Capital gains transfer date depends on effective compromise and ratification, not an unperformed earlier sale agreement.

For capital gains purposes, a transfer under section 2(47) read with section 53A of the Transfer of Property Act is completed only when the contractual arrangement is effectively acted upon and validated. Where an earlier sale agreement was not fully performed and was later revived through a compromise deed and ratification, the transfer date followed the effective compromise rather than the original agreement, so assessment year 2004-05 was the relevant year. Land development expenses, if actually recorded in the books as cost of improvement, were allowable with indexation while computing capital gains, and the challenge on that issue also failed.

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Issues: (i) Whether the transfer of the property for capital gains purposes took place in assessment year 1999-2000 or assessment year 2004-05; (ii) Whether the assessee was entitled to deduction of land development expenses with indexation while computing capital gains.

Issue (i): Whether the transfer of the property for capital gains purposes took place in assessment year 1999-2000 or assessment year 2004-05.

Analysis: The agreement for sale was entered into in 1998, but the terms were not fully complied with and disputes led to criminal proceedings. The later compromise deed of 19.7.2003 ratified the earlier power of attorney and provided for payment of the balance consideration in instalments, all of which were eventually honoured. On these facts, the conditions of section 53A of the Transfer of Property Act, 1882 were not satisfied in 1998, and the effective transfer for the purposes of section 2(47) of the Income-tax Act, 1961 took place only when the compromise revived and validated the transaction.

Conclusion: The transfer was rightly brought to tax in assessment year 2004-05, against the assessee.

Issue (ii): Whether the assessee was entitled to deduction of land development expenses with indexation while computing capital gains.

Analysis: The appellate authority found that the assessing authority had not considered the cost of improvement and had only directed verification of land development expenses actually recorded in the books. If such expenses were recorded, the assessee would be entitled to the deduction and the corresponding indexation as permissible in law.

Conclusion: The assessee was entitled to the deduction, in favour of the assessee.

Final Conclusion: The assessee's challenge to the assessment year failed, while the Revenue's challenge to the allowance of land development expenses also failed, leaving the common order undisturbed.

Ratio Decidendi: For capital gains purposes, a transfer under section 2(47) read with section 53A of the Transfer of Property Act, 1882 is complete only when the contractual arrangement is effectively acted upon and validated; where the original agreement is not complied with and is later revived by compromise and ratification, the transfer date follows the effective compromise, not the earlier agreement.

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