Redevelopment rights and additional FSI: no capital gains without possession or ascertainable cost, and section 50C did not apply.

A redevelopment agreement was treated as an executory arrangement, not a transfer of a capital asset under section 2(47), because possession had not been handed over and the society retained ownership and control. Even on the assumption that additional FSI or development rights were transferred, no taxable capital gains arose where no ascertainable cost of acquisition could be attributed to those rights and the computation mechanism under sections 45, 48 and 55(2) failed. Section 50C was also inapplicable because it applies only to transfers of land or building, not development rights. The overall result was that the capital gains addition was unsustainable.

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Issues: (i) Whether the development agreement resulted in a transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961. (ii) Whether, assuming a transfer of additional FSI or development rights, any capital gains arose when no cost of acquisition could be ascribed to such rights. (iii) Whether section 50C of the Income-tax Act, 1961 applied to the transfer of development rights under the agreement.

Issue (i): Whether the development agreement resulted in a transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961.

Analysis: The agreement was found to be an executory arrangement for redevelopment and not a sale of land or building. The crucial element under section 2(47)(v) read with section 53A of the Transfer of Property Act, 1882 was possession, and possession had not been handed over to the developer. On the facts, the society continued to retain ownership and control, and the contemplated redevelopment had not reached the stage of part performance giving rise to transfer.

Conclusion: No transfer of a capital asset had taken place within section 2(47); the finding was in favour of the assessee.

Issue (ii): Whether, assuming a transfer of additional FSI or development rights, any capital gains arose when no cost of acquisition could be ascribed to such rights.

Analysis: The rights attached to redevelopment and additional FSI were held to arise by operation of the development control regime and not by any identifiable cost of acquisition. The computation mechanism for capital gains requires a cost base under sections 45, 48 and 55(2), and where the transferred right has no ascertainable cost and is not a category specifically covered by section 55(2), the charging computation fails.

Conclusion: No taxable capital gains arose from the transfer of the development rights or additional FSI; the finding was in favour of the assessee.

Issue (iii): Whether section 50C of the Income-tax Act, 1961 applied to the transfer of development rights under the agreement.

Analysis: Section 50C is confined to transfer of land or building or both and is a deeming provision requiring strict construction. Since the subject matter was development rights and not the land or building itself, and since the basic charge of capital gains itself did not survive on the facts, the deeming valuation provision could not be invoked.

Conclusion: Section 50C was held inapplicable; the finding was in favour of the assessee.

Final Conclusion: The addition made towards long-term capital gains was unsustainable, and the revenue's challenge failed.

Ratio Decidendi: Where redevelopment rights or additional FSI are transferred without handing over possession and without any ascertainable cost of acquisition, no capital gains can be charged, and section 50C cannot be applied to substitute the value of development rights.

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