Development rights transfer tax timing and valuation turn on possession, completion of construction, and actual consideration basis

Permissive entry under a development agreement did not amount to possession in part performance under section 53A of the Transfer of Property Act, so section 2(47)(v) was not triggered in assessment year 2009-10; the capital gain arose only on completion of construction and handing over of the owner's share, taxable in assessment year 2012-13. In valuing transfer of development rights, section 50C did not apply to rights in land, and the consideration was confined to 42% of the DVO-determined construction cost; the component linked to loading of TDR was not taxable. The interest disallowance and addition for unexplained expenditure were upheld for lack of supporting proof.

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Issues: (i) whether long-term capital gain arising from transfer of development rights was taxable in assessment year 2009-10 or assessment year 2012-13; (ii) whether the full value of consideration under the development agreement had to be taken on the basis of 42% of the cost of construction and whether consideration relatable to loading of TDR was taxable; (iii) whether the disallowance of interest of Rs. 3,11,920/- was justified; and (iv) whether the addition of Rs. 1,30,000/- as unexplained expenditure was sustainable.

Issue (i): Whether long-term capital gain arising from transfer of development rights was taxable in assessment year 2009-10 or assessment year 2012-13.

Analysis: The development agreement and power of attorney showed that the developer was permitted to enter the property only for construction purposes. The arrangement did not confer possession in the legal sense required by section 53A of the Transfer of Property Act, 1882, and therefore the deeming transfer provision in section 2(47)(v) of the Income-tax Act, 1961 was not attracted in assessment year 2009-10. The exchange of rights for constructed area took place only on completion of construction and handing over of the owner's share.

Conclusion: The capital gain was taxable in assessment year 2012-13 and not in assessment year 2009-10.

Issue (ii): Whether the full value of consideration under the development agreement had to be taken on the basis of 42% of the cost of construction and whether consideration relatable to loading of TDR was taxable.

Analysis: In a transfer of development rights, section 50C of the Income-tax Act, 1961 does not apply to rights in land. The consideration relatable to permitting loading of TDR was also not taxable. For valuation of the owner's share in the constructed area, the appropriate measure was the cost of construction determined by the DVO, and only 42% of such cost represented the assessee's consideration under the arrangement.

Conclusion: The consideration had to be restricted to 42% of the cost of construction, and the component relatable to loading of TDR was not taxable.

Issue (iii): Whether the disallowance of interest of Rs. 3,11,920/- was justified.

Analysis: The assessee did not substantiate that the borrowing from ECL Finance Ltd. was for acquisition or construction of the house property or that the interest was deductible in computing income from house property. In the absence of supporting evidence, the disallowance was sustainable.

Conclusion: The disallowance of interest was upheld.

Issue (iv): Whether the addition of Rs. 1,30,000/- as unexplained expenditure was sustainable.

Analysis: The assessee admitted the expenditure, but failed to prove that it was incurred from explained sources. The material found in survey proceedings and the explanation offered did not establish a satisfactory source of the expenditure.

Conclusion: The addition of Rs. 1,30,000/- was upheld.

Final Conclusion: The Revenue's appeals failed, the cross-objections were withdrawn, and only the assessee obtained limited relief on the computation of capital gains.

Ratio Decidendi: Mere permissive entry or construction rights under a development agreement do not amount to possession in part performance under section 53A of the Transfer of Property Act, 1882 unless the developer obtains legal possession enabling enforcement of the agreement, and consideration for transfer of development rights must be computed on the actual exchange value attributable to the constructed area.

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