Unregistered development-rights agreement cannot trigger deemed transfer; only accrued taxable income and identified interest were brought to tax.

An unregistered shareholders' agreement and related arrangements could not trigger deemed transfer under section 2(47)(v) after the 2001 Registration Act amendment, because an unregistered instrument cannot support section 53A protection; income also could not accrue without an enforceable right to receive it. On the project receipts, only the interest component was taxable, while specified expenses were excluded and the balance retained capital-receipt character. Interest on fully convertible debentures was treated as work-in-progress on a revenue-neutral basis, repayment of an existing debt was not hit by section 40A(3), and current-account movements were not deemed dividends under section 2(22)(e).

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Issues: (i) whether the alleged transfer of development rights together with land under the shareholders' agreement constituted a taxable transfer or gave rise to accrual of income in the assessment year; (ii) whether the receipt styled as settlement of debts was taxable in full in the year under appeal; (iii) whether the interest on fully convertible debentures, the disallowance under section 40A(3), and the deemed dividend additions under section 2(22)(e) were sustainable.

Issue (i): whether the alleged transfer of development rights together with land under the shareholders' agreement constituted a taxable transfer or gave rise to accrual of income in the assessment year.

Analysis: The shareholders' agreement and the connected arrangements were admittedly unregistered. The legal effect of section 2(47)(v) of the Income-tax Act read with section 53A of the Transfer of Property Act and section 17(1A) of the Registration Act was examined in the light of the principle that, after the 2001 amendment, an unregistered agreement cannot operate as a contract enforceable under section 53A. The Court also noted that income accrues only when there is a corresponding right to receive it and a corresponding liability in the other party, and that the assessee's right to the consideration was linked to the completion of approvals and compliances.

Conclusion: The alleged transfer did not attract section 2(47)(v) in the year under appeal and no income accrued on that basis in that year. The addition on account of transfer of development rights was deleted.

Issue (ii): whether the receipt styled as settlement of debts was taxable in full in the year under appeal.

Analysis: The amount was found to be linked to the overall arrangement governing the project, involving revaluation elements, advances earlier made, and obligations undertaken by the assessee. However, the assessee had no unfettered control over the whole amount because withdrawal was restricted until the contractual conditions were fulfilled. At the same time, the Court held that part of the amount represented interest on advances and that certain project-related expenses could not be treated as forming part of work-in-progress for the purpose of this issue. The balance had the character of capital receipt.

Conclusion: The issue was partly decided against the assessee and partly in its favour. The Court directed taxation only of the interest component, excluded specified expenses, and treated the remaining balance as a non-taxable capital receipt.

Issue (iii): whether the interest on fully convertible debentures, the disallowance under section 40A(3), and the deemed dividend additions under section 2(22)(e) were sustainable.

Analysis: The interest on fully convertible debentures was treated as linked to the project consideration and, in the circumstances of the case, as properly carried to work-in-progress on a revenue-neutral basis. The payment of Rs. 26 lakhs was held to be repayment of an existing debt and not an expenditure hit by section 40A(3). The inter-company movements were found to be current-account transactions in the nature of business arrangements and not loans or advances attracting section 2(22)(e), particularly in the absence of the mischief targeted by the deeming provision.

Conclusion: The additions on account of interest on fully convertible debentures, disallowance under section 40A(3), and deemed dividend were deleted.

Final Conclusion: The assessees succeeded on the main transfer-of-development-rights issue, obtained deletion of the debenture-interest, section 40A(3), and deemed-dividend additions, and succeeded only partly on the settlement-of-debts issue. The Revenue's appeal was dismissed.

Ratio Decidendi: After the 2001 amendment to the Registration Act, an unregistered agreement of the nature contemplated by section 53A of the Transfer of Property Act cannot trigger section 2(47)(v) of the Income-tax Act, and income cannot be taxed unless the assessee has an enforceable right to receive it.

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