Permissive possession under a development agreement may not trigger capital gains where legal rights and consideration remain outstanding

A development agreement may not constitute a transfer under Section 2(47)(v) of the Income-tax Act where the landowner retains legal rights, receives no consideration during the relevant year, and grants only permissive entry for construction. Section 2(47)(v) requires possession taken or retained in part performance of a contract satisfying Section 53A of the Transfer of Property Act. Where construction is to be completed later and possession is not transferred in that statutory sense, the provision is inapplicable. Section 2(47)(vi) also requires evidence that the arrangement transferred or enabled enjoyment of the property during the relevant year. On the stated facts, no real income accrued and capital gains were not chargeable for that year.

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Issues: Whether execution of the development agreement dated 12.07.2011, under which the assessee was to receive 50% of the constructed area and had received no consideration during the relevant year, amounted to a transfer under Section 2(47)(v) or Section 2(47)(vi) of the Income-tax Act, 1961 so as to attract capital gains in Assessment Year 2012-13.

Analysis: The legal framework applied was Section 45 of the Income-tax Act, 1961 read with Section 2(47)(v) and Section 2(47)(vi) of that Act, and Section 53A of the Transfer of Property Act, 1882. For Section 2(47)(v) to apply, the transaction had to involve possession of immovable property being taken or retained in part performance of a contract of the nature contemplated by Section 53A. On the terms of the development agreement, the developer had not taken legal possession of the land in that sense; the landowners retained their rights in the property, no monetary consideration was received in the relevant year, and the assessee was only to receive 50% of the constructed area on completion of construction. Construction itself was completed only in 2015. The arrangement therefore involved only permissive entry for development activity and not such transfer of possession as would satisfy Section 53A. Section 2(47)(vi) was also found inapplicable because there was no evidence that the agreement had the effect of transferring or enabling enjoyment of the immovable property in the relevant year. On these facts, no real income accrued to the assessee in Assessment Year 2012-13 from the development agreement.

Conclusion: The development agreement did not result in a transfer under Section 2(47)(v) or Section 2(47)(vi) of the Income-tax Act, 1961 in Assessment Year 2012-13, and no capital gains were taxable for that year; this issue was decided in favour of the assessee.

Ratio Decidendi: A development agreement under which the landowner retains legal rights in the property, receives no consideration in the relevant year, and grants only permissive possession for construction without transfer of possession in the sense required by Section 53A of the Transfer of Property Act, 1882 does not constitute a transfer under Section 2(47)(v) or Section 2(47)(vi) of the Income-tax Act, 1961 for charging capital gains in that year.

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