Capital gains on development agreements must track actual receipt where section 2(47)(v) is not triggered by part performance.

Capital gains from a development agreement could not be taxed on the entire agreed consideration on accrual basis because the arrangement did not satisfy the conditions of section 53A of the Transfer of Property Act, 1882, and therefore did not trigger section 2(47)(v) of the Income-tax Act, 1961. Where possession was not delivered in the manner required for part performance and the agreement was unregistered, no completed transfer arose on notional accrual. The capital gains computation was to be made only on actual receipts during the year, with any balance taxable, if at all, in the year of receipt.

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Issues: Whether capital gains arising from the development agreement were taxable on the entire agreed consideration on accrual basis, or only to the extent of actual consideration received during the year, in the absence of a completed transfer attracting section 2(47)(v) of the Income-tax Act, 1961.

Analysis: The dispute turned on whether the arrangement resulted in a completed transfer under section 53A of the Transfer of Property Act, 1882 so as to bring it within section 2(47)(v) of the Income-tax Act, 1961. The authority relied on the governing High Court decision, which held that where possession was not delivered in part performance in the manner required by section 53A and the development agreement was unregistered, the statutory conditions for invoking section 2(47)(v) were not satisfied. On that footing, capital gains could not be fastened on the whole notional consideration merely on accrual assumptions, and taxation had to follow the consideration actually received.

Conclusion: The issue was decided in favour of the assessee. Capital gains were directed to be computed only on the basis of actual receipts during the year, and the balance was to be taxed, if at all, in the year of receipt.

Ratio Decidendi: For capital gains to arise under section 2(47)(v) on the basis of part performance, the conditions of section 53A of the Transfer of Property Act, 1882 must be fully satisfied, including effective possession in the requisite legal capacity and a qualifying registered arrangement; absent this, taxation cannot be imposed on the full notional consideration and must track actual receipt.

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