Transfer of Right to Receive Flat under Development Agreement Taxable as LTCG

 In a recent ruling, the Kolkata ITAT held that gains arising from the transfer of a right to receive a flat under a development agreement are taxable as long-term capital gains where such right—emanating from the assessee’s pre-existing leasehold rights in land—was held for more than the prescribed period.

The ITAT observed that where possession of the flat is handed over directly by the developer to the buyer during the construction phase, the conveyance is executed in the buyer’s favour, and the assessee never acquires or enjoys possession of the flat, the transaction cannot be characterised as a transfer of a completed residential unit. Accordingly, the ITAT held that what was transferred was a long-held capital right, and the resulting gains were chargeable as LTCG.

The assessee, a long-term lessee of a premises, entered into a development agreement with a Developer on an area-sharing basis, entitling the assessee to four flats. Prior to commencement of construction, the assessee entered into an agreement for sale of one flat, under which the developer was obligated to complete construction and hand over possession directly to the buyer. The assessee never received possession of the said flat. Upon completion, of the project, possession of the remaining flats was handed over to the assessee. The assessee treated the gains from sale of the flat as Long-Term Capital Gains (LTCG) and claimed Section 54 exemption in respect of construction of the remaining flats. The AO however, treated the gains as Short-Term Capital Gains (STCG) on grounds that the flat formed part of the “new asset” constructed under the development agreement. The AO also denied section 54 exemption claimed by assessee due to non-deposit of funds under the Capital Gains Deposit Scheme (CGDS). These findings were subsequently affirmed by the CIT(A).

The Tribunal ruled in favour of the assessee and held that the assessee transferred a right to receive a flat along with corresponding undivided share in land, both of which were held from the date of the development agreement. Since the assessee never acquired or possessed the constructed flat and possession was directly handed over to the buyer, the flat could not be regarded as a “new asset” acquired and held by the assessee. Accordingly, the gains were rightly taxable as LTCG. On the issue of section 54 exemption, the Tribunal noted that although the capital gains were placed in term deposits instead of being deposited under the CGDS, the funds were actually utilised for construction within the stipulated time. Relying on settled judicial precedents, the Tribunal held that exemption should not be denied merely due to technical non-compliance with the CGDS, where the taxpayer’s intention and actual utilisation are clearly established.

This ruling provides strong support for taxpayers involved in redevelopment and joint development arrangements. It reiterates that the nature of the right transferred and actual possession are decisive factors for determining the character of capital gains.