Suraj Lamp & Industries (P) Ltd.(II) v. State of Haryana ― Lacking in Law? | A case comment

Introduction

In Suraj Lamp & Industries (P) Ltd. v. State of Haryana (Suraj Lamp I), a two-Judge Bench of the Supreme Court declared “power of attorney” sales to be an invalid mode of property transfer.¹ A three-Judge Bench issued a clarificatory judgment substantiating this point in 2011 in Suraj Lamp & Industries (P) Ltd. v. State of Haryana (Suraj Lamp II).² The Court conclusively stated that the parties could not effectuate a valid sale by executing a power of attorney, nor by entering into a sale agreement (SA) which was followed by a power of attorney (GPA) and will – a transaction termed as SA/GPA/will transfer.³

The pertinent question sought to be answered in this paper is whether registration is an absolute prerequisite for transferring immovable property. In light of the Supreme Court’s judgment in Suraj Lamp⁴, the paper demonstrates a lack of nuance in the Court’s reasoning concerning the justifications posited for invalidating SA/GPA/will transactions while considering registration to be a prerequisite for the transfer of immovable property. This objective is sought to be accomplished by considering two crucial contentions usually advanced by parties endorsing the validity of SA/GPA/will transfers. The paper will support the integrity of the ultimate holding in Suraj Lamp⁵ but will prescribe a revision of the Supreme Court’s dicta to the extent of it ignoring the specificities of legal interests created by “irrevocable” GPA contracts and sale agreements.

Suraj Lamp and its critique of the modus operandi of SA/GPA/will transfer

The impugned SA/GPA/will transactions, as “modes of transferring” immovable property, originally evolved in Delhi intending to circumvent certain inhibitions imposed by the Delhi Development Authority (DDA) on the resale of flats by first allottees.⁶ The DDA taxed the “unearned increase” in flat prices and granted permission for resale only upon paying such taxes.⁷ Allottees, purporting to avoid the aforementioned tax, entered into a tripartite arrangement with prospective buyers:

First, the flat allottee and the purchaser entered into a sale agreement, wherein the allottee delivered possession upon the purchaser’s payment of the entirety of the purchase money. Second, the allottee granted an “irrevocable” GPA (a “general power of attorney”, as per the terms of the Contract Act) through which the allottee authorised the buyer to deal freely with, manage, and even alienate the property without requiring the seller’s sanction.

Lastly, a will, bestowing the property in the buyer’s favour, was ceded to guard against the death of the allottee before property transfer.

Such was the “modus operandi” of the SA/GPA/will transactions.⁸ The transactions accomplished an effective sale between the parties, albeit lacking formal registration in the purchaser’s name. Though these transactions demonstrated pernicious objectives deleterious to public policy, the Delhi High Court had previously recognised them as valid transfers in furtherance of the buyers’ interests.⁹ However, since they had “disastrous collateral effects” like enabling transfers of imperfect titles in property, the criminalisation of land transfers, and the growth of the real estate mafia, the Supreme Court in Suraj Lamp I invalidated such SA/GPA/will transactions.¹⁰ The Court buttressed this invalidation upon the public policy aspects embodied in the Registration Act’s¹¹ necessitation of registration for legal recognition of the sale of immovable property – that is, “safety, security and publicity to immovable property transactions, thereby preventing fraud and forgery”.¹²

A more vital attack was instituted against these transactions in Suraj Lamp II¹³. The Court, here, interpreted various sections of the Transfer of Property Act (hereinafter “TPA”), particularly Section 54¹⁴.¹⁵ The Bench postulated that the TPA under Section 54 considers “registration” to be an indispensable factor for enacting a sale and that a “sale agreement”, by itself, was insufficient to create a charge or interest over immovable property.¹⁶ It also asserted that a GPA was merely an instrument for creating an agency ‒ consequently excluding the transfer of title or interest over immovable property; it deemed SA/GPA/will transactions to be “grossly violative of public policy” insofar as they assisted in the avoidance of certain preconditions involved in transfer particularly the registration of property after paying due stamp duties and registration charges.¹⁷ These transfers were also assailed for facilitating the investment of “black” (or unaccounted) money, thereby promoting income tax evasion.¹⁸ Nevertheless, the Court acknowledged the viability of “genuine” GPA contracts and the creation of charges under “part performance”, subject to Section 53-A¹⁹ of the TPA.²⁰

Two contentions arising from Suraj Lamp’s over-facile justifications for negating SA/GPA/will transfers and further responses

However, as evidenced in a significant case after Suraj Lamp II²¹ ― in Hardip Kaur v. Kailash, the simplistic justification utilised by the court has bred two significant contentions.²² The first contention supports the enaction of a valid SA/GPA/will, involving payment of the total purchase money, under the provisions of the Contract Act²³, as against the provisions of the TPA. This contention rests upon a joint reading of Section 202²⁴ of the Contract Act and Section 54 of the TPA. The second contention considers sale agreements, supported by the “transfer of possession to the buyer” and the “payment of the entirety of the purchase money” to the seller, as creating a significant interest over the property under Sections 55(6)(b)²⁵ and 53-A of the TPA, to effectively enable the transfer of property. It is pertinent to consider these two issues in detail and consequently illustrate their fallibility.

The irrevocable agency argument and the “specific law” response

Section 202 of the Contract Act envisages the creation of an agency wherein the agent has an “interest” in the subject-matter of the agreement.²⁶ Termed “irrevocable” GPAs, such contracts allow the agent to deal with and dispose of the immovable property which forms the subject-matter of the GPA. Section 54 of the TPA holds that an agreement of sale, “of itself”, creates no “interest” in immovable property.²⁷ Now, reiterating for good measure, Suraj Lamp II²⁸ held SA/GPA/will transfers not to constitute sales on two isolated grounds. One, it held that no GPA could be “irrevocable” per se, insofar as all GPAs were entered into as at the instance of the principal, represented his interests and therefore were liable to be revoked by him.²⁹ Two on a bare reading on Section 54 of the TPA, it held that sale agreements created no property interests.³⁰

The major altercation to this singular, disjunct reasoning of the Court appears in the form of a joint reading of Sections 202 and 54. The Supreme Court judgment of Kuldip Singh Suri v. Surinder Singh Kalra³¹ succinctly embodies this position. Here, the Court summarised a long line of cases that reinforced ― firstly, the irrevocability of certain GPAs and secondly, the general enforceability of sale agreements. Restating the Court’s decision in Harbans Singh v. Shanti Das³², the Bench conceded that a sale agreement did not create any “interest” in immovable property, as mentioned in Section 54 of the TPA. However, the Bench postulated that the “interest” incorporated in Section 54 of the TPA, when read with Section 202 of the Contract Act, could not be restricted to the “narrow and pedantic sense” in which it appeared in the TPA. Instead, it held that the Contract Act provided the beneficiary of an agreement of sale with a “legally enforceable interest and right in enforcing the sale agreement by getting possession of the property under the Specific Relief Act³³ and further acquiring title by executing a sale deed through the GPA”. This interest was compounded when the impugned sale agreement was accompanied by a transfer of possession and payment of purchase money. Summarily, the Court considered the “interest” supporting irrevocable GPAs and sale agreements to be contractually significant, thereby acknowledging their legitimacy.

The reasoning in this case and several others³⁴ pivots around the words, “of itself”, as present in Section 54 of the TPA, which considers “a sale agreement, ‘of itself’, not to create an interest over the property”.³⁵ While sale agreements do not create interests by themselves, they create rights and interests upon being complemented by contracts for irrevocable GPAs. Therefore, SA/GPA/will transactions, insofar as they involve irrevocable GPAs and sale agreements buttressed by the transfer of possession and payment of the contractual price, are held to constitute “valid transfers of property under the Contract Act” as against the Transfer of Property Act.³⁶

While the legal viability of this argument holds substance, it suffers from an instrumental defect. This reasoning considers the sale of property to be governed by the Contract Act as against the TPA. It, therefore, disregards the primacy of special laws (or, particular laws) over general law. The Transfer of Property Act, 1882 governs particular transactions involving the transfer of property in India,³⁷ while the Contract Act governs all general contractual relations between parties.³⁸ A cardinal principle of statutory interpretation, in cases of apparent conflict during applicability, is embodied in the Latin maxim “generalis specialibus non derogant” ― which requires the general statute to yield to a special one.³⁹ This principle has been restated by the courts in several instances.⁴⁰ In this regard, even if property transfers could purportedly occur under the terms of the Contract Act, it is the TPA which is primarily applicable to the sale of property in India. Section 54 of the TPA authorises parties to enact valid sales (when the property value is greater than 100 rupees) only through a “registered agreement”.⁴¹ Thereby, parties are obligated to register the transaction of sale as per the terms of the Registration and Stamp Duty Acts, a position that was reaffirmed by the Court in Suraj Lamp.⁴² Consequently, we can conclude that a sale agreement, coupled with an irrevocable GPA, only creates an “absolute right to obtain another document” and does not create interest in the property itself.⁴³ Therefore, even if the court failed to address the nuanced arguments supporting the validity of SA/GPA/will transfers, its concluding position is legally warranted.

Argument on the creation of a total charge over property and a “definitional” response

The next contention parties use to defend the validity of SA/GPA/will transactions, involving the payment of purchase money and the delivery of possession, concerns Section 55(6)(b) of the TPA.⁴⁴ Section 55(6)(b) allows the buyer to acquire a charge over the seller’s property, to the extent of his payment of purchase money, in anticipation of the delivery of the said interest.⁴⁵ This section is undergirded by the principles of justice, equity, and good conscience,⁴⁶ and creates a statutory charge over the property (as against a contractual charge arising out of an agreement). The courts have allowed the buyer to enforce this statutory charge and avail specific performance or damages upon the seller’s default during delivery of the property.⁴⁷ Now, in the specific case of SA/GPA dealings, the intending buyer pays the entirety of the purchase money and thereby acquires an interest over the entire property. Parties involved in such agreements contend that an acquisition of the “full quantum” of interest of the property automatically creates an absolute right to the ownership of the property, in its bare sense of the term.⁴⁸ This proposition is further supplemented by taking recourse to Section 53-A of the TPA, which embodies the equitable considerations of “part performance”.⁴⁹ The principle applies to prospective transferees, allowing their retention of property in cases where the transfer executes a defective instrument of transfer and later forbears from completing the transfer as per legal requirements.⁵⁰ The principle underlying this section is codified in another section of the TPA, Section 55 ― which enumerates the rights and liabilities of parties involved in a transfer of immovable property.⁵¹ Section 55(1)(d) imposes a duty upon the seller to convey the impugned property to the buyer upon his payment of the entire consideration.⁵² Thereby, the buyer gains a right to ownership. Accordingly, it is argued by parties that SA/GPA/will transactions result in a transfer of property ownership.

However, such an argument pivots around an incorrect understanding of various provisions of the TPA. It is imperative to note that the creation of a “charge” over immovable property does not create “ownership” of the property. Rather, it merely creates a “right to ownership”, or a “right to execution of the sale”.⁵³ It gives rise to a “right to conveyance”.⁵⁴ The actual conveyance still requires registration of the sale deed as per the terms of the Registration Act. That is, even if the seller is required to transfer ownership upon the vendee paying the entire purchase money, he is obligated to transfer ownership in accordance with the procedure prescribed by law. According to Section 54, the vendee gains title/formal ownership only through a registered sale deed.⁵⁵ Therefore, it is evident that the second contention fails to distinguish between a “right to” ownership and “actual” ownership. Such failure equates the rights arising out of a sale agreement with a sale. Suraj Lamp II also recognised the fallibility of this contention by stating that SA/GPA/will transactions, in this regard, could continue to be treated like sale agreements.⁵⁶ Consequently, the court’s recognition of the requirement of registration is valid, despite its lack of serious engagement with the rationale behind requiring registration of the transfer of immovable property.

Conclusion

The judgment in Suraj Lamp reaffirms an important legal position – the indispensability of registering a sale deed during transfer. Registering a conveyance deed offers a “notice to the entire world” regarding the execution of such a document.⁵⁷ It also protects the interests of the parties, particularly the buyer, by providing legal proof of ownership. These considerations have motivated the legislative inclusion of “registration” as a fundamental aspect of property transfer. The registration and stamp duty laws have also been promulgated to accomplish similar public policy aspects. Additionally, they constitute a valuable source of revenue for the State, despite the State having reduced the registration and stamp fees to incentivise property registration.⁵⁸ The spate of litigation resulting from defective titles is also curbed. It is therefore critical that Suraj Lamp⁵⁹ be heralded as asserting an important legal position in matters relating to the transfer of immovable property.