SC rules property transfers done through Power of Attorney won't be valid

To save on stamp duty and registration charges, many individuals, for decades, have sold their properties by giving an irrevocable Power of Attorney (PoA) to the buyer, instead of registering a sale deed. However, the Supreme Court has ruled that property transfers done through a PoA, Will, or sale agreement will not be considered a valid mode of transfer.

The judgment has a bearing on both buyers and sellers. “If someone buys a property from a person with PoA, the earlier owner will still be considered the title holder,” says Atul Pandey, partner, Khaitan & Co. 

Going by the judgement, if the PoA holder resells the property to someone else, the transfer will actually be between the original owner and the new buyer.

Transactions done after the court ruling have raised questions on who will pay the tax if the PoA holder further transfers the property to someone else. If property sale through the PoA route is not valid, then will the tax liability fall on the original owner when the PoA holder resells it? “In such cases, the original seller would have paid income tax on gains arising out of the sale of property. He won’t need to pay again,” says Naveen Wadhwa, a chartered accountant with Taxmann.com. He further explains: “When the original owner would have sold the asset, the PoA holder would have received some rights under the Income Tax Act, such as the right to use or the right of possession. The PoA holder (an assessee) has to pay tax on transferring such rights.” In such scenarios, one has to see the facts of the case, he adds.  

But, in a recent case, an income tax tribunal held that the PoA could not be construed as an instrument of transfer concerning any right, title, or interest in the immovable property. It, therefore, ruled that the original owner, who has the PoA, would be liable to pay tax. 

An individual holding the PoA executed a sale deed to his daughter. He did not offer to pay capital gains when filing his income tax returns. The assessing officer said this was a sale from the assessee to his daughter, as he was not only the PoA holder but also the owner of the property. He was liable to pay tax on capital gains arising from the transaction. 

The PoA holder contended that he was not liable to pay tax, as he is not the owner of the property. 

He added that he did not receive any money in the transaction. According to him, the buyer (his daughter) had paid Rs 8.4 lakh to the original property owner in the year 1994 when the property was sold.  

He only executed the sale deed on her behalf much later, based on his PoA rights. 

The tribunal quoted the Supreme Court judgment and said that since the assessee is not the owner of the property, capital gains cannot be taxed in his hands. 

“In this case, the PoA holder did not receive any payment. He was given the PoA to do the sale deed on behalf of his daughter. As the transaction did not involve any transfer of funds, the tribunal ruled in favour of the assessee,” says Wadhwa.

Tax experts say that even if a transaction may not be valid under the Transfer of Property Act, the income tax department will look at the funds transfer and take a call accordingly. 

“If someone has already paid capital gains on property — even if done through PoA — he won’t be liable to pay it again if the PoA holder transfers it,” says Arvind Rao, a chartered accountant as well as a Sebi-registered investment adviser and founder of Arvind Rao & Associates.