Capital gains in joint development and prior possession cases turn on the agreement and transfer character, not later construction cost or section 54 relief.

For capital gains on the J.P. Nagar property, the assessee could adopt the fair market value as on 01.04.1981 and claim indexation from that date because prior allotment and possession brought the transaction within the transfer framework recognised by section 2(47); the Revenue's challenge failed. For the Aga Abba Ali Road property, the joint development agreement governed the consideration, and the developer's actual construction cost was not the correct basis for computation; the Revenue's challenge again failed. Exemption under section 54 was unavailable because the residential structure had already been demolished and the transfer related to vacant land; relief, if any, lay under section 54F, so this claim failed.

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Issues: (i) Whether, for computing long-term capital gains on the J.P. Nagar property, the assessee was entitled to adopt the fair market value as on 01.04.1981 and claim indexation from that date; (ii) Whether, for the property at Aga Abba Ali Road, the consideration for capital gains had to be taken as the value fixed in the joint development agreement or as 50% of the developer's actual construction cost; (iii) Whether the assessee was entitled to exemption under section 54 of the Income-tax Act, 1961, and whether only section 54F was available.

Issue (i): Whether, for computing long-term capital gains on the J.P. Nagar property, the assessee was entitled to adopt the fair market value as on 01.04.1981 and claim indexation from that date.

Analysis: The property had been allotted and the assessee's family had been put in possession prior to 01.04.1981. The transfer provisions under section 2(47) of the Income-tax Act, 1961, as expanded by clause (v), recognise possession given in part performance within the ambit of transfer. On that footing, the relevant cost base for computation could be linked to the earlier date of possession and allotment, and the earlier market value could be adopted for indexation.

Conclusion: The issue was decided against the Revenue.

Issue (ii): Whether, for the property at Aga Abba Ali Road, the consideration for capital gains had to be taken as the value fixed in the joint development agreement or as 50% of the developer's actual construction cost.

Analysis: The joint development arrangement was treated as an exchange transaction. The agreement itself fixed the value of the owner's share and identified the consideration structure. The developer's subsequent project cost was not treated as the correct basis for capital gains computation because it did not necessarily represent the market value of the consideration passing under the agreement.

Conclusion: The issue was decided against the Revenue.

Issue (iii): Whether the assessee was entitled to exemption under section 54 of the Income-tax Act, 1961, and whether only section 54F was available.

Analysis: The existing residential structure had been demolished before the development arrangement was implemented, and the subject matter transferred was vacant land for construction of apartments. In such a situation, the statutory conditions for exemption under section 54 were not satisfied. The proper relief, if any, lay under section 54F and not section 54.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The appeal succeeded only to the limited extent of setting aside the direction granting exemption under section 54, while the findings on computation of capital gains for both properties were left undisturbed.

Ratio Decidendi: For capital gains arising from transactions involving prior possession or joint development arrangements, the relevant consideration and transfer must be determined from the legal character of the transaction and the agreement itself, while exemption under section 54 is unavailable where the original residential structure has been demolished and the transfer relates to vacant land.

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