[Paras Ahuja is a student at National Law University, Jodhpur.]
What may appear to be a piffling case of judicial interpretation may have significant ramifications. One of such pertinent yet not so widely discussed issues is the erroneous interpretation of the expression 'of the nature referred to in Section 53A of the Transfer of Property Act, 1882' as used in Section 2(47)(v) of the Income Tax Act, 1961 (ITA). The interpretation of the expression was first elaborately discussed in the case of Commissioner of Income Tax v. Balbir Singh Maini, the ratio of which was subsequently followed in several other cases and more recently in the Bombay High Court judgement of Principal CIT v. MR. Fardeen Khan). The bench in Balbir Singh interpreted the expression to include the aspect of mandatory registration within its scope. Such interpretation, in author's view, is flawed on several grounds, which have been elucidated in this article.
The doctrine of part performance has been laid down under Section 53A of the Transfer of Property Act, 1882 (TPA), which provides for a statutory right to the transferee against the transferor to defend his / her possession over the property, either taken in possession, or after that, in continuance of the possession. The intent behind this provision was understandably to protect the prospective transferees by allowing them to retain possession over the property. This provision was enacted because the transferors, after the execution of an incomplete instrument of transfer, failed to complete it in the manner specified by law (without there being any fault on the part of the transferee).
Section 2(47)(v) of the ITA deals with transactions 'of the nature referred to in' Section 53A of the TPA and states that the same shall amount to 'transfer in relation to capital asset'. The taxability of such transactions is provided under Section 45 of the ITA.
After the commencement of the Registration and Other Related Laws (Amendment) Act, 2001, the requirement of registration was made mandatory under Section 53A of the TPA. The question thus arose as to whether compulsory registration under Section 53A would be considered as part of 'the nature of Section 53A'. More specifically, the issue was whether or not registration would be a mandatory requirement under Section 2(47)(v). This becomes relevant because the determination of the inclusion / non-inclusion of unregistered transfer deeds in the compass of Section 2(47)(v) would then allow / bar taxation of such transactions under Section 45 of the ITA.
As mentioned earlier, the aforementioned question was first dealt with in Balbir Singh. The court, while answering this question in affirmative, interpreted the phrase 'of the nature referred to in' in the following manner:
“All that is meant by this expression (of the nature referred to in) is to refer to the ingredients of applicability of Section 53A to the contracts mentioned therein.”
The court neither offered any reason nor employed any interpretative tool to justify the conclusion so arrived at. The court here equated the phrase 'of the nature referred to in' with the 'ingredients of Section 53A'. It is to be noted that the wording of Section 2(47)(v) merely requires the transaction to be of the 'nature' referred to in Section 53A. The court in Balbir Singh seems to have ignored this understanding. Needless to mention here, it has now been settled by the Supreme Court that taxation and penal statutes require strict interpretation, which means that the import of every word has to be analysed. The court, in Balbir Singh, has not taken note of the said principle and arguably deviated from the legislative intent by equating the 'nature' of a provision with the provision itself.
It is further submitted that including the requirement of registration as part of the nature of Section 53A would frustrate the equitable nature of the provision. It has been held that Section 53A imbibes the principles of the equitable doctrine of part performance to create a provision in the favour of the transferee. It is another principle of equity that formalities that frustrate the ends of justice ought to be avoided. Keeping these principles in view, registration, which is a requirement purely of form and not of substance, may be a mandatory condition under Section 53A but cannot be considered as part of the nature thereof.
Another argument that may be used to justify the inclusion of unregistered transfer deeds within Section 2(47)(v) is rooted in the understanding of the legislative intent behind the inclusion of the clause. It is beyond question that it is the duty of the court to give effect to the intent of the legislature and seek for that intent in every legitimate way (Chintapalli Achaiah v. P. Gopalakrishna Reddy). In the case of C.S. Atwal v. The Commissioner of Income Tax, the Punjab and Haryana High Court observed as follows:
“The legislative intent behind incorporating clause (v) to Section 2(47) of the Act from assessment year 1988-89 as discernible from CBDT circular is to embrace within its ambit those transactions of sale of property where assessee enters into agreements for developing properties with builders and the seller confers the rights and privileges of ownership to the buyer without executing/registering a formal conveyance deed in order to avoid capital gains tax.”
It can be inferred from the above that the intent behind the insertion of clause(v) of Section 2(47) was to protect unregistered transfer deeds and ensure their taxability.
The importance of relying on the legislative intent of a provision in construing its meaning was discussed by the court in the case of Union of India v. A.K. Pandey, wherein the question arose as to whether the word 'shall' shall be accorded a mandatory or a directory meaning. The court held as follows:
“If such a meaning is clearly contrary to the obvious intention of the legislature, then words which ordinarily are mandatory in their nature will be construed directory, or vice versa.”
Therefore, even if we accept that the nature of a provision should not be construed differently from what the literal reading of the provision indicates, the fact that it frustrates the legislative purpose would be a sufficient reason to dissuade us from considering mandatory registration as a condition precedent to Section 2(47)(v).
Principal CIT v. MR. Fardeen Khan [(2019) 411 ITR 0533].