Is property sale through power of attorney legal?

[ecis2016.org] In 2011, the Supreme Court ruled that property sale through power of attorney (PoA) is illegal and only registered sale deeds provide any legal holding to property transactions.

Historically, real estate has been one of the preferred asset classes, to park unaccounted money. Over time, numerous ways were invented, to make the investment appear legal, including sale and purchase of property through power of attorney (PoA).

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In cities like Delhi, in fact, property sale through power of attorney has been quite common for the past several decades. Property sale through power of attorney is an arrangement, which primarily is entered into by two parties with an aim to short-change the law.

The increasing use of this method coincided with the growth in the property market, starting in the 1990s. So much so, that the Supreme Court (SC) was forced to take cognisance of the matter, and eventually passed a landmark verdict in 2011, declaring property sale through power of attorney illegal.

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Sale of property through power of attorney not valid: SC

While stating that property transactions done through general power of attorney (GPA) had no legal sanctity, the Supreme Court (SC) ruled that only registered sale deeds provide any legal holding to such transactions.

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What is power of attorney and how property is sold using this instrument?

Mentioned below is all about a POA, and how sales through this instrument took place and why these are illegal.

Power of attorney (PoA) for property 

The concept of POA has been discussed under two laws in India – the Powers of Attorney Act, 1882 and the Indian Stamp Act, 1899. These legislations defined POA as an instrument empowering a specified person to act on behalf of the person executing the transaction.

Basically, a person gives another person the legal right to present himself as his representative, to perform specific tasks on his behalf.

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This instrument is commonly used by non-resident Indians (NRIs), as it may not be possible for the NRI to visit his country of origin at a given time, because of his/her businesses or personal work. Owing to the convenience it provides, a POA is also handy for extremely busy people, such as businessmen and people who cannot perform various personal and professional tasks.

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Types of POA: General POA (GPA) and Special POA (SPA)

While a general power of attorney (GPA) gives an agent the rights to perform routine tasks on one’s behalf, a special power of attorney (SPA) is granted in order to get specific tasks accomplished.

“While a GPA grants broad powers to a representative, an SPA talks about a specific act that the representative can carry out, on the behalf of the principal. If you grant someone a GPA, they can pay your utility bills, collect rent on your behalf, manage and settle disputes, or carry out all bank-related work, while acting as your representative,” says Himanshu Yadav, a lawyer at the Supreme Court. On the other hand, if an NRI has to sell his property in India, they would get it done through an agent here, by way of an SPA, he adds.

The registration of both, GPA and SPA, is a must for it to be legally valid. An SPA loses its effect, as soon as the task it is intended for, is completed. A GPA can be revoked by the executor as and when they like, in their lifetime. In case of their demise, the GPA loses its legal validity.

How property sales through GPA happened?

A buyer is supposed to pay stamp duty and registration charge on the transaction, while a seller has to pay capital gains tax. Also, once a sale deed is registered, the information is public and could be used any time to unearth benami transactions.

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Often, with the intention to short-change the law and evade taxes on property transactions, buyers and sellers entered into an elaborate three-step plan, to carry out the sale transaction. First, an agreement for sale was created (not to be confused with a sale deed), laying own the rules for the sale. Following this, the seller would create an irrevocable PoA, putting the buyer in absolute charge of managing the property. As the third and final step, the seller would bequeath this property to the buyer through a will.

“To avoid the cumbersome procedure in obtaining permissions and to avoid payment of a huge part of the price to the Delhi Development Authority (DDA) as unearned increase, a hybrid system was evolved, whereby the holder of the flat, on receiving the agreed consideration, would deliver the possession of the flat to the purchaser and execute the following document,” the SC was informed in 2009, when the Suraj Lamp & Industries Pvt Limited vs the State of Haryana case came into the limelight.

This kind of ownership transfer became increasingly popular among people who were allocated units from the lotteries for the DDA’s various housing schemes and then sold them at exorbitant prices to interested parties.

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Latest supreme court judgement on power of attorney 2021

In a landmark verdict, the Supreme Court, while delivering its judgment in the Suraj Lamp & Industries Pvt Limited vs the State of Haryana case, ruled that property transactions carried out by way of PoA do not hold legal validity.

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“A PoA is not an instrument of transfer in regard to any right, title or interest in an immovable property,” a three-judge bench, headed by justice RV Raveendran, said, adding that property can legally be transferred only through a registered sale deed.

The judgment, which came after interpreting various provisions of the law concerning property sales and became effective retrospectively, said it would not affect the validity of sale agreements and PoAs executed in genuine transactions.

The top court cited specific examples to elaborate on genuine cases. “For example, a person may give a PoA to his spouse, son, daughter, brother, sister or a relative, to manage his affairs or to execute a deed of conveyance,” it said. While stating that municipal bodies should not entertain mutation requests for properties that changed hands through GPAs, it clarified that existing records should not be disturbed, because of the verdict.

Following the SC’s ruling, the Delhi government, in 2012, came up with a circular banning the sale of property through GPA, a will and agreement to sell, collectively or separately.

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Delhi High Court order of 2013 on power of attorney

The Delhi government’s circular affected many property holders in the national capital region (NCR), where sales through GPA had become rampant. Following the notification, various applications were moved in the Delhi High Court, seeking relief. The HC ruled that the SC verdict clearly mentioned that registration cannot be barred in genuine cases.

“The SC has not said that in no case a conveyance can be registered by taking recourse to a GPA. As long as the transaction is genuine, the same will have to be registered by the sub-registrar,” the HC said “A person may enter into a development agreement with a land developer, for development of a parcel of land or for construction of apartments in a building and for this purpose, a POA to execute sale agreements can be executed,” it added.

“In 2019, the Delhi government also provided legal sanctity to unauthorised constructions that had previously been transferred by PoA,” points out Pranjal Kishore, a lawyer at the SC.

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Registration of power of attorney

According to the SC, registration of a PoA is mandatory, if it is executed for the sale of a property. Also note that a notarised PoA would be admissible as proof in the court of law. However, the rules may vary, depending on the state where the instrument is being drafted. In Gujarat, for example, the registration of notarised power of attorney documents has been made mandatory in the state under the provisions of the Gujarat Registration (Amendment) Bill.

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