If we have ever studied the Income Tax Act, 1961, the income has been chargeable under the five sources of income and the head of capital gain tax is one of them. Capital gain tax has been explained under section 45 of the Income Tax Act, 1961 states as follows:
Profits or gains generated from the disposition of a capital asset during the preceding year, except as specified in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G, and 54H, will incur income tax obligations under the category of “Capital gains.” Such income is to be recognized as belonging to the fiscal year in which the disposition occurred.
Agreement to sell is not completely liable to the Capital gain tax
The definition is more dependent on the transfer of the capital assets and in our case, we are going to discuss the transfer definition along with the relevant case law and we are not much concerned with the capital assets under this article.
The word transfer has been explained under section 2(47) of the Income Tax Act, 1961, and stated as follows:
“transfer of a capital asset, including the sale, exchange, relinquishment or extinguishment of the capital asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.”
The agreement to sell has been explained under section 4(3) of the Sale of the Goods Act, 1932 is stated as follows:
Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
Apart from the above definitions we have cleared one thing the definition of the transfer includes the sale and, in the provisions, explaining the agreement to sell, it has set the difference between the sale and the agreement to sell.
It is conclusive that the sale does not include the agreement to sell in the definition of transfer and neither there is any exchange, relinquishment, or extinguishment of the capital asset or the extinguishment of any rights therein or the compulsory acquisition at the current date because the taxability under section 45 of the Income-tax is on the transfer held in the previous year.
The taxability may arise on the date of the transfer of the ownership i.e. the future date and the treatment shall be provided in that previous year while filing the Income tax return.
Further, about the moveable property under section 4(4) of the Sales of Goods Act, 1932, an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
In the case of the Immovable property, the contract for sale is explained under section 54 instead of the Agreement to sell under the Transfer of Property Act, of 1882 it states that “A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties. It does not, of itself, create any interest in or charge on such property.”
And, Sale has been defined as a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.
Considering the aforementioned provisions, the sale will be considered in case the Immovable property terms have been complied with as decided under the contract for sale, on a further date it will be construed as a sale. The sale has been derived based on two conditions:
- Transfer of the ownership
- In exchange for the price paid or promised or part-paid and part-promised.
Conclusion: In the conclusion part of the article I just want to add that we cannot deny the capital gain tax completely in case of the agreement to sell and contract for sale. The above provision has stated that the sale will be deemed to be on a future date, the date on which the transaction can be derived as a sale as per the definition in the Sale of Goods Act and Transfer of Property Act. As we all know the capital gain tax is applicable on the sale of the capital Asset. Hence, the agreement to sell and contract for sale is not required to be said that they are not covered under the Income Tax Act and does not create any right but ultimately if terms and conditions are fulfilled it will be construed as sale as per the provisions discussed above. The income from the sale of the assets will be chargeable to the Income tax in the previous year in which the sales occur.
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