Development agreement as transfer for capital gains when possession passes in part performance and substantial consideration is received

A development agreement may constitute a transfer for capital gains purposes where possession of immovable property is handed over in part performance under section 53A and substantial consideration is received. On that basis, capital gains can accrue in the assessment year in which the consideration is received, even if the formal sale deed is executed later. The court also noted that any consequential exemption or investment relief claim was to be examined by the Assessing Officer in accordance with law, with adjustment if further benefit was available. The timing of transfer and capital gains was therefore treated as arising when possession and substantial consideration converged.

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Issues: (i) Whether handing over possession of immovable property to a builder under the development agreement amounted to a transfer within the meaning of section 2(47)(v) read with section 53A, so as to attract capital gains in the assessment year in which substantial consideration was received. (ii) Whether the assessee was entitled to consequential benefit in respect of the exemption/investment claim under section 11(1A).

Issue (i): Whether handing over possession of immovable property to a builder under the development agreement amounted to a transfer within the meaning of section 2(47)(v) read with section 53A, so as to attract capital gains in the assessment year in which substantial consideration was received.

Analysis: Section 2(47)(v) treats as transfer a transaction involving allowing possession of immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. The agreement showed that possession was handed over to the builder on receipt of the first instalment and that substantial consideration was to be paid in instalments. The arrangement was held to be one of part performance, and the builder was treated as stepping into the position of the purchaser for purposes of the transfer. On that basis, the capital gains accrued when substantial consideration was received during the relevant assessment year.

Conclusion: The transfer took place in the assessment year 2004-05 when substantial consideration was received, and the capital gains assessment made by the Assessing Officer was upheld. This issue was decided in favour of the Revenue.

Issue (ii): Whether the assessee was entitled to consequential benefit in respect of the exemption/investment claim under section 11(1A).

Analysis: The order records that the Assessing Officer had granted exemption to the extent of investment already made, and it directed that if the assessee was entitled to any further benefit under the relevant provision, the Assessing Officer should make the necessary adjustment in accordance with law.

Conclusion: The assessee's claim for further benefit was left for appropriate consideration by the Assessing Officer in accordance with law.

Final Conclusion: The appeal was allowed, the Tribunal's view on the timing of transfer and capital gains was reversed, and the assessment of capital gains was restored, while leaving the assessee's consequential exemption claim to be examined by the Assessing Officer.

Ratio Decidendi: For purposes of capital gains, a development agreement can amount to a transfer when possession is handed over in part performance and substantial consideration is received, even if the formal sale deed is executed later.

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