Deemed transfer under development agreements and separate taxation of constructed-area transfers in capital gains law

A development agreement may trigger a deemed transfer for capital gains when possession is given in part performance and the developer obtains effective control, even if the final conveyance is not yet registered or completed. The constructed area allotted to the landowners is treated as a separate capital asset, so any actual transfer of that share is taxable in the year it is effected, with capital gains computed under section 48. An appellate direction affecting non-party co-owners is unsustainable where they were not heard.

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Issues: (i) whether the transfer of immovable property under the development agreement was a deemed transfer under section 2(47)(v) so as to attract capital gains in the year of grant of possession; (ii) whether the transfer of the assessee's share in the constructed area and undivided land in the relevant previous year was separately taxable as capital gains; (iii) whether the direction to pass reassessment orders in the hands of the other co-owners could be sustained.

Issue (i): whether the transfer of immovable property under the development agreement was a deemed transfer under section 2(47)(v) so as to attract capital gains in the year of grant of possession.

Analysis: The development agreement, read with the surrounding facts, showed that the developer was put in possession and was enabled to act upon the contract in part performance. The Court applied the statutory scheme of section 2(47)(v) of the Income-tax Act, 1961, together with section 53A of the Transfer of Property Act, 1882, and held that registration or completion of the eventual conveyance was not decisive for capital gains purposes. The relevant enquiry was whether possession and effective control had been granted in part performance of the contract, and the record showed that the conditions for deemed transfer were satisfied.

Conclusion: The transfer under the development agreement was a deemed transfer, and the issue was decided in favour of the Assessee.

Issue (ii): whether the transfer of the assessee's share in the constructed area and undivided land in the relevant previous year was separately taxable as capital gains.

Analysis: The constructed area received by the landowners was treated as a distinct capital asset from the original land, and the actual sale of the assessee's share in the constructed area during the relevant year was held to give rise to a separate taxable event. The Court held that capital gains had to be computed only on the transfer actually effected in the previous year, with deduction admissible in accordance with section 48 of the Income-tax Act, 1961. The attempt to treat the whole transaction as a single deferred event was rejected.

Conclusion: The transfer of the assessee's share in the constructed area was taxable in the relevant year as capital gains, and the issue was decided partly in favour of the Assessee.

Issue (iii): whether the direction to pass reassessment orders in the hands of the other co-owners could be sustained.

Analysis: The appellate direction affecting the other co-owners was held to be unsustainable because they were not parties before the authority and had not been heard. The direction was beyond the proper appellate remit in the absence of notice and opportunity to those third parties, and it was therefore vacated.

Conclusion: The direction relating to the other co-owners was set aside, and the issue was decided in favour of the Assessee.

Final Conclusion: The dispute was resolved by holding that the development agreement attracted capital gains on deemed transfer, while the actual transfer of the constructed area in the relevant year remained separately taxable, and the appellate direction concerning non-party co-owners was unsustainable.

Ratio Decidendi: For capital gains purposes, a development agreement can effect a deemed transfer when possession is given in part performance under section 53A of the Transfer of Property Act, 1882, and later transfers of the constructed consideration are distinct taxable events governed by the year in which they are actually effected.

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