Question #1
In this fiddle, the flag raises above the pole
Current Transition

Expected Transition

and restores to expected position after transition is complete, but i am looking for a smooth transition as how a flag naturally hoisted, any suggestions please? Am i missing some thing?
Question #2:
Why does the following code do not work
#flag:hover{
top:50px;
left:100px;
-webkit-transform:rotate(0deg);
}
while the following code works
#container:hover #flag{
top:50px;
left:100px;
-webkit-transform:rotate(0deg);
}
Am i not supposed to hover on an <image> tag? Does CSS do not support it?
Take a look at
-webkit-transform-origin.I changed your CSS a little bit to account for the changes:
Demo: http://jsfiddle.net/YMw3v/6/