THE COMMISSIONER OF INCOME TAX vs. MRS RAJ M VIRMANI

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 18TH DAY OF AUGUST 2014 PRESENT THE HON'BLE MR. JUSTICE N. KUMAR AND THE HON'BLE MRS. JUSTICE RATHNAKALA I.T.A. NO.663/2008 A/W I.T.A.NOs.646, 652, 656, 659 AND 666 OF 2008

IN ITA NO 663/2008:

(BY SRI.K V ARAVIND, ADV.)

SHRI MOHAN VIRWANI NO.101/102, EMBASSY CHAMERS, NO.5, VITHAL MALYA ROAD BANGALORE -560 001.

THIS ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 17-12-2007 PASSED IN ITA NO. 914/BNG/2006, FOR THE ASSESSMENT YEAR 2002-2003,

PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO:

914/BNG/2006,DATED ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE - 2(3), BANGALORE.

IN ITA.NO.646/2008:

(BY SRI.K V ARAVIND, ADV.)

MRS. RAJ M VIRMANI NO.101/102, EMBASSY CHAMBERS, NO.5, VITTAL MALYA ROAD,

ITA NO. 909/BNG/2006, FOR THE ASSESSMENT YEAR

I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN,

909/BNG/2006,DATED ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2(3), BANGALORE.

IN ITA NO 652/2008:

MRS RAJ M VIRMANI

NO.101/102, EMBASY CHAMBERS, NO.5,VITHAL MALYA ROAD, BANGALORE-560 001

ITA NO. 910/BNG/2006, FOR THE ASSESSMENT YEAR 2002-2003, PRAYING THAT THIS HON'BLE COURT MAY BE 910/BNG/2006,DATED COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE - 2(3),

IN ITA NO 656/2008:

... APPELLANTS

SHRI JAIKISHAN VIRWANI NO.101/102, EMBASSY CHAMERS, NO.5, VITHAL MALYA ROAD,

(BY SRIYUTHS A SHANKAR & M LAVA, ADVS.)

ITA NO. 911/BNG/2006, FOR THE ASSESSMENT YEAR

911/BNG/2006,DATED ASSISTANT COMMISISONER OF INCOME TAX, CENTRAL CIRCLE 2(3), BANGALORE.

IN ITA NO 659/2008:

2.THE ASST. COMMISSIONER OF INCOME TAX

SHRI JAIKISHAN VIRWANI NO.101/102,EMBASSY CHAMERS, NO.5,VITHAL MALYA ROAD, BANGALORE -560 001.

(BY SRI. A SHANKAR & M LAVA, ADV.)

ITA NO. 912/BNG/2006, FOR THE ASSESSMENT YEAR 2002-2003, PRAYING THAT THIS HON'BLE COURT MAY BE

912/BNG/2006,DATED COMMISISONER OF INCOME TAX, CENTRAL CIRCLE - 2(3),

IN ITA NO 666/2008:

CENTRAL CIRCLE,

2.THE ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 2(3)

SHRI MOHAN VIRWANI NO 101/102, EMBASSY CHAMBERS NO 5, VITHAL MALLYA ROAD

(BY SRIYUTHS A SHANKAR & M LAVA, ADVS.)

ITA NO. 913/BNG/2006, FOR THE ASSESSMENT YEAR 913/BNG/2006,DATED COMMISISONER OF INCOME TAX, CENTRAL CIRCLE - 2(3),

THESE APPEALS COMING ON FOR HEARING, THIS DAY, N.KUMAR, J., DELIVERED THE FOLLOWING:

J U D G M E N T

These appeals are filed by revenue challenging the common order passed by the Tribunal which upheld the conclusion of the Appellate Commissioner that nature of transaction would not strictly fall within the case of family partition but falls in the case of a family arrangement requiring reacquisition, revaluation and settlement of interest and properties and thereby provisions of Section 49(1) of the Income Tax Act (“the Act” for brevity) are not attracted.

which slowly escalated into a full-fledged family dispute covering all its activities and properties of the firm and companies belonging to the Group. These disputes between the members of the Family/Group came to be resolved after lot of efforts to bring a reconcilement by several well wishers under an oral family settlement reached amongst the members of the family on 9.1.1999.

respect of family settlement. It is in the subsequent year, the Assessing Authority refused to act on the said explanations on the ground that adopting a higher cost is that consequent to family settlement there was depletion in net worth position of the assessee and that depletion should be treated as additional cost towards the shares retained by them so that net worth of the assessee prior to family settlement and consequent to family settlement remained the same. The Assessing Authority was of the view that such a stand is not supported by the provisions of the Act. The depletion in the net worth can no way be termed as increase in the cost of any asset since improvement of cost is with reference to a specific asset and loss of other assets would not be cost of improvement to the existing assets. The concept of computation of capital gains is with regard to the sale of proceeds and cost of this computation is nothing to do with the valuation in the net worth position of the assessee owing to the happenings like

family settlement. The amount actually paid by the assessee for acquisition of the shares are only to be considered for the purpose of computation of capital gains apart from the cost paid for acquiring shares. No other cost had been incurred by the assessee against these shares. As the assessee was the absolute owner of the shares and there was no cost incurred towards improvement since the right was absolute from the very first day and was so till the date of transfer. Therefore, the Assessing Authority was of the view that what assessee lost was an asset which was individually belonged to him and therefore, no variation in the cost is called for. Therefore, taking into consideration the actual cost of acquisition of the shares, the capital gains was worked out. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals).

rendered a finding that there was no basis for adopting the cost of acquisition of shares at Rs.1,30,000/- as a result of family settlement and that the entire family settlement was merely a devise to claim higher deduction on account of the cost of acquisition of the shares. The assessee contends that the fact that there is depletion of the assets of the appellant to the tune of Rs.3,44,51,783/- as a result of the family settlement is not only borne on record, as the Assessing Authority has worked out in the assessment order, but also the adoption of cost of acquisition of shares at Rs.1,30,00,000/- under the family arrangement in regard to depletion of the assets, is corroborated by the fact that when the assessee has subsequently sold the shares after family settlement, the assessee was able to realize a sum of Rs.92,87,843/- which compares favourably with the cost of the shares under the family arrangement at Rs.1,30,00,000/-. He has recorded a categorical finding that there is no force in the finding

of the Assessing Authority that the basis for adoption of cost of shares at Rs.13,30,000/- is not known or that the family settlement was merely a device and a make believe arrangement between the members of the family. Theses findings being contrary to the materials available on record, which clearly shows that there were prevailing disputes and that pursuant to the family settlement, the parties had acted upon and divided the various business between them, are unjustified and cannot be the basis for holding that the assessees are not entitled to claim deduction in the actual cost of the shares at Rs.1,30,00,000/-. He further held that the provisions of Section 49(1) of the Act are applicable only in the case of assets acquired from a previous owner in the modes specified in the Section and no other. Partition or a family arrangement of the assets of the Hindu undivided family is specified under Section 49(1) of the Act and the Assessing Authority has sought to invoke the said provision in the case of the assessee to take the cost

to the previous owner as the cost in the hands of the assessee. The said provision would not be applicable to the case of the assessee as the family settlement reached between the members of the family/group was neither a partition nor a family arrangement with regard to the joint family property of the parties and therefore, the shares in GS Homes cannot be regarded as property received by the assessee in one of the specified modes under Section 49(1) of the Act. Thereafter he proceeded to refer to the judgment of the Apex Court in the case of Kalooram Govindram Vs. Commissioner of Income Tax reported in 57 ITR 335, where it was held that, “in case of allotment of property under a partition, the value at which the same was allotted would be cost of acquisition of the said asset, as the said value could be regarded as a consideration paid by the assessee for the acquisition of the property under the partition. The ratio of the said judgment squarely applies to the facts of the assessee’s case and therefore, he set aside the order

of the Assessing Authority and granted relief to the assessee. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal.

Department is not claiming that family arrangement is a make shift arrangement and not a real arrangement or a dubious action where the facts of family dispute for over 3 years being settled with give and take of family interest, business etc. with the compensation being made to the family members in such a way that all received equal shares in the family, the element of payment or waiving of liabilities were taken into account, it would show that these were relevant only if considered with the value adopted for the purpose of family arrangement. Therefore, relying on aforesaid judgment of the Apex

Court, held that the Tribunal was justified in coming to the conclusion of the that this was not strictly a case of family partition, but it is a family arrangement requiring reclassification, revaluation and settlement of interest in the property and thereby Section 49(1) of the Act were not attracted was justified and therefore, he dismissed the appeal. Aggrieved by the said order, the revenue is in appeal.

Appellate Authorities, there was reacquisition, revaluation and settlement of interest in properties and thereafter the properties were not disturbed. The value of the shares in the case of GS Homes was arrived at Rs.1,30,00,000/- for the assessee Mohan Virwani and when he sold the said shares he was able to realize only Rs.92,87,843/- Though initially he acquired 6000 shares for Rs.60,000/- subsequently, another 6000 shares of Rs.13,61,000/- at the time of family settlement of the properties were revalued. In the family settlement he gave up interest in other properties and he exclusively got those 12000 shares to his share which was valued at Rs.1,30,00,000/-. The contention of the revenue that it is the cost of acquisition initially incurred alone should be taken into consideration and Rs.1,30,00,000/- which is taken as the cost of shares is only notional and for the purpose of avoiding capital gain tax has been rightly rejected by both the Appellate Authorities. In coming to that conclusion

the Assessing Authorities have not taken into consideration the interest, the assessee gave up in other properties. In fact, the material on record shows that the assessee has given up interest to the extent of about Rs.3,44,51,783/- and what he got in settlement is his share worth Rs.1,30,00,000/-. Therefore, rightly the authorities have held that Section 49(1) of the Act is not attracted. This is not a case where any transfer of interest in the property is involved under Section 49(1)(i) of the Act which Section deals with partition of the Hindu undivided family. In the present case, the members of the family had various interests in various properties in their individual capacities. When the dispute arose, they amicably settled the same by entering into the family arrangement and at that time, they valued their assets and the share of the assessee was valued at Rs.1,30,00,000/- and when he sold the shares for Rs.92,87,843/-, he earned no capital gains. Therefore, levy of capital gain by taking into

consideration the initial acquisition of the shares is illegal and therefore, we do not find merits in these appeals. Accordingly, we answer the substantial questions of law framed in these appeals in favour of the assessee and against the revenue. Ordered accordingly.

Hence, there is no merit in all these appeals. Dismissed. No costs.

Sd/- JUDGE

Sd/-

JUDGE

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