This article on Power of Attorney Sales is written by Sangam Sangroula from Kathmandu School of Law, Nepal. Power of Attorney Sales has a significant role in the stamp duty evasion and avoidance. This has created revenue loss to the states in India. The circulation of black money has been widely promoted due to this kind of transaction. The objective of this paper is to understand what is ‘Power of Attorney Sale’ and how it is used as a tool to skip stamp duty (a form of tax) which is precluding government and people from the benefit of revenue. The other objective is to know the loopholes in the legal system and judgment in the Suraj Lamp Industries case.
Introduction
Tax evasion is an illegal practice to avoid paying taxes by a person, organization or corporation intentionally. Underreporting income, inflating deductions, or hiding money and its interest takes place by misrepresentation.The tax evader, if caught, is generally subject to criminal charges and substantial penalties. Similarly, Stamp duty is a tax on land and property transactions. The amount of stamp duty depends on the value of the property. If someone is buying a house or even buying a second home, holiday home or buy-to-let property, he/she will have to pay stamp duty. So, it applies on both transferring of immovable property and renting a house or flat. Hence, Stamp duty is also one of the types of fiscal crime like tax evasion.
Stamp duty evasion and avoidance have been a problem for several countries. Even in UK homebuyers are avoiding to pay stamp duty by not letting the cost of property cross the £125,000 threshold from where the stamp duty will be levied and by setting up a limited liability company to buy the property, which then immediately sold it back to the individual.
Power of Attorney
A registered property owner, who holds registered and valid title deed of an immovable property like sale deed, gift deed, partition deed etc., may execute Power of Attorney.When the principle is weak, old, sick or unable to travel, a power of attorney is commonly given. Power of Attorney can be registered in favor of those in blood relation like father, mother, son, daughter, brother, sister, husband, wife, person of trust etc by paying stamp fee of just Rs.50 and registration fee of Rs. 1100 which is not a big amount of money for sellers and buyers. Before 2011 immovable property could be transferred easily by General and Specific Power of Attorney (GPA/SPA) without registration. Parties don’t have to pay stamp duty through such transaction. Execution of mere agreement to sell, GPA/SPA/Will etc do not carry transfer of any title and thus are not valid modes of conveyance of immovable property. Registration of an immovable property is necessary because to prevent fraud and give information to the public at large regarding the status of legal rights and obligation respecting an immovable property.
Some Legal Provisions Related to Registration, Stamp duty and Power of Attorney
The different categories of documents relating to transactions of immovable properties required to be compulsorily registered Section 17 of the Registration Act, 1908 are as follows;
- Instrument of gift of immovable property
- Lease of immovable property from year to year or for any term exceeding one year or reserving a yearly rent.
- Instruments which create or extinguish any right or title to or in an immovable property of a value of more than one hundred rupees.
According to section 49 (c) of the Act, it cannot be produced as an evidence in a court of law, if a document of which registration is compulsory under section 17 of Registration Act, has not been registered.
This is done in order to ascertain the preservation of evidence, assurance of title, publicity of documents and prevention of property related disputes and frauds.
The time limit to present all documents (except WILLs) for registration after it is excited is four months. Under Section 23 of Registration Act, if a document is executed out of India, the period of four months will be counted from the date of its receipt in India. In the event of delay, the document may be presented within another four months with a penalty of maximum of ten times of the registration fees in case time limitation of registration has been exceeded.
Stamp duty is paid according to Section 3 of the Indian Stamp Act, 1899. As per Schedule I of the same act, rates of Stamp Duty are payable for different types of documents. It must be paid in full and on time. It attracts penalty, if there is a delay in payment of stamp duty. If the documents are not properly stamped, it is not admitted as evidence by the Court. The amount of stamp duty may vary from one province to another. Like, in Delhi 3% stamp duty + 5% surcharge as per Delhi Municipal Corporation Act, 1957. It is mandatory to have legal evidence of ownership or transfer of a property. To the end, the buyer, in most cases, has to register his or her name in the municipal records. At the time of registration, the buyer has to pay a stamp duty. Stamp duty also depends on whether a given property is new or old.To determine the exact value of stamp duty respecting an instrument, an application may be presented under section 31 of the Indian Stamp Act to the Collector of Stamp in case if there is any doubt. No provision or rule restricts a registered property owner from executing a general power of attorney in favor of their spouse, son, daughter, brother, sister or any other relative or person of his trust by paying stamp duty Rs.50 and Registration fee of Rs.1,100. Also, the principal/executants are not compelled to execute power of attorney only in blood relation.
Case Study
Suraj Lamp & Industries (P) … vs. State of Haryana & Anr., 15th May 2009
The petitioner, in this case, is a company which bought land from the defendant Ramnath and his family by the means of an agreement of sale, General Power of Attorney (GPA) and a will for a consideration of Rs.716,695/-. After buying two and a half acres of land from Ramnath and his family, Petitioner agreed verbally to sell one acre to Dharamvir Yadav (ex-MLA). But before the land was sold, Dharamvir came in contact with Ramnath and his family who sold to the petitioner by the means of GPA and again sold Dharamvir the same two and half acres land by the means of GPA. Then Dharamvir illegally cancelled the earlier GPA which was in favour of petitioner. So, the petitioner claimed lodged a criminal complaint against Ramnath and his who sold the same land twice by the means of GPA for punishable under sections 406, 420, 467, 468, 471 and 120B of Indian Penal Code.
Delhi Development Authority (DDA) unveils a housing scheme under which will be available for sale by the means of Power of Attorney. No right, title or interest in an immovable property could be transferred to the purchaser in the absence of a registered deed of conveyance. However, Power of Attorney was accepted by Delhi High Court in a few cases for creating an `interest’ in the DDA flat which was so `transferred’ and consequently, protected such interest of the purchaser by issuing injunctions or decrees precluding the vendor from further dealing with the property. This led to a general impression the `Power of Attorney Sales’ were legitimately recognized modes of transfer for which no registration is required. The intention for the enactment of The Registration Act, 1908 is to provide orderliness, discipline and public notice in regard to transactions relating to immovable property and protection from fraud and forgery of documents of transfer. Power of Attorney enables two things. Firstly, it enables large scale evasion of income tax, wealth tax, stamp duty and registration fees which preclude the government and the public from the benefit of such revenue. Secondly, such transactions enable persons with unrevealed wealth/income to invest their black money and also gain profit/income, thereby encouraging circulation of black money and corruption. Giving reference to some of the states Supreme Court has stated that some of the states have made more or less efforts to control such `Power of Attorney Sales’ by subjecting agreements of sale involving delivery of possession and irrevocable powers of attorney for consideration, to the same stamp duty as deeds of conveyance or by making registration of such documents mandatory. But the steps taken are neither satisfactory nor properly enforced. In regard to the case, Supreme Court submits that there is no reason as to why a company registered under Companies act wanted to buy a land through the means of General Power of Attorney. If petitioner had purchased the property under a registered sale deed, numerous disputes, litigations and criminal proceedings could have been avoided.
To check and discourage power of attorney sales, there was a proposal to amend Section 147 of Delhi Municipal Corporation Act, 1957 in 2008. There was also a proposal to have special enactment relating to registration and recording of title in Delhi. But so far no steps have been taken. To own a house or a plot of land is the dream of every citizen. The government must have assured citizens to do so with safety, security and without fear of litigation or defects in title.
Finally, the court requests Solicitor General to give suggestions on behalf of Union of India and give notice representatives of states like Punjab, Haryana, Uttar Pradesh, Maharashtra including Delhi to come out with their view that whether Power of Attorney is prevalent in their state or not, what is their opinion regarding such transactions and what measures have they taken to tackle the problem coming out from such transactions.
On 11th October 2011
The Supreme Court gives the final judgment after receiving a response from all four states.
There cannot be a transfer by execution of a power of attorney and will. These kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on deeds of conveyance to invest unaccounted money (`black money’).The modus operandi in such SA/GPA/WILL transactions are an agreement of sale agreeing to sell the property along with a separate affidavit confirming receipt of full price and delivery of possession and undertaking to execute sale deed whenever required, an Irrevocable General Power of Attorney by the vendor in favor of the purchaser or his nominee authorizing him to manage, deal with and dispose of the property without reference to the vendor, a will leaving the property to the purchaser after death. When the seller comes to know that the price of land has hiked up then he/she may take the advantage of the transaction done with the previous purchaser through the means of Power of Attorney by reselling it since the seller is well aware that there is no registered instrument or record in any public office. Then purchaser is prone to take action using muscleman against the seller. On the other hand, real estate mafia many a time purchases properties which are already subject to power of attorney sale and then threaten the former ‘Power of Attorney Sale’ purchasers from asserting their rights.
The four states Delhi, Haryana, Punjab and Uttar Pradesh have responded and confirmed that Power of Attorney transfers required being discouraged as they lead to deprivation of revenue (stamp duty) and increase in litigations due to defective title. They also took some measures which vary from state to state. For example, Haryana reduces stamp duty on deed of conveyance from 12.5% to 5 % which may lead to immediate loss in revenue but in long run, it will have advantages like
The State of Haryana has however taken a further positive step by reducing the stamp duty on deeds of conveyance from 12.5% to 5%. When parties resort to SA/GPA/WILL transfers, the adverse effect is not only loss of revenue (stamp duty and registration charges) but the greater danger of generation of ‘black’ money. Though the reduction of the stamp duty may result in an immediate reduction in the revenue by way of stamp duty, in the long run it like instead of entering into Power of Attorney parties will be encouraged to execute registered deeds of conveyance/sale deeds without any undervaluation, transactions and reduce in black money transaction. Hence, the Supreme Court decides that immovable property can be legally and lawfully transferred only by a registered deed of conveyance.
Transactions done on the basis of Power of Attorney sales cannot be recognized as valid mode of transfer of immovable but a person may give a power of attorney to his spouse, son, daughter, brother, sister or a relative to manage his affairs or to execute a deed of conveyance in the exceptional case. For developing the land either by forming plots or by constructing apartment buildings, a person may enter into a development agreement with a land developer or builder and in that behalf execute an agreement of sale and grant a Power of Attorney empowering the developer to execute agreements of sale or conveyances in regard to individual plots of land or undivided shares in the land relating to apartments in favor of prospective purchasers. The execution of such development agreements and powers of attorney are already regulated by law and subjected to specific stamp duty in several States. The court submits that its observations are not intended to in any way affect the validity of sale agreements and powers of attorney executed in genuine transactions.
Conclusion
From the above case and facts, it is clear that Power of Attorney Sales have created revenue deprivations in India. Several states have faced this problem. Some states have taken measures. Suraj Lamp Industries, a landmark case relating which explains about how ‘Power of Attorney Sales’ has been used as a tool to evade stamp duty and able to create black money circulation. It also stated that along with stamp duty evasion different other crimes will be germinated. The municipal law and national legislation didn’t have provision to tackle with this problem. But after this decision, s some changes have been seen in the legal part.Firstly, the property won’t be transferred with the means of ‘Power of Attorney Sales’. Secondly, it can be exceptionally transferred using ‘Power of Attorney Sales’ to family members or relatives or trustworthy person or if there is any genuine transaction is to be made. Although it can be transferred using ‘Power of Attorney Sales’, it must be registered paying specific amount of fee.
Despite this effort from Supreme Court, it has still opened a gateway for criminals to commit crime. It’s not very hard for the offender to influence the vendor/seller to transferred land by making himself/herself seller’s or vendor’s trustworthy person or relatives. The stamp duty and Registration fee is very less if the purchaser chooses ‘Power of Attorney Sales’ to transfer claiming that the purchaser is the relative or trustworthy person of seller or vendor. A purchaser can also influence seller or vendor in order to show genuine cause. Though the court decided referring that by the means of ‘Power of Attorney Sale’, immoveable property can be transferred to relatives or trustworthy person or can also be transferred even if there is genuine cause, but it is very vague to decide to whom the registration office will call trustworthy person and register ‘Power of Attorney Sales’ and what kind of transaction will be regarded as genuine transaction. Court and law have failed in this part. If the purchaser is able to skip huge amount of stamp duty through the means of ‘Power of Attorney Sales’ then why the purchaser will be using deed of conveyance. Hence the decision has been made only from the seller’s perspective. The purchaser may buy using ‘Power of Attorney Sales’ and sell using the same instrument to other taking profit because all the purchaser will like to buy the land free of stamp duty. This will lead towards great loss of revenue. It will also foster black market and emergence of a number of land mafias.
In order to tackle with this problem, the rate of stamp duties may be reduced by states so that the purchaser will be motivated to buy the land through the legal means. Also, the law should strictly levy equal burden of stamp duty to both buyer and seller because both are beneficial by land transaction i.e. the land price keeps on hiking. This will also decrease the burden of stamp duty on purchaser and he/she won’t be motivated to choose wrong way which would make losses in Government revenue.
