate of stamp duty in order to encourage people to comply with the laws.

While observing the invalid and uncertain nature of such transactions, the court emphasised the advantages of registering a document. It stressed that the registration of documents makes the process of verification and certification of title easier. It further observed that registration of documents also reduces disputes and litigation, to a large extent.

In respect of agreements of sale, powers of attorney and wills, the court referred to various provisions of the Transfer of Property Act, the Registration Act and the Stamp Act to define the essentials of a valid transfer, the liability to pay stamp duty and the obligation to get a transfer deed registered.

Agreements of sale
The court observed that Section 54 of the Transfer of Property Act makes clear that a contract of sale does not itself create any interest in or charge on such property. The Supreme Court has reiterated the settled position of law in this regard - any contract of sale (or agreement to sell) that is not a registered deed of conveyance or deed of sale will fall short of the requirements of Sections 54 and 55 of the Transfer of Property Act, and will therefore confer no title and transfer no interest in an immovable property (except to the limited right granted under Section 53A of the Transfer of Property Act). According to the Transfer of Property Act, an agreement of sale - whether with or without possession - is not a conveyance.

Powers of attorney
It was further observed that a power of attorney cannot be construed as an instrument of transfer in regard to any right, title or interest in an immovable property. Instead, the power of attorney is creation of an agency, whereby the grantor authorises the grantee to perform the acts specified therein, on behalf of grantor and which, when executed, will be binding on the grantor as if carried out by him or her. However, it was clarified that an attorney holder can execute a deed of conveyance in exercise of the power granted under the power of attorney and convey title on behalf of the grantor.

Wills
The court observed that a will is the testament of the testator and is not a transfer inter vivos. The two essential characteristics of a will are that:

  • it comes into effect only after the death of the testator; and
  • it is revocable at any time during the lifetime of the testator.

Due to its revocable nature, even registration of a will does not make it any more effective.

Decision

The Supreme Court held that sale agreement, GPA and will transfers do not convey title and do not amount to a transfer of immovable property. The court further held that such transactions cannot be recognised as a valid mode of transfer of immovable property. However, while the Supreme Court held such transactions to be invalid, it also clarified that such observations were in no way intended to affect the validity of sale agreements and powers of attorney executed in genuine transactions.

The Supreme Court therefore held that sale agreement, GPA and will transfers do not convey any title or create any interest in immovable property. The court overruled the observations of the High Court of Delhi in Asha M Jain v Canara Bank(5) insofar as the high court recognised or accepted that such transfers could be considered concluded transfers.

The Supreme Court further held that immovable property can be legally and lawfully transferred or conveyed only by a registered deed of conveyance. Therefore, since sale agreement, GPA and will transfers do not convey any title, they do not amount to transfers. Such transfer documents cannot be recognised as deeds of title, except under the limited extent of Section 53A of the Transfer of Property Act.

However, in order to avoid hardship for parties that have already effected such transfers, the Supreme Court clarified that these could continue to be treated as existing agreements of sale. The affected parties could acquire registered deeds of conveyance for completing valid transfers. It was further held that sale agreement, GPA and will transfers could also be used to obtain specific performance or to defend possession under Section 53A of the Transfer of Property Act. The Supreme Court also clarified that this decision would not disturb any actions taken by the municipal and development authorities based on documents of such transactions. Lastly, it also clarified that any genuine or good-faith transactions would not be invalidated by this decision.

Comment

This judgment confirms that a valid transfer of immovable property can occur only through a registered deed of conveyance. As a consequence, all buyers that have purchased property through sale agreement, GPA and will transfers must now perfect their title of ownership by paying the appropriate stamp duty and registration fees. Otherwise, the rights of such buyers to further transfer or sell the immovable property in future will be adversely affected. This judgment also clarifies the position taken by the various high courts.

Although this judgment is the correct way forward, as it seeks to curb corruption and the circulation of black money, the Supreme Court has provided no guidelines as to the regulation of sale agreement, GPA and will transfers. The success in implementation and practical implications of this pronouncement will become evident only with time.

For further information on this topic please contact Kirat Singh Nagra or Tanuj Bhushan at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (kirat.nagra@amarchand.com or tanuj.bhushan@amarchand.com).

Endnotes

(1) SLP (C) 13917/2009.

(2) (1977) 3 SCC 247.

(3) (1967) 1 SCR 293.

(4) 2009 (7) SCC 363.

(5) 94 (2001) DLT 841.


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