Capital gains on development agreements require actual transfer of possession; mere execution of the agreement is insufficient.

Capital gains could not be charged on a development agreement where the assessee retained possession and use of the land, the developer had not taken possession, approvals were not obtained, and development had not commenced. The record did not show actual delivery of vacant possession, so the statutory conditions for a deemed transfer were not satisfied; the agricultural character of the land also supported the view that it was not a capital asset for the year in question. Reopening of the assessment was treated as valid because the return had originally been processed under section 143(1) and later material indicated possible escapement of income.

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Issues: (i) Whether the land covered by the development agreement was a capital asset and whether capital gains could be charged on the alleged transfer; (ii) Whether the reopening of assessment was valid.

Issue (i): Whether the land covered by the development agreement was a capital asset and whether capital gains could be charged on the alleged transfer.

Analysis: The assessee produced material showing continued possession and user of the land, while the developer had not taken possession, obtained approvals, or commenced development. The agreement contemplated handing over vacant possession only from a later point, but the record did not establish that such possession was actually delivered. In these circumstances, the conditions for treating the transaction as a transfer under the relevant capital gains provisions were not satisfied. The finding that the land remained agricultural also supported the conclusion that it was not a capital asset for the impugned tax year.

Conclusion: The issue was decided in favour of the assessee, and the addition towards capital gains was unsustainable.

Issue (ii): Whether the reopening of assessment was valid.

Analysis: The assessment had originally been processed under section 143(1), and material showing possible escapement of income came to light later. On that basis, the reopening was treated as legally permissible.

Conclusion: The reopening was held to be valid.

Final Conclusion: The Revenue's challenge to the deletion of capital gains failed, and the assessee's connected objection did not require separate adjudication.

Ratio Decidendi: In a development-agreement case, capital gains cannot be taxed unless the revenue establishes actual transfer of possession or otherwise satisfies the conditions for transfer under the statutory deeming provision; mere execution of the agreement is insufficient.

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