Capital gains on development rights require possession transfer; nil-cost additional FSI cannot attract computable capital gains.

Capital gains under a development rights arrangement arise only when possession and effective control are handed over in part performance so that section 2(47)(v) read with section 53A applies; on the stated facts, the society retained control and the developer had not obtained possession or approvals, so no transfer occurred in the relevant year. Where the dispute concerns additional floor space index created by development regulations, and no ascertainable cost of acquisition is attributable, capital gains cannot be computed on a nil-cost asset; the section 50C valuation issue becomes irrelevant once chargeability itself fails.

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Issues: (i) Whether capital gains arose in the assessment year on execution of the development rights agreement when possession and effective control over the property had not been handed over to the developer. (ii) Whether capital gains could be levied on transfer of additional floor space index acquired under development regulations where no cost of acquisition was attributable.

Issue (i): Whether capital gains arose in the assessment year on execution of the development rights agreement when possession and effective control over the property had not been handed over to the developer.

Analysis: The charging of capital gains 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. A transfer under the deeming provision requires handing over of possession in part performance of the contract. On the facts, the society retained full control over the existing building and the developer had not obtained the necessary approvals or taken possession. The agreement, therefore, had not resulted in a completed transfer during the relevant year.

Conclusion: Capital gains were not chargeable in the relevant assessment year.

Issue (ii): Whether capital gains could be levied on transfer of additional floor space index acquired under development regulations where no cost of acquisition was attributable.

Analysis: The transfer, if any, related only to additional floor space index made available by development regulations, not to land or the existing building. Such additional entitlement arose without any cost of acquisition. In the absence of an ascertainable cost of acquisition, the principle that capital gains cannot be computed on a nil-cost asset was applied. The issue of valuation under section 50C of the Income-tax Act, 1961 did not survive once the charge itself failed.

Conclusion: No capital gains were leviable on the additional floor space index for want of cost of acquisition.

Final Conclusion: The addition made by the revenue authorities was unsustainable and the assessee succeeded in the appeal.

Ratio Decidendi: Capital gains under a development rights arrangement arise only when possession is handed over in a manner satisfying section 2(47)(v) of the Income-tax Act, 1961, and a right created without cost of acquisition cannot give rise to a computable capital gain.

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