Capital gains under development agreements depend on realistic land valuation, transfer timing, and proof for loss set-off claims

For capital gains computation, fair market value as on 1 April 1981 should be determined on a realistic comparison of comparable properties and surrounding circumstances, especially where the land has municipal location and development potential. In a development agreement, transfer is treated as occurring when effective control and possession pass to the developer, even if the conveyance deed is executed later, making the agreement date relevant for taxability. Claims for unabsorbed depreciation require factual verification, while current year business-loss set-off must be supported by evidence and return filing; unsupported claims may be rejected.

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Issues: (i) whether the fair market value of the land as on 1 April 1981 for computation of capital gains was to be taken at the value claimed by the assessee or at the lower value determined by the revenue authorities; (ii) whether capital gains arising from the development agreement were chargeable in the assessment year corresponding to the date of the agreement and handing over of control; and (iii) whether the assessee was entitled to carry forward and set off unabsorbed depreciation and to claim deduction of current year business losses.

Issue (i): Whether the fair market value of the land as on 1 April 1981 for computation of capital gains was to be taken at the value claimed by the assessee or at the lower value determined by the revenue authorities.

Analysis: The land was non-agricultural, within municipal limits, and had development potential. The revenue authorities relied on certain small and less comparable sale instances from outside the municipal limits, while the assessee relied on a valuation report and surrounding circumstances. The valuation adopted by the assessee was found to be on the higher side, but the rate adopted by the revenue was also held to be unrealistically low because it ignored the superior location and potential of the assessee's land. A balanced approach was applied having regard to the relevant circumstances and the stamp valuation background.

Conclusion: The assessee's valuation was not fully accepted, but the revenue's valuation was also rejected. The fair market value was directed to be taken at Rs. 665 per sq. mtr. as on 1 April 1981, in partial favour of the assessee.

Issue (ii): Whether capital gains arising from the development agreement were chargeable in the assessment year corresponding to the date of the agreement and handing over of control.

Analysis: The terms of the development agreement showed that effective control over the property had passed to the developer on the date of the agreement, while execution of the conveyance deed was deferred. On those facts, the transfer was held to have occurred when the agreement coupled with possession and control took effect. The date of the agreement was treated as the relevant date for taxability.

Conclusion: The capital gain was held taxable in the assessment year corresponding to the development agreement date, against the assessee.

Issue (iii): Whether the assessee was entitled to carry forward and set off unabsorbed depreciation and to claim deduction of current year business losses.

Analysis: The claim for unabsorbed depreciation required factual verification and was not finally decided on the existing record, so the matter was sent back for fresh adjudication after giving opportunity of hearing. The claim for current year business losses was not substantiated by evidence, and the absence of return and supporting material justified rejection of the set-off claim.

Conclusion: The issue of unabsorbed depreciation was remanded to the Assessing Officer, while the claim for current year business losses was disallowed, resulting partly against the assessee.

Final Conclusion: The appeals were disposed of with a mixed result: the assessee obtained relief on the fair market value issue, failed on the year of taxability and business-loss claim, and secured a remand on the depreciation issue.

Ratio Decidendi: For capital gains computation, fair market value must be fixed on a realistic comparison of comparable properties and surrounding circumstances, and transfer under a development agreement occurs when effective control and possession are conveyed, not merely on formal conveyance.

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