Contractual right to acquire flats can be a capital asset; cancellation compensation is taxed as capital gains.

A contractual right under a letter of intent to obtain conveyance of immovable property can constitute property and thus a capital asset under section 2(14) of the Income-tax Act, 1961, even if the flats are yet to be constructed and the agreement is unregistered. Cancellation of that enforceable right results in extinguishment of a capital asset and amounts to a transfer under section 2(47)(vi). Compensation received for surrender of the right is therefore treated as consideration for capital gains purposes and not as income from other sources.

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Issues: Whether the assessee's right under the letter of intent for purchase of flats constituted a capital asset, and whether compensation received on cancellation of that arrangement was chargeable as capital gains or assessable as income from other sources.

Analysis: The letter of intent contained the essential terms of the proposed purchase, including the property description, consideration, payment schedule and consequences of cancellation, and was held to confer an enforceable right to obtain conveyance of the immovable property. The fact that the flats were yet to be constructed and that the agreement was not registered did not, by itself, prevent the right from amounting to property of the kind contemplated by section 2(14) of the Income-tax Act, 1961. The cancellation of that right resulted in extinguishment of a capital asset, bringing the transaction within the scope of transfer under section 2(47)(vi) of the Income-tax Act, 1961. The compensation received on cancellation was therefore part of the consideration for surrender of that capital right and could not be treated as mere interest or income from other sources.

Conclusion: The right created under the letter of intent was a capital asset, and the compensation received on cancellation was assessable under the head capital gains, with the resulting long-term capital loss allowable to the assessee.

Ratio Decidendi: A contractual right to obtain conveyance of immovable property is property and therefore a capital asset, and its extinguishment on cancellation amounts to transfer for capital gains purposes.

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