Development-rights transfer timing drives capital gains; inherited property cost and exemption claim require fresh verification.

Capital gains on transfer of development rights were treated as arising when the transfer was completed in substance under the development agreement, so taxability attached in assessment year 2006-07. For inherited property acquired before 1 April 1981, nil cost was rejected; the computation had to consider the substituted fair market value as on that date, and the valuation and sale consideration were remanded for verification. The assessee's exemption claim was also admitted as a legal ground and sent back for examination on the facts and law.

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Issues: (i) whether capital gains arising from transfer of development rights were chargeable in the assessment year 2006-07; (ii) whether the cost of acquisition of the inherited property could be taken at nil or had to be determined with reference to the fair market value as on 1 April 1981; and (iii) whether the assessee's claim for deduction under section 54F required examination.

Issue (i): whether capital gains arising from transfer of development rights were chargeable in the assessment year 2006-07.

Analysis: The property was placed under a development agreement and the consideration agreed for surrender of rights was linked to allotment of the flat, which was completed in December 2005. On the facts recorded, the transfer of rights for capital gains purposes was treated as having culminated in the relevant previous year corresponding to assessment year 2006-07. The plea that the taxability arose only in assessment year 2000-01 was not accepted.

Conclusion: The capital gain was held taxable in assessment year 2006-07, against the assessee.

Issue (ii): whether the cost of acquisition of the inherited property could be taken at nil or had to be determined with reference to the fair market value as on 1 April 1981.

Analysis: Since the property had devolved on the assessee from a predecessor who had acquired it before 1 April 1981, the cost to the previous owner had to be substituted for the assessee under the applicable succession provision. The principle applied was that where the asset predates 1 April 1981, the fair market value as on that date is relevant for computation, and the Department had not adopted any such value. The valuation report furnished by the assessee therefore required examination, along with the correct sale consideration, and the matter was restored to the Assessing Officer for verification.

Conclusion: The nil-cost approach was rejected, and the issue was remanded for fresh determination in favour of the assessee on principle.

Issue (iii): whether the assessee's claim for deduction under section 54F required examination.

Analysis: The claim had not been raised earlier, but being a legal claim it was admitted as an additional ground. Since the relevant factual and legal verification had not been undertaken below, the claim was sent back for examination according to law.

Conclusion: The section 54F claim was admitted and remanded for consideration, in favour of the assessee.

Final Conclusion: The appeal was disposed of by sustaining the year of taxability adopted by the Revenue, while setting aside the computation-related issues and the exemption claim for fresh examination by the Assessing Officer.

Ratio Decidendi: In a development-agreement transfer, capital gains arise when the transfer of rights is completed in substance, and for inherited property acquired before 1 April 1981, the computation must proceed on the substituted fair market value rather than a nil cost basis, with a legally sustainable exemption claim open to fresh adjudication if it raises a pure question of law.

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