Development agreement as deemed transfer and interest disallowance upheld where business use of borrowings was not proved.

A development agreement was treated as a transfer for capital gains purposes because it gave the developer possession or possession-like control in part performance of the contract; legal title remaining with the owner and deferred consideration did not prevent taxability in the year of the agreement. Interest on borrowings was also disallowed because the assessee did not prove that the funds were used for business purposes, and the record suggested diversion to non-business assets and outgoings. The valuation adopted by the first appellate authority was left undisturbed.

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Issues: (i) Whether entering into the development agreement amounted to transfer of the assessee's land for the purposes of capital gains under section 2(47)(v) of the Income-tax Act, 1961. (ii) Whether the disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was justified in respect of the borrowings allegedly diverted for non-business purposes.

Issue (i): Whether entering into the development agreement amounted to transfer of the assessee's land for the purposes of capital gains under section 2(47)(v) of the Income-tax Act, 1961.

Analysis: The agreement was examined in the light of section 2(47)(v) of the Income-tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882. The decisive question was whether the developer was put in possession or allowed to retain possession in part performance of a contract and whether the agreement had been acted upon so as to create the statutory fiction of transfer. The arrangement was treated as conferring possession and control sufficient to attract the deeming provision, and the fact that legal title remained with the owner or that consideration was to be received in kind in the future was held not to prevent taxability in the year of the agreement.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was justified in respect of the borrowings allegedly diverted for non-business purposes.

Analysis: Deduction of interest was treated as allowable only where the borrowed funds were used for business purposes. The assessee was found not to have satisfactorily established that the borrowed monies were deployed for business use, while the investments and deposits reflected diversion to assets and outgoings not shown to be connected with business operations. On that footing, the mixed-fund and own-funds explanations were not accepted for deleting the disallowance.

Conclusion: The disallowance of interest was upheld against the assessee.

Final Conclusion: The development-agreement transaction was held taxable as a transfer, and the interest disallowance was sustained, while the valuation adopted by the first appellate authority was not disturbed.

Ratio Decidendi: For capital gains purposes, a development agreement attracts section 2(47)(v) when it confers possession or possession-like control in part performance of a contract covered by section 53A of the Transfer of Property Act, 1882, and interest on borrowings is deductible only to the extent the assessee proves deployment for business purposes.

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