Capital gains on cancelled development agreements depend on valid section 53A compliance and enforceable possession in part performance.

Capital gains under section 2(47)(v) were held not to arise on the unperformed and cancelled portion of a joint development agreement where the arrangement was unregistered and the requirements of section 53A of the Transfer of Property Act, 1882 were not satisfied. Possession was described as permissive for development purposes, not possession in part performance as a transferee. On that basis, the deeming transfer provision did not apply and the remaining land could not be taxed as capital gains. The separate claim for exemption under section 54F did not require adjudication.

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Issues: Whether capital gains tax could be levied on the consideration arising from the joint development agreement in respect of the remaining land, when the agreement was cancelled and the essential requirements of section 53A of the Transfer of Property Act, 1882 were not satisfied.

Analysis: The transaction was examined in the light of section 2(47)(ii), (v) and (vi) of the Income-tax Act, 1961 and the requirements of section 53A of the Transfer of Property Act, 1882. The arrangement contemplated pro rata transfer, and possession, if any, was only permissive for development purposes and not in the capacity of a transferee in part performance. As the joint development agreement executed after 24.9.2001 was unregistered, its terms could not be enforced under section 53A, and the deeming provision in section 2(47)(v) did not apply. In the circumstances, no taxable capital gain arose in respect of the unperformed and cancelled portion of the arrangement.

Conclusion: The question of capital gains tax was answered in favour of the assessee and against the Revenue. The authorities were not justified in taxing the remaining land under the joint development agreement.

Final Conclusion: The appeals succeeded on the substantive tax issue, and the allied claim for exemption under section 54F did not survive for adjudication.

Ratio Decidendi: For section 2(47)(v) to apply, the agreement must satisfy all the ingredients of section 53A of the Transfer of Property Act, 1882, including a legally enforceable registered arrangement and possession in part performance; permissive possession under an unregistered development agreement does not constitute a taxable transfer.

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