Unregistered development agreements and business fund movements: tax accrual, expense deductibility, and deemed dividend principles clarified.

Development-right consideration is not treated as accrued income where the arrangement is unregistered and the required statutory approvals for development remain pending; taxability arises only when the transaction is sufficiently complete and the consideration is finally earned. Proportionate development expenses linked to sanctioned floor space index are allowable when they directly relate to the income recognised from that project and the same accounting treatment has been consistently followed. Amounts moving between group concerns in a real estate consortium are not deemed dividend when they are commercial project funds used for business purposes rather than loans or advances in substance.

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Issues: (i) Whether consideration relating to transfer of development rights could be taxed in the year under appeal when the underlying agreement was unregistered and the statutory approvals for development had not yet been obtained; (ii) whether the proportionate development expenses relatable to the sanctioned floor space index were allowable; (iii) whether amounts received from group concerns in the course of the real estate consortium arrangement were liable to be treated as deemed dividend.

Issue (i): Whether consideration relating to transfer of development rights could be taxed in the year under appeal when the underlying agreement was unregistered and the statutory approvals for development had not yet been obtained.

Analysis: The development arrangement was part of a composite transaction under which the assessee was obliged to secure the necessary permissions and approvals before the consideration could be treated as finally earned. The agreement relied upon by the Revenue was not registered under the compulsory registration provision applicable to contracts attracting part performance. In the absence of such registration, the transaction did not satisfy the requirements of transfer under the relevant capital gains provision. The income, therefore, could not be said to have accrued merely on the execution of the agreement or on the basis of book entries, particularly when the approvals were obtained only in later years and the assessee offered the amounts in those years.

Conclusion: The addition on account of development rights was not sustainable and was deleted.

Issue (ii): Whether the proportionate development expenses relatable to the sanctioned floor space index were allowable.

Analysis: The assessee had offered income in respect of sanctioned floor space index and claimed proportionate expenses incurred to earn that income. The Revenue did not dispute the receipt-based accounting pattern consistently followed by the assessee, and similar expenditure had been accepted in later years. Once the corresponding income was held to be taxable in the year and the expenses were shown to be directly related to that income, there was no justification to deny the deduction on a different treatment of the same transaction. Consistency in treatment of the same project receipts and expenses also supported the assessee.

Conclusion: The disallowance of development expenses was deleted.

Issue (iii): Whether amounts received from group concerns in the course of the real estate consortium arrangement were liable to be treated as deemed dividend.

Analysis: The transactions between the group companies were found to be part of a common business arrangement for acquisition and development of land, with funds moving through current and inter se business accounts for project purposes. The amounts were used for business exigencies and did not represent loans or advances in the commercial sense intended to be covered by the deeming fiction. A provision creating deemed dividend must be applied strictly, and business or trade advances arising from commercial transactions do not fall within its mischief.

Conclusion: The addition under the deemed dividend provision was deleted.

Final Conclusion: The appeals were allowed in full, and all additions made by the lower authorities were deleted.

Ratio Decidendi: For tax purposes, development-right consideration does not accrue on an unregistered and incomplete development arrangement lacking the necessary statutory approvals, and commercial fund movements in a consortium business arrangement are not deemed dividend unless they constitute loans or advances in substance.

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