Sale of Inherited Property Without Tax Payment: Understanding the Tax Liability

The Background: Sale of the Inherited Property

Two non-resident brothers and their mother are left in a soup since their father had inherited a property from his mother and sold the property, say, fifteen years back. At the time of sale the father did not have a PAN in India and the buyer apparently did not withhold any taxes or even if he did, there is no trace of it since there is no PAN or TAN. The father had inherited a portion of the property which he had sold and the proceeds from that sale were transferred to one of the brothers once the father passed away.

The Legal Dispute Over the Property:

Now there was a sequence of events which had taken place after this. There was a contempt of court filed by one of the buyers in between, saying that the sellers are not cooperating and not willing to sign a consent letter or a deed of conveyance stating that they had a right on the property which they have now sold and there is no further right on the property in their name.

The deed of conveyance was filed in one of the recent years. However, in the deed of conveyance there is no mention of the brothers or the mother. There is just the mention of the father, who held a portion of the property which he sold in the earlier years. It is also very clearly mentioned that since he has received the consideration for the sale of his share in the property, he had no further right in the property. He or his successors were not going to claim any right on the property in the future.

The Tax Issue:

Now the problem is that the buyer wants to avail a loan from the bank. For the bank to verify title clearance of the property, the buyers are asking the original owners or their successors to sign a deed of consent or a confirming letter. This, again, has things mentioned like the father had the share in the property which was sold in the earlier days and the proceeds were received in the father's bank account.

The question here, or the problem, lies here: the tax has never been paid on the sale of this share in the property. From various documents and agreements, it is very clearly corelated that the father had received an X amount in his bank account on sale of his share in the property. There is also evidence with the income tax department that the funds had been received as part of inheritance by one of the brothers. The question here lies whether to make the tax payment or not and if the brothers plus mother are willing to make a tax payment then how to make the tax payment?

The deed of conveyance also mentions that the current value of the property is a very big amount, which is much more than what the father had received years back when he had sold the property. The other dilemma of the brothers is whether the income tax department will come behind them saying that the tax liability should be paid not on the sale consideration but on the current market value. Also, the deed of conveyance mentions that the buyers had received major sums of money in two installments as part of their sale of right in the property. The brothers also want to check if the department can say that they also had a claim to a higher amount and not only the sale consideration.

On analyzing all the documents (which are the agreement to sell the property, the deed of conveyance, the suit which was filed and the confirming letter), we find that it is quite certainly identifiable that the property which the father had inherited was legally sold and the proceeds were received in his bank account. Now the question here is how to make a tax payment if at all the brothers agree to that. Since it is not possible to go back so many years when the property was sold and filed the return for that particular year, it may be assumed that the date of the deed of conveyance should be taken as the base to make the tax payment. The option that the brothers have is that they will then have to obtain a PAN (which one brother has and one doesn't) and then file an updated return. They will have to pay the tax on the sale consideration (not the current market value) plus the penalty which is due for filing an updated return.

The Legal Dispute and Risks

Upon verification of documents, it was found that one agreement with stamp paper mentions that the father had sold the property and his successor(s), in case of his passing, will have to sign a deed of conveyance or a confirming letter at a later date as and when the buyers require the same. It was also pointed out to us that this was probably a forged document as the original stamp paper agreement did not mention this clause that the successors will have to sign on any deed of conveyance or a confirming letter stating that the property was sold.

The brothers have filed a suit against this forged document. If at all they win then it is not due or compulsion on them to sign a deed of conveyance or confirming letter. If this gets mitigated then they do not sign anything and they forget about the tax which is due and not paid.

This approach is of course very risky and the income tax department can come back to them saying that you have done a default. Though they are non-residents, India has agreements with various countries for exchange of information and it is highlighted to the brothers by us that there are chances that the income tax department will approach you, find you somewhere and serve you a notice.

What did the KDP do?

• Analyzing all the documents, which include the agreement to sell, deed of conveyance, and lawsuit filed by the buyer in dispute with one of the sisters of the father, contempt of code filed by the buyers and draft terms of settlement.
• Advising the client rightfully on the scope of tax, their penalties applicable and the compliance which is due. We also informed the client on what we think are our words in the terms of settlement and other documents that can save them from future liability or dispute on the property which was sold by the father.

Through this exercise, KDP helped the clients understand the tax and compliance implications of a complicated property transaction involving inheritance, non-resident heirs and a sale completed several years ago. Now the decision and commercially what is right for them is what the clients will decide. However, we have taken due care to inform them rightfully of the provisions of the law and the consequences of not following the law. If you need any such guidance or expert assistance connect with us at enquire@kdpaccountants.com.