Capital gains on development agreements must be split between land and superstructure, with long-term treatment following the land interest.

Where flats are sold after a development arrangement, the gain cannot be treated as wholly short-term if the transaction includes separate interests in land and superstructure. The Tribunal distinguished the assessee's pre-existing landholding from the flats acquired under development, holding that land and building are distinct assets and the consideration must be apportioned accordingly. The land component retained long-term capital gain character, while the superstructure component was treated as short-term capital gain. Relief under section 54EC was therefore available only for the long-term land component, and the gains had to be recomputed on that basis.

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Issues: (i) Whether the gains arising from sale of flats acquired under a development agreement were to be assessed wholly as short-term capital gains or whether the consideration had to be bifurcated between the assessee's right in the land and the superstructure. (ii) Whether the assessee was entitled to treat the gain relatable to the land component as long-term capital gain and claim exemption under section 54EC of the Income-tax Act, 1961.

Issue (i): Whether the gains arising from sale of flats acquired under a development agreement were to be assessed wholly as short-term capital gains or whether the consideration had to be bifurcated between the assessee's right in the land and the superstructure.

Analysis: The right to acquire the flats under the agreement was an asset, but once the flats came into existence and possession was taken, the assessee sold the flats and not the right to acquire them. Accordingly, the holding period of the flats could not be reckoned from the agreement date for the entire composite transaction. At the same time, the assessee had retained a separate and independent interest in the land, which had been held since 1962. Land and superstructure are distinct assets, and the capital gain arising from them cannot be mechanically clubbed together. The proper approach was therefore to segregate the consideration attributable to the land from the consideration attributable to the superstructure.

Conclusion: The entire sale consideration could not be taxed wholly as short-term capital gain; the gain had to be bifurcated, with the land component treated as long-term capital gain and the superstructure component as short-term capital gain.

Issue (ii): Whether the assessee was entitled to treat the gain relatable to the land component as long-term capital gain and claim exemption under section 54EC of the Income-tax Act, 1961.

Analysis: Since the assessee had held the land for the requisite long period, the gain attributable to that asset retained the character of long-term capital gain. The Tribunal therefore accepted that the assessee could avail the statutory relief available against such long-term capital gains, while the short-term component from the superstructure would be computed separately. The Assessing Officer was directed to re-compute the gains accordingly.

Conclusion: The assessee was entitled to long-term capital gain treatment for the land component and consequential relief under section 54EC in accordance with law.

Final Conclusion: The Revenue's challenge succeeded only in part, because the assessment was not sustained on a wholly short-term basis and the capital gains were required to be recomputed by separating the land and building components.

Ratio Decidendi: Where a transaction involves both an independent land interest and a superstructure acquired or developed pursuant to a development arrangement, the capital gain must be apportioned according to the distinct assets transferred, and the character of the gain follows the asset to which the consideration is properly attributable.

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