Clause (v) and (vi) Part Performance Under Transfer in Relation to a Capital Asset

Clause (v) and (vi) Part Performance Under Transfer in Relation to a Capital Asset Under Income Tax in India

Understanding the implications of transfer of capital assets under the Income Tax Act, 1961 is crucial for both taxpayers and tax professionals. Specifically, clauses (v) and (vi) of Section 2(47) of the Act define certain transactions as "transfer" that might not ordinarily be considered as such. These clauses relate to part performance of a contract and cooperative societies, respectively, and their interaction with capital assets demands careful attention. This article delves into the intricacies of these clauses, providing a comprehensive understanding of their application and implications under Indian law.

Defining "Transfer" under Section 2(47) of the Income Tax Act

Before exploring clauses (v) and (vi), it's essential to understand the definition of "transfer" under Section 2(47). This section outlines various scenarios that constitute a transfer of a capital asset for the purpose of income tax. These include:

Sale, exchange, or relinquishment of the asset: These are straightforward transfers involving a change in ownership.
Extinguishment of any rights therein: This covers situations where rights in an asset are extinguished, leading to a transfer.
Compulsory acquisition thereof under any law: Acquisition of an asset by the government or other authorities under legal provisions constitutes a transfer.
Conversion of the asset into stock-in-trade: When a capital asset is converted into stock-in-trade, it's treated as a transfer.
Any transaction allowing the possession of any immovable property to be taken or retained in part performance of a contract referred to in Section 53A of the Transfer of Property Act, 1882 (clause (v)).
Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property (clause (vi)).
Any transaction involving the allowing of taking possession of or enjoyment of any immovable property in pursuance of a power of attorney (clause (viia)).
Any transfer of a capital asset in a scheme of reverse mortgage referred to in clause (ea) of section 47 (clause (viii)).

Clauses (v) and (vi) are of particular interest because they broaden the scope of "transfer" beyond the conventional understanding of a sale deed or other formal conveyance.

Clause (v): Part Performance of a Contract and Section 53A of the Transfer of Property Act

Clause (v) specifically addresses transactions that allow the possession of immovable property to be taken or retained in part performance of a contract, as defined under Section 53A of the Transfer of Property Act, 1882. This provision is crucial for understanding the tax implications of incomplete property transactions.

Section 53A of the Transfer of Property Act: Doctrine of Part Performance

Section 53A provides protection to a transferee (buyer) who has taken possession of immovable property based on a written contract for transfer, even if the formal sale deed hasn't been executed. The key conditions for invoking Section 53A are:

A Written Contract: There must be a valid contract for the transfer of immovable property, in writing, signed by the transferor (seller) or someone on their behalf.
Consideration: The contract must be for consideration (something of value).
Possession: The transferee must have taken possession of the property (or continue in possession if already in possession) in part performance of the contract.
Part Performance: The transferee must have done some act in furtherance of the contract. This could include paying part of the purchase price, making improvements to the property, or any other action demonstrating their intention to complete the transaction.
Willingness to Perform: The transferee must be willing to perform their part of the contract.

If these conditions are met, the transferor is barred from enforcing any right against the transferee other than the right expressly provided by the contract. Essentially, Section 53A provides a shield to the transferee against eviction, even without a registered sale deed, as long as they fulfill the conditions outlined above.

Tax Implications under Clause (v) of Section 2(47)

Clause (v) of Section 2(47) states that any transaction allowing the possession of immovable property to be taken or retained in part performance of a contract referred to in Section 53A is considered a "transfer" for income tax purposes. This means that even if the legal ownership hasn't been formally transferred via a registered sale deed, the transaction is still treated as a transfer at the point when the possession is handed over under the agreement fulfilling the conditions of Section 53A.

Implications for Capital Gains Tax:

Taxable Event: The transfer triggers a capital gains tax liability for the transferor (seller) in the year in which possession is handed over.
Computation of Capital Gains: Capital gains are calculated as the difference between the sale consideration (as per the agreement) and the indexed cost of acquisition and improvement.
Holding Period: The holding period of the asset is determined from the date of acquisition to the date of transfer (i.e., the date of handing over possession). This determines whether the capital gain is short-term or long-term.
Deductions and Exemptions: The transferor can claim deductions and exemptions under sections 54, 54EC, etc., subject to fulfilling the prescribed conditions.

Practical Considerations:

Importance of Documentation: Proper documentation, including the written agreement, proof of possession, and evidence of part performance, is crucial to establish the applicability of Section 53A and clause (v).
Valuation: Determining the correct sale consideration is essential for computing capital gains. In some cases, the stamp duty valuation may be relevant.
Advance Tax: The transferor is required to pay advance tax on the capital gains arising from the transfer.

Clause (vi): Transfer Through Co-operative Societies and Similar Arrangements

Clause (vi) of Section 2(47) addresses situations where the transfer of immovable property is achieved indirectly through mechanisms such as membership in a co-operative society, company, or association of persons. This clause aims to prevent tax avoidance by disguising property transfers as membership transactions.

Scope of Clause (vi)

This clause covers any transaction (whether by becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

The key phrase here is "which has the effect of transferring, or enabling the enjoyment of, any immovable property." This broad language captures transactions that might not involve a direct transfer of ownership but effectively allow the transferee to possess and enjoy the property.

Examples of Transactions Covered under Clause (vi):

Acquiring Membership in a Co-operative Housing Society: If becoming a member of a co-operative housing society grants the individual the right to occupy a specific flat or plot, this is considered a transfer under clause (vi).
Transfer of Shares in a Company Owning Immovable Property: If the transfer of shares in a company effectively transfers the control and enjoyment of immovable property owned by the company, it falls under this clause.
Agreements for Transfer of Development Rights: Agreements that grant development rights and enable the enjoyment of the property are also covered.
Any other Arrangement: The clause's broad language ensures that any arrangement designed to transfer the enjoyment of property, regardless of its form, is treated as a transfer.

Tax Implications under Clause (vi) of Section 2(47)

Similar to clause (v), clause (vi) triggers a capital gains tax liability for the transferor in the year in which the transaction is completed.

Implications for Capital Gains Tax:

Taxable Event: The transaction that effectively transfers the enjoyment of the immovable property triggers a capital gains tax liability.
Computation of Capital Gains: Capital gains are calculated based on the consideration received for the membership, shares, or other rights transferred, less the indexed cost of acquisition.
Holding Period: The holding period is calculated from the date of acquisition of the original asset (e.g., the plot of land by the co-operative society) to the date of transfer of the membership or shares.
Deductions and Exemptions: The transferor may be eligible for deductions and exemptions under sections 54, 54EC, etc., if the prescribed conditions are met.

Practical Considerations:

Valuation of Membership/Shares: Determining the fair market value of membership or shares in a co-operative society or company can be challenging and may require professional valuation.
Documentary Evidence: Proper documentation of the transaction, including membership agreements, share certificates, and transfer deeds, is crucial for tax compliance.
Advance Tax: The transferor is responsible for paying advance tax on the capital gains arising from the transfer.

Distinguishing Between Clause (v) and Clause (vi)

While both clauses (v) and (vi) relate to the transfer of immovable property, they operate in different contexts:

Clause (v) deals with part performance of a direct contract for the sale of immovable property. It applies when the buyer takes possession of the property under a written agreement, even if the formal sale deed hasn't been executed. Section 53A of the Transfer of Property Act is central to this clause.
Clause (vi) deals with indirect transfers of immovable property through membership in a co-operative society, company, or other association of persons. It focuses on transactions that effectively transfer the enjoyment of the property, even without a direct sale.

In essence, clause (v) addresses incomplete direct sales, while clause (vi) targets indirect transfers disguised as membership transactions.

Conclusion

Clauses (v) and (vi) of Section 2(47) of the Income Tax Act play a crucial role in determining the taxability of transactions involving immovable property. They broaden the definition of "transfer" to include situations where the legal ownership hasn't been formally transferred but the possession or enjoyment of the property has been effectively passed on. Understanding these clauses is essential for taxpayers and tax professionals to ensure accurate reporting and compliance with income tax laws. Proper documentation, accurate valuation, and timely payment of taxes are critical aspects of managing the tax implications of these types of transactions. Consulting with a tax advisor is always recommended to navigate the complexities of these provisions and ensure compliance with the law.