Capital gains on development agreements depend on possession under section 53A, and later cancellation may require fresh factual review.

Capital gains under section 2(47)(v) arise in a development agreement only where possession is handed over in part performance within the scope of section 53A of the Transfer of Property Act; if the factual basis is incomplete or the agreement is later cancelled, the taxability must be tested on fresh factual examination. The note also addresses an unexplained opening cash balance, stating that acceptance of the figure in a cash flow statement is insufficient without verification of its source, so further enquiry is required before any addition is deleted or sustained.

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Issues: (i) Whether capital gains could be brought to tax on the basis of the development agreement under section 2(47)(v) of the Income-tax Act, 1961 and section 53A of the Transfer of Property Act, 1882, despite the later cancellation of the agreement. (ii) Whether the addition of Rs. 16,00,000 as unexplained opening cash balance required fresh examination.

Issue (i): Whether capital gains could be brought to tax on the basis of the development agreement under section 2(47)(v) of the Income-tax Act, 1961 and section 53A of the Transfer of Property Act, 1882, despite the later cancellation of the agreement.

Analysis: The charging provision for capital gains operates only where there is a transfer of a capital asset. In a development arrangement, section 2(47)(v) applies only when the transferee is put in possession in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. The surrounding facts, including the alleged cancellation agreement and the actual state of possession and development activity, had not been properly examined by the lower authorities. The computation and legal effect of the transaction therefore could not be finally affirmed on the material then on record.

Conclusion: The question of taxability of capital gains on the development agreement was set aside for fresh consideration by the appellate authority.

Issue (ii): Whether the addition of Rs. 16,00,000 as unexplained opening cash balance required fresh examination.

Analysis: The opening balance was accepted by the assessee in a cash flow statement, but the source of the amount had not been properly verified. The deletion of the addition by the first appellate authority was therefore considered premature without necessary enquiry into the availability and source of the cash balance.

Conclusion: The issue was remanded for fresh enquiry and decision in accordance with law.

Final Conclusion: The matter resulted in partial relief to the assessee, with the principal capital gains issue and the opening balance issue sent back for reconsideration.

Ratio Decidendi: Section 2(47)(v) applies to a development agreement only when the contractual arrangement results in possession being allowed in part performance within the meaning of section 53A, and where the factual foundation for that conclusion is incomplete or altered by a later cancellation, the matter requires fresh factual determination.

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