Fraudulent Transfer AND PART Performance PDF

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section 53 of transfer of property act 1882...

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FRAUDULENT TRANSFER AND PART PERFORMANCE The Transfer of Property Act, 1982 came into force on the 1 st July, 1882. In the first instance it extends to whole India, except some states at the time of independent of India. Section 5 defines “transfer of property” means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons; and “to transfer property” is to perform such act. “living person includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals. “Immovable property “is defined by the act as it does not include standing timber, growing crops and gross. To describe it in more detail, immovable property includes land, buildings, hereditary allowances, rights to way, lights, ferries, fisheries or any other benefit which arises out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth. It does not include standing timber, growing crops, or grass. It includes the right to collect rent, life interest in the income of the immovable property, a right of way, a fishery, or a lease of land.

Section 53 – FRAUDULENT TRANSFERS Introduction: The object of the fraudulent transfer is to protect the creditor and subsequent transferee. Fraudulent transfer is voidable at the option of creditor and transferee. S. 53 consists of two parts. The first part is in respect of transfer of immovable property made with intent to defeat or delay the creditors of the transferor and second part is in respect of transfer with intent to defraud a subsequent transferee. The principle of section 53 is based on the rule of justice, equity and good conscience. The section enumerates fraudulent transfer. A transfer made with intention to defeat any right of the transferee or of any other person interested therein is called fraudulent transfer of property. Such transfer is not void but voidable at the option of person named.

Relevant Provisions (i) Section 53 Transfer of Property Act 1882. (ii) Cross reference Section 17 of Contract Act

Meaning of Fraud A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which shall have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

Meaning of Transfer Transfer means an act of the parties, or of law, by which the title to property is conveyed from one person to another.

Fraudulent transfer S. 53 Every transfer of immoveable property made with intent to defeat or delay creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed, and every transfer of immovable property made without consideration, with intend to defraud a subsequent transferee, is voidable at the option of such transferee. Thus, S.53 deals with two types of fraudulent transfers. As for the first rule is concerned, when the consideration for transfer and good faith on the part of transferee are present, the intention of the transferor to defeat or delay his creditor is immaterial. Thus, S.53 has a limited scope restricted to immoveable property and not to movable property. Moreover the benefit of this section is not restricted to existing creditors alone, but it extends to subsequent creditors also. This section does not make the translation void-ab-initio but only voidable and that to only at the option of any person defeated delayed or defrauded.

Under Transfer of Property act, following points are important to explain of fraudulent transfer of property.

(i) Voidable at option of Defeated or Delayed Creditor Every transfer of immovable property, which is made with intent to defeat or delay creditors of transferor, is voidable at option of any creditor, who is so defeated or delayed. For example, Bashir is indebted to Ahmad, and he attempts to sell his house, and is intentions to convert his house into cash to defeat Ahmad. And if Rasheed is aware of Bashir’s indebtness, but he purchases Bashir’s house, then such transfer is voidable at option of Ahmad.

(ii) Rights of Transfer In Good faith and for consideration Transfer of immovable property, which is made with intent to defeat or delay creditors of transferor, does not affect rights of transferee in good faith and for consideration. For example, Bashir is indebted to Ahmad, and he attempts to sell his house, and his intention is to convert his house into cash to defeat Ahmad. And if Rasheed is not aware of Bashir’s indebtness, but he purchases Bashir’s house against a consideration of ten lakh rupees, then such transfer does not affect rights of Rasheed.

(iii) Law Relating to Insolvency Transfer of immoveable property, which is made with intent to defeat or delay creditors of transferor, does not affect any law, which is in relation to insolvency and which is in force.

(iv) Institution of Suit If a creditor institute’s suit to avoid a transfer on this ground that it has been made with intends to defeat or delay the creditors of transferor, it is considered that such suit is instituted on behalf of all creditors or for benefit of all creditors.

(v) Voidable at Option of Subsequent Transferee Every transfer of immoveable property, which is made without consideration and which made with intent to defraud a subsequent transferee, is voidable at option of such transferee.

It

is

now

well

settled

that

if

objection

is

raised

founded

on Section 53, Transfer of PropertyAct, such objection is distinct and separate from the defence referred to above. As it has been observed by Sir Lawrence Jenkins in — ‘Mina Kumari

v.

Bijoy

Singh’,

44

Ind.

App.

72,

(P.C.)

to

attract

the

provisions

of Section 53, Transfer of Property Act. It must proceed on the footing that title has passed, but the document under which the title has passed is a voidable one. It is not open to a party to say that the provisions of section 53 are attracted as the document itself or the transaction was a sham one. The question whether Section 53, Transfer of Property Act, would be attracted in the present case or not, whether such a defence had actually been raised by the defendant, and even if raised, such defence was available to him or not, would be an

alternative claim which would be considered at the proper place later on. At this stage all that we are required to consider is whether the transaction itself was a real one or not.

Exception:

A transferee from such debtor will be protected --:

A) if he acquires property for value in good faith without the knowledge of transferor's intention. B) if the himself is a creditor and the transfer is made in satisfaction of his pre-existing debt. If the creditor established that transfer was made with the object of defeating him, the shifts on the transferee to prove.

1) that he had paid a fair price, and 2) that he was not a party to the fraud.

PROVISIONS OF SECTION 53A 53A. Part performance.—Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefore by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract: Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.

Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or the part performance thereof. Following conditions should be complied under Section 53A; 1.

There should be a contract for consideration in writing and same should be signed by the transferor;

2.

The contract should be for transfer of immovable property and from therein the term necessary to constitute transfer should be certainly ascertained;

3.

The transferred should has taken possession of the property and has done something for furtherance of the contract;

4.

The transferee should be ready and willing to perform his part of the contract; and

5.

In this case even without execution of sale deed, the transferee acquires the right in the property and the transferor cannot claim any right in respect of property under consideration other than the rights expressly provided in the terms of contract. Note: it an alternative method of transfer of immovable property in case sale deed has not been registered. ANALYSIS OF PROVISIONS OF INCOME TAX ACT, 1961; Section 2(47) in the Income- Tax Act, 1995 (47) transfer”, in relation to a capital asset, includes,(i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock- in- trade of a business carried on by him, such conversion or treatment;] or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 1 (4 of 1882 ); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative 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. Section 2(47(v) of the Income Tax Act, 1961; covers within its scope any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882.

Note: All transactions in which possession of immovable property is handed over would not covered under provisions of section 2(47) (v). Only those transactions, which are complied provisions of section 53A, are considered as transfer under 2(47) (v). The main ingredient is the intention of transfer of property in the contract for the consideration. Note: Handing over possession of the property by the transferor to the transferee in part performance of the contract under section 53A of the Transfer of Property Act, 1882 in necessary, but transfer should be of legal titles and rights to enjoy the property. The essence of handing over the possession as contemplated in section 53A of Transfer of Property Act, 1882 lies not merely in handing over possession but lies in the intention of the transferor to transfer the ownership rights of the property for consideration in favor of transferee. Transfer in case of Joint Development Agreements; In case of Joint Development Agreement, landowner may hand over possession of land to the developer for development without intention to transfer ownership to the developer in the land , than this transaction is not covered under provisions of Section 53A of the Transfer of Property Act, 1882. The ownership rights can be said to have be transferred when transferee/developer acquires right to use, lease out or dispose the property at his sole discretion. Thus in case of any Joint Development Arrangement , where possession of the land is given to the developer by the landowner, without giving right of disposal , sale or otherwise does not fall within provisions of Section 53A of the Transfer of Property Act, 1882 and hence not a transfer of property within meaning of Section 2(47)(v) of the Income Tax Act, 1961. Dwarka Das Kapadia v. CIT [2003]/180CTR (Bom.)107/260ITR491(Bom)/[2003]; is a landmark decision which is generally applied to treat the event of handing over the possession of land or entering into the date of Joint Development Agreement as the year of transfer of land by the landowner. The court observed that the contract read as a whole indicates that at the time of entering into JDA, there is transfer of complete control over the property in favor of the developer. Therefore, the date of entering into JDA, in the above decision was considered to be relevant for recognizing the transfer of land by the landowner. Thus the essence of Section 2(47) (v) may be considered, when there is transfer of complete control over the asset by the owner to the developer. Mysore Minerals Limited v. CIT [1999]239ITR775/106; Hon’ble Supreme Court held that anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded there from and having right to use and occupy the

property in his own right would be the owner though a formal deed of title may not have been executed and registered. IN SOME CASES MERE POSSESSION GIEV BY LANDOWNER TO THE DEVELOPER CONSTITUTES TRANSFER U/S.2 (47) (V) OF THE INCOME TAX ACT, 1961; CIT v. Dr. T.K. Dayalu[2011]202(Kar.); it was held by High Court of Karnataka that as the possession of the property was handed over to developer, also some sum was received by the owner , so capital gain should be taxed in the year of entering into development agreement. Hussain Lal Puri v. ITO [2013] (Chand.) the Tribunal held that it is not necessary in terms of Section 2(47) (v) that the developer should have exclusive possession. The concurrent possession of the ownership is possible which gives rights to a limited extent for a limited purpose. Thus it is very much possible to hold concurrent possession and therefore it falls in the definition of Section2 (47(v). Dr. Maya Shenoy v. Asst. CIT [2009] 124TTJ (Hyd.) the assessee entered into development agreement with ASR for construction of flats. According to the agreement the developer was to handed over the possession of the said land and in turn had to give 45% of the constructed area to the owner. Therefore it was held that the handing over the possession was towards the part performance of the agreement and held the effect of transfer as contemplated in section 2(47) (v). Whether registration of contract relating to part performance mandatory; The Government has amended Section 17A of the Registration Act, 1908 in the year 2001 in such a manner that the documents containing contracts to transfer for consideration of any immovable property for the purpose of Section 53A of the Transfer of Property Act, 1882 shall be registered if they have been executed on or after the commencement of Registration and other Related Laws(Amendment) Act, 2001 and if such documents are not registered on or after such commencement then they shall have no effect for the purpose of Section 53A of the Transfer of Property Act, 1882, subject to one safeguard that unregistered agreement of sale executed earlier would be taken as a tool to enforce part performance of the contract by the other part. We may conclude that Power of Attorneys, Sale Agreements, Contract to Sale etc., made should be registered for transfer of valid title of ownership to the transferee. But provisions of Section 2(47) (v) are applicable as earlier. Dr. T. Achyutha v. Asstt.CIT [2007]108TTJ (Hyd.); the assessee entered into a “Sale cum Development Agreement” with the developer on 22-08-1997. An Irrevocable Power of Attorney was also signed thereby passing all rights to dispose of the developed property and also to utilize advance and sale consideration. It was decided by the Tribunal that was a

transfer of property under Section 53A of the Transfer of Property Act, 1882, which fell within scope of Section 2(47)(v) of the Income Tax Act, 1961. Charanjit Singh Atwal v. ITO Ward-VI(1) Ludhiyana; it was held that Irrevocable General Power of Attorney which leads to overall control of property in hands of developer, even if that does not involve exclusive possession of developer, would constitute transfer within the meaning of Section 2(47)(v) . It was held that the possession contemplated by provisions of Section 2(47) (v) of the Income tax Act, 1961 does not require handing over exclusive possession. What is required is that the transferred by virtue of possession should be able to exercise from overall intended purposes. Smt. Vasavi Pratap Chandv. Dy. CIT [2004]89ITD73 (Delhi): it was held that, an immovable property can be said to be sold or transferred either when the deed of conveyance is executed as per the general law under the Transfer of Property Act, 1882, or when the possession is transferred in part performance of contract within the meaning of provisions of section 53A of the Transfer of Property Act, 1882 as provided under provisions of Section 2(47) of the Income Tax Act, 1961....