Development agreement transfer, building cost computation and section 54 relief apply where possession is handed over for development.

Where a development agreement records handing over of possession to the developer and the conditions of part performance are treated as satisfied, transfer is treated as taking place on the date of the agreement for capital gains purposes, and capital gains arise in that year. The note also states that the existing building formed part of the transferred arrangement, so the cost of construction and related valuation of the superstructure had to be considered in recomputing capital gains. It further states that section 54 relief was allowable for the flats received under the development agreement, because the expression covers a residential house and the transfer was not confined to land alone.

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Issues: (i) Whether the development agreement resulted in transfer of the capital asset on the date of the agreement for the purposes of capital gains; (ii) whether the cost of construction of the existing building and related valuation adjustments were allowable in computing capital gains; (iii) whether deduction under section 54 was allowable in respect of the flats received under the development agreement.

Issue (i): Whether the development agreement resulted in transfer of the capital asset on the date of the agreement for the purposes of capital gains.

Analysis: The agreement recorded handing over of possession to the developer for development, and the conditions of part performance were treated as satisfied. On that basis, the transfer was held to have taken place on the date of the agreement, attracting capital gains in that year.

Conclusion: Decided against the assessee.

Issue (ii): Whether the cost of construction of the existing building and related valuation adjustments were allowable in computing capital gains.

Analysis: The existence of the building was accepted from the development agreement itself, including the clause dealing with demolition and disposal of dismantled material. The building's superstructure was therefore held to be part of the transferred arrangement, and the capital gains had to be recomputed by allowing the cost of construction with appropriate valuation as on the relevant date.

Conclusion: Decided in favour of the assessee.

Issue (iii): Whether deduction under section 54 was allowable in respect of the flats received under the development agreement.

Analysis: The transfer was held not to be confined to land alone, but to include a residential building arrangement. Following the principle that the expression used in section 54 is a residential house and not a narrow residential unit, deduction was held allowable in respect of the flats received under the development agreement.

Conclusion: Decided in favour of the assessee.

Final Conclusion: The appeals were allowed only to the extent of recomputation of capital gains and grant of section 54 relief, while the finding on transfer under the development agreement was sustained.

Ratio Decidendi: In a development agreement where possession is handed over for performance and the arrangement includes a residential building, the transfer is complete for capital gains purposes on the date of the agreement, but the assessee is entitled to have the building value considered in computation and to claim section 54 relief for the residential flats received.

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