Difference Between A Selling Agreement And A Final Payment?

Selling Agreement: When is the transfer stated to be complete if there is a delay between the date of registration and the full execution of a property sale agreement? We look at a Bombay High Court judgement and its ramifications for property owners.


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When selling an immovable property, two types 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 execution of the agreement. It is often assumed that when an agreement is registered. The rights to the property are automatically transferred from the vendor to the purchaser. This perception, however, is not always 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, decided on October 29, 2018.


Sale agreement versus final payment: Income Tax Tribunal decision

Agreement for sale versus final payment: Income Tax Tribunal Decision M/s Talwalkars fitness club agreed to sell an apartment for Rs 2.2 crores and got a Rs 20 lakh advance against the agreement. The sale agreement was signed and registered on February 14, 2011. The agreement stated that the sale/transfer will take effect 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 property’s possession was likewise to be given over upon full payment of the selling amount. According to the provisions of the agreement. The vendor was also expected to pay for upkeep and other expenses until possession was transferred. Because the dates of agreement and final payment/possession came in two distinct fiscal years. A disagreement emerged between the tax authorities and the taxpayer as to which year the profit on sale of this property would become taxable.


Selling Agreement

The Income Tax Department considered the date of registration of the property to be the date of transfer and. As a result. Taxed the capital gains in the assessment year 2011-2012. The case was heard by the Income Tax Tribunal.

The Income Tax Tribunal concluded after reading the agreement in its entirety 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 handed 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 from the assessment year 2011-2012. As the assessing officer had done incorrectly. The tribunal further noted that the registered agreement was a purchase agreement rather than a selling agreement.


Selling Agreement: Bombay High Court’s Decision

The Bombay High Court, in its decision on October 29, 2018. Concluded that the Income Tax Tribunal’s judgement was accurate and that the sale/transfer of the property in question was completed only during the fiscal year 2011-2012. The court further stated that the tribunal was correct in its determination that the agreement inked on February 14, 2011. Constituted a contract for the sale of real estate. The law at the time required that such an arrangement be registered. In any case, just because it is registered does not automatically make it a conveyance deed or a sale deed.


Selling Agreement: The impact of the Bombay High Court judgement on capital gains computation 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, however, have ramifications for calculating the duration for which a certain item was held by the seller on the date of sale/transfer. It will be the day on which all of the criteria outlined in the purchase agreement have been met.

Currently, the date of transfer as envisaged on the basis of the agreement must be taken into consideration. When classifying an immovable property as a long-term capital asset. Earnings from which are eligible for exemptions and concessional tax rates.


Selling Agreement

Similarly, there are clauses in the legislation that oblige an assessee to invest in another residential property within a certain time frame. For example. An assessee can claim exemption from long-term capital gains under Sections 54 and 54F if he purchases a residential dwelling within one year before and two years after the sale of a long-term asset. In order to qualify for the aforesaid exemption, he must also build or book a house within three years. As a result, when computing the one-year, two-year, and three-year periods. The actual date on which the assessee became the owner of the property will be significant in determining. Whether he complied with the criteria within the time specified.

Similarly, a taxpayer must keep the residential dwelling acquired with a home loan for a minimum of five years. Failing which the tax benefits obtained under Section 80 C for repayment of the principal amount of the home loan are reversed in the year in which the property is transferred.


Selling Agreement

The actual date of transfer, rather than the date of execution/registration of the agreement, will be considered here as well.

It should be emphasised that just because the entire consideration is not obtained does not result in the transfer of ownership. Other terms and restrictions may be imposed 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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