Development agreement as transfer triggers capital gains, while consideration, cost base and sections 54 and 54F need fresh verification.

A development agreement that conferred possession and required the developer to enter, develop and construct on the property was treated as a transfer under section 2(47) of the Income-tax Act read with section 53A of the Transfer of Property Act, so capital gains arose in the year of the agreement. At the same time, the sale consideration and cost of acquisition, including possible double addition, demolished structures, tenant payments and litigation-related expenditure, required fresh verification on evidence. Eligibility for deduction under sections 54 and 54F was also left open for reconsideration on the recomputed gains. Ex parte assessments for non-filing were upheld as procedurally justified.

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Issues: (i) Whether capital gains arose in the year of the development agreement on the basis of possession and performance under the agreement; (ii) whether the sale consideration and cost of acquisition adopted by the Assessing Officer required re-examination; (iii) whether deduction under sections 54 and 54F was allowable; (iv) whether the ex parte assessments of the assessees who had not filed returns were invalid for want of further notice.

Issue (i): Whether capital gains arose in the year of the development agreement on the basis of possession and performance under the agreement.

Analysis: The agreement permitted the developer to enter the property, develop the site, and construct the residential complex. The owners were obliged to place the developer in possession and not interfere with the work, while the tenants had substantially been settled. On these terms, the arrangement satisfied the requirements of section 53A of the Transfer of Property Act and fell within the concept of transfer under section 2(47) of the Income-tax Act. The earlier unfruitful agreements did not alter the effect of the agreement in question, and the cited decisions where the contract had not been performed were held inapplicable.

Conclusion: Capital gains were held taxable in the year of the development agreement and this issue was decided against the assessees.

Issue (ii): Whether the sale consideration and cost of acquisition adopted by the Assessing Officer required re-examination.

Analysis: The Assessing Officer had effectively taken both the refundable deposit and the value of the constructed area, which would amount to double addition. The value of the constructed area and the assessee's objections on cost of construction had not been properly examined, and the cost of acquisition also required consideration of the demolished structures, payments to tenants, and litigation-related expenditure, if supported by evidence. These aspects required fresh inquiry and proper opportunity to the assessees.

Conclusion: The adoption of sale consideration and cost of acquisition was set aside for fresh adjudication in favour of the assessees.

Issue (iii): Whether deduction under sections 54 and 54F was allowable.

Analysis: Since the assessees had received residential flats in a development arrangement involving residential property, their eligibility for relief under sections 54 and 54F had to be examined along with the recomputation of capital gains. The earlier rejection could not be sustained without a proper examination of the revised computation and supporting material.

Conclusion: The claim for deduction under sections 54 and 54F was directed to be examined afresh and was thus left open for reconsideration in favour of the assessees.

Issue (iv): Whether the ex parte assessments of the assessees who had not filed returns were invalid for want of further notice.

Analysis: The assessees had not complied with repeated notices and had not filed returns despite summons and opportunities. In those circumstances, completion of the assessments ex parte was held justified, and the absence of a separate final opportunity was treated as only a procedural lapse, especially since the assessments were being remitted for fresh computation on merits.

Conclusion: The challenge to the ex parte assessments was rejected against the assessees.

Final Conclusion: The appeals were disposed of by setting aside the existing assessments and restoring the capital-gains computation to the Assessing Officer for fresh consideration, while upholding the taxability in principle and rejecting the procedural challenge.

Ratio Decidendi: Where the development agreement grants possession and the contractual obligations are substantially performed so as to attract section 53A of the Transfer of Property Act, the transaction constitutes a transfer under section 2(47) of the Income-tax Act for capital-gains purposes; however, the computation of consideration and deductible cost components must be examined independently on proper evidence.

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