Accrual on MoU execution: transfer of hydro project rights taxed as business income, not capital gains.

Consideration for transfer of rights in a hydro power project accrued on execution of the MoU because the transferee paid most of the price, took over the project, and commenced work, showing transfer of substantial risks and rewards and no real uncertainty in realisation. The resulting receipt was therefore taxable in the relevant year. As the asset transferred was project rights and interest forming part of the assessee's business of developing hydro projects, the transaction was treated as business income. Capital gains treatment and provisions governing transfer of immovable property were held inapplicable.

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Issues: Whether the consideration received on transfer of rights in the hydro power project was taxable in the year under consideration and whether the resultant gain was assessable as business income or as short-term capital gains.

Analysis: The transfer was effected through an MoU, under which the transferee took over the project after payment of 90% of the consideration and commenced work at the site. The revenue was measurable, the consideration was fixed, and there was no significant uncertainty regarding realization. On these facts, the transfer of significant risks and rewards was held to have occurred on execution of the MoU, making the income accrue in the relevant year. The asset transferred was not land but rights and interest in a hydro project forming part of the assessee's business of developing such projects. The provisions relating to transfer of immovable property and capital gains were therefore held inapplicable to the transaction.

Conclusion: The gain was taxable in the year under consideration and was assessable as business income, not as short-term capital gains.

Final Conclusion: The addition was sustained in substance, and the assessee's challenge to the characterization of the transfer proceeds failed.

Ratio Decidendi: Where substantial risks and rewards of a project are transferred under an enforceable MoU and the transaction is part of the assessee's business activity, the resulting consideration accrues on execution of the MoU and is taxable as business income rather than as capital gains.

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