Web column: SC order on Power of Attorney will improve transparency

The nullification of power-of-attorney deals will not only protect property buyers, but will also curb tax evasion and circulation of black money

A Power of Attorney (PoA) is a legal instrument through which one person (donor) gives another (attorney) the authority to act on the former's name and behalf. The attorney, in exercise of his power under such PoA, only acts in place of the donor, subject to the powers granted to him under the instrument. An attorney acts in a fiduciary capacity and cannot use the PoA for his own benefit.

However, the PoA has been excessively misused in the real estate sector, by entering into transactions, where a purchaser pays full price but instead of getting a conveyance, gets an agreement for sale/power of attorney as a mode of transfer. These transactions were entered into to avoid:

1. Prohibitions/restrictions regarding certain transfers;
2. Payment of stamp duty, registration charges on sale deeds;
3. Payment of capital gains tax on transfers;
4. Payment of unearned increase payable to development authorities on transfer.

PoA transactions also permitted investment of unaccounted money and several so-called transfers using this mechanism have involved the use of hard cash instead of cheque entries.

In October 2011, the Supreme Court ruled that immovable property can be legally transferred only by a stamped and registered deed of conveyance. Transactions in the nature of PoA sales do not convey title and do not amount to transfer, hence cannot be recognised as a valid mode of transfer of immoveable property. The courts will not treat such transactions as completed or concluded transfers. They can neither be recognised as title deeds (except to obtain specific performance or defend possession) nor be relied upon for mutations in municipal or revenue records.

However, the Supreme Court's decision will not affect the validity of sale agreements and powers of attorney executed in genuine transactions. For example, a person may enter into an agreement with a developer for developing land and, therefore, execute an agreement for sale and grant a power of attorney empowering the developer to execute agreements for the sale of apartments/plots to prospective buyers or a person may also execute a PoA favouring a family member to manage his affairs or execute sale deed.

Considering the hardship likely to be caused to a large number of people who had entered into power of attorney sales prior to the order, it was suggested that the affected parties execute and register sale deeds/deeds of assignment (in case of leasehold properties) for perfecting their title.

In April 2012, the Divisional Commissioner, Delhi passed a circular directing that no transfer of property would be effective in the absence of a duly registered sale deed and no conveyance can be executed on the basis of a PoA, a will and agreement to sell collectively or separately in respect of an immovable property. In view of the circular, all the transactions that took place in Delhi during the intervening period will become null and void.

This is a good decision as it helps curb large-scale evasion of tax, stamp duty, registration charges and discourages circulation of undisclosed money and corruption. More importantly, it facilitates title verification and certification and protects the interests of bonafide purchasers by ensuring that they get a clear and marketable title of the property that they have purchased.

The authors are Partners at J Sagar Associates, a leading law firm. Views expressed are personal