TDR rights from stock-in-trade were treated as business assets, so capital gains valuation rules and deemed cost did not apply.

Residual development rights and the right to load TDR arising from a construction project were treated as business assets linked to stock-in-trade, not capital assets; accordingly, section 50C did not apply. The later insertion of section 43CA was noted as consistent with the view that valuation rules for capital assets could not govern business assets for the relevant assessment year. In the alternative, no capital gains could be charged because the cost of acquisition of the TDR rights was not ascertainable, and the computation machinery for capital gains could not operate. The transfer addition was therefore deleted and the assessee's appeal was allowed.

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Issues: (i) Whether the residual development rights and right to load TDR constituted a capital asset chargeable to capital gains or a business asset giving rise to business income and whether section 50C applied; (ii) whether, in the alternative, any capital gains could be charged when the cost of acquisition of the TDR rights was not ascertainable.

Issue (i): Whether the residual development rights and right to load TDR constituted a capital asset chargeable to capital gains or a business asset giving rise to business income and whether section 50C applied.

Analysis: The rights in question arose out of the assessee's construction business and were linked to land held as stock-in-trade and shown as work-in-progress. The transfer of the residual TDR was found to be incidental and ancillary to completion of the project, and not an independent capital exploitation of an asset. Since section 50C operates only in the computation of capital gains and not in relation to stock-in-trade or business assets, it had no application on these facts. The later insertion of section 43CA was noted as reinforcing that such valuation rules for business assets were not applicable to the assessment year involved.

Conclusion: The residual development rights and right to load TDR were business assets and not capital assets, and section 50C was inapplicable.

Issue (ii): Whether, in the alternative, any capital gains could be charged when the cost of acquisition of the TDR rights was not ascertainable.

Analysis: The right to additional FSI/TDR was treated as a right emanating from the land but one for which no separate ascertainable cost of acquisition could be identified on the facts. The decision applied the principle that a transaction cannot be brought within the capital gains provisions unless the computation machinery can operate, and where the asset has no determinable cost of acquisition, capital gains taxation fails. The statutory scheme in section 55(2)(a) was also noted as not specifically bringing TDR within the listed rights for which a cost is deemed.

Conclusion: No capital gains tax was chargeable on the transfer of the TDR rights because their cost of acquisition could not be determined.

Final Conclusion: The addition on account of transfer of the residual development rights was deleted, and the assessee's appeal was allowed.

Ratio Decidendi: Development rights/TDR arising from stock-in-trade and transferred as part of a business project are not capital assets for section 50C purposes, and where the right transferred has no ascertainable cost of acquisition, capital gains cannot be charged.

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