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Facts
The assessee, Y. Shanmuga Durai (deceased), and his brother mutually exchanged properties through settlement deeds in 2010. The Assessing Officer treated these transactions as 'transfer' and added long-term and short-term capital gains for Assessment Year 2010-11. After initial appeals in favor of the assessee, the Madras High Court remanded the matter to the CIT(A), who subsequently confirmed the AO's additions.
Held
The Income Tax Appellate Tribunal held that the CIT(A) erred in treating the settlement deeds between the brothers as 'exchange' or 'transfer' for capital gains purposes. The Tribunal concluded that such family arrangements, entered to prevent disputes, do not constitute a 'transfer' under Section 2(47) of the Income Tax Act and fall under the exceptions of Section 47(iii). Accordingly, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to delete the capital gains additions.
Key Issues
Whether a family settlement deed involving mutual exchange of properties between brothers constitutes a 'transfer' liable for capital gains tax under the Income Tax Act, or if it is exempted under the provisions relating to gifts or family arrangements.
Sections Cited
2(47), 45, 47(iii), 49(1)(i), 132, 153C, 153A, 143(3), 250, 260A, 145A, 122 (Transfer of Property Act), 2(24) (Indian Stamp Act), 2(xii) (Gift Tax Act), 2(xxiv) (Gift Tax Act)
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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE KAND SHRI S.R. RAGHUNATHA
आदेश /O R D E R
PER S.R. RAGHUNATHA, ACCOUNTANT MEMBER:
1. This appeal on behalf of the assessee (deceased) Shri Y.Shanmuga Durai is directed against ld. CIT(A)-18, Chennai order dated 12.01.2024 passed under section 250 of the Income Tax Act, 1961, relevant to the Assessment Year 2010-11.
The legal heir of the assessee has raised following grounds of appeal:-
1. The order of the CIT (Appeals) -18, Chennai dated 12.01.2024 vide DIN & Order No. ITBA/APL/M/250/2023-24/1059642460(1) for the above mentioned Assessment Year is contrary to law, fact and in circumstances of the case.
2. The CIT (Appeals) -18, Chennai erred in impliedly confirming the search assessment order and ought to have appreciated that fundamentally the search assessment order was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
3. The CIT (Appeals) -18, Chennai failed to appreciate that issue of validity of the search assessment order on the facts of the case being open for questioning at every stage, the search assessment was passed without jurisdiction as well as time barred inasmuch as further ought to have appreciated that the lack of seized material would vitiate the search assessment order completely.
4. The CIT (Appeals)-18, Chennai erred in sustaining the addition of Rs.6,48,31,420/- as Long-term Capital Gains and a sum of Rs.4,74,82,926/-as Short-term Capital Gains in the computation of taxable total income without assigning proper reasons and justification.
5. The CIT (Appeals) -18, Chennai failed to appreciate that settlement deed dated 05.03.2010 entered between the late appellant and his brother, Mr. Rajarathinam for the mutual exchange of 30 properties for 55 properties respectively wrongly construed as transfer of property / extinguishment of rights on such immovable properties for the purpose of computing Capital Gains on such transfer, the consequential computation of LTCG & STCG on various facets was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
6. The CIT (Appeals) -18, Chennai failed to appreciate that a deed of settlement would not attract the charging provisions of Section 45 of the Act and further ought to have appreciated that the in absence of "transfer" within the ambit of provisions in Section 2(47) of the Act between the two individuals within the family, there could not be a scope for invoking the provisions relating to computation of capital gains on such presumed transfer of property, thereby vitiating the findings in relation thereto.
7. The CIT (Appeals) -18, Chennai to appreciate that the settlement deed entered into by the appellant herein would be covered by the exception carved out in Section 47(iii) of the Act read with Section 122 of Transfer of Property Act and further ought to have appreciated that the mutually accepted exchange of immovable properties would not come attract the provisions relating to computation of Capital Gains, thereby vitiating the findings in relation thereto.
8. The CIT (Appeals) -18, Chennai failed to appreciate that the mere recitals in the settlement deed pertaining to the exchange of properties mutually along with a payment of consideration to another would not discolour the true meaning behind such settlement deed and ought to have appreciated in the absence of bringing forth evidences to prove such settlement deed was neither voluntary nor commercial in nature, the rejection of such settlement deed on the face of it would vitiate the findings in relation thereto.
9. The CIT (Appeals) -18, Chennai failed to appreciate that the concept of family arrangement would necessary be imputed on facts of the present case and ought to have appreciated that rejection of stand of the appellant was erroneous, vitiating the related findings recorded in the impugned order as well as invalid search assessment order.
10. The CIT (Appeals) -18, Chennai failed to appreciate that having not scrupulously followed the directions of the Madras High Court in TCA No. 234 of 2018 dated 08.07.2020 with regard to question of chargeability of capital gains on the account of transfer of properties between the two, if any, the consequential order passed by them should be reckoned as bad in law.] 11. The CIT (Appeals) -18, Chennai failed to appreciate that order of search assessment under Section 153C of the Act was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
12. The CIT (Appeals) -18, Chennai failed to appreciate that the entire re-computation of taxable total income in the invalid search assessment order was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
13. The CIT (Appeals) -18, Chennai failed to appreciate that there was no effective/proper opportunity given before passing the impugned order and ought to have appreciated that any order passed in violation of the principles of natural justice is nullity in law.
14. The Appellant craves leave to file additional grounds/arguments at the time of hearing.
3.0 The brief facts of the case are that the assessee is an individual and was Partner of certain concerns of Saravana Store Group. The Search & Seizure action u/s.132 of the Act was conducted in the business premises and residence of the assessee on 18.08.2011 notice u/s.153C of the Act was issued by the AO on 23.07.2013 and in response the assessee filed reply on 22.10.2013 stating that the original return filed may be treated as the return filed in response to notice u/s.153C of the Act. After issuing statutory notices, the AO completed the assessment u/s.153C r.w.s 153A r.w.s 143(3) of the Act dated 31.03.2014 by arriving total income of Rs.12,70,75,080/- after making the following additions: a) Income from house property - Rs.1,34,15,885/- b) Income from other sources (commission) - Rs. 15,000/- c) Income from other sources (agrl) - Rs. 1,50,000/- d) Short term capital gain - Rs.4,74,82,926/- e) Long term capital gain - Rs.6,48,31,420/- 4. In the said order, the AO has observed that the assessee and his brother Shri S. Rajarathinam have purchased certain property jointly in the past. These properties are not inherited HUF properties. During the previous assessment year the assessee has relinquished his 50% share in certain jointly held properties in favour of his brother vide settlement dated 05.03.2010. Reciprocally the brother of the assessee Shri Rajarathinam also relinquished his 50% share in certain other jointly held properties on the same date i.e.05.03.2010 by way of another settlement deed and settled the same in favour of the assessee. The combined effect of both the transactions is that the assessee and his brother have mutually exchanged their properties by way of relinquishing their rights in the jointly held properties and therefore these transactions are liable to capital gains u/s.45 of the Act. The AO concluded that these transactions are not a distribution of capital assets on account of total or partition of HUF enhance the same does not fall u/s.47 of the Act and also it does not fall as a transfer of a capital asset and a gift or Will or irrevocable trust. Therefore, the AO brought the transactions to tax under the head capital gains.
5. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld. CIT(A)-18, Chennai. Before the ld. CIT(A) the assessee filed written submission by providing the entire details of properties transferred between the brothers and explained the corresponding provisions in the Act for claiming the settlement transactions as not taxable. Further the assessee stated that in order to avoid dispute between family members, family settlement deed was made and the joint holding properties between brothers were settled, which amounts to family arrangements and which would not amounts to “transfer”.
On perusal of the submissions made by the assessee the ld. CIT(A) deleted the capital gain on transaction of family settlement by allowing the appeal of the assessee in his order dated 13.04.2014 by observing as under: “….6.2. I have perused the assessment order, grounds of appeal
, written submissions and the family partition deed dt. 20.2.2010 in this regard. It is seen that the appellant along with his brothers have purchased certain properties jointly. Due to family arrangement, both the brothers agreed to partition the properties by way of settlement deed. The appellant by way of settlement dated 5.3.2010 has given certain properties to his brother Shri S. Rajaratnam as Gift. Similarly, Rajaratnam has also given certain properties to the appellant. But the AO has imposed Capital Gain tax by stating that the settlement deed made out by his brother, Shri Rajaratnam in favour of the appellant falls under "Transfer" as per section 2(47) of the Act. Thus, imposed STCG and LTCG on the difference between the Guideline value and value shown in the books. In the instant the first question to be addressed is whether property jointly purchased by brothers partitioned byway of settlement will amount to transfer within the meaning of section 2(47) of the Act or not. In an identical issue the jurisdictional Hon'ble High Court in the case of CIT VS A.L. Ramanathan in245 ITR 494 (MAD) has given its decision as under:
2. The family arrangement was arrived at in order to avoid continuous friction and to maintain peace among-the family members. The family arrangement is an agreement between the members of the same family intended be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its hoņour. So, the family arrangements are governed by principles which are not applicable to dealings between strangers and the family arrangement among them is for the Interest of the family, for the harmonious way of living. So, such realignment of Interest by way of effecting family arrangement among the family members would not amount to transfer.
Applying the principles laid down in the decisions cited supra, we hold the family arrangement involved in this case does not amount to transfer. The Tribunal is perfectly justified, in taking the view that the transaction of the assessee being a family arrangement, did not amount to transfer and, therefore, there was no chargeable capital gain arising from that transaction. So, the transaction of the assessee did not amount to transfer and there was no chargeable capital gain arising from that transaction….”
Aggrieved by the order of the ld. CIT(A), the revenue preferred an appeal at Chennai Tribunal. After perusal of the submission made by the both parties the tribunal decided the issue in favour of the assessee by dismissing the revenue’s appeal in to 988,1037 and 1038/MDS/2016 dated 15.03.2017 by holding as under: “….14. We have heard both the parties and perused the material on record. In our opinion, the distinction made by the lower authorities between Gift and Settlement is not correct, It is categorically held in the Co-ordinate Bench in the case of Mr. Abdul Hameed Khan Mohammed in ITA Nos.1782/Mds./2015 vide order dated 29.12.2015 for assessment year 2011-12 that transfer of property made voluntarily and without consideration by way of Settlement Deed, all within the definition of Gift and there is no difference between the Gift and Settlement u/s.49(1)) of the Act. While adjudicating this, the Tribunal placed reliance 'on Sec. 122 of the -Transfer of Property Act, 1882 and also from the Cochin Bench of Tribunal in the case of ACIT Vs. Anjana Mohan (2013) 36 CCH 0008(Cochin) and also Redington (India) Ltd. Vs. JCIT reported in 40 CCH 527 (Chennai).
In view of this, in our opinion the artificial distinction made by the lower authorities with reference to the Gift and Settlement is not appropriate and we are of the opinion that for the purpose of -Sec.49(1)(i), there is no difference between the gift and settlement and in the present case, the settlement made with the assessee's brother Mr. S. Rajaratnam and there cannot be any capital gains on this count. The ground raised
by the Revenue is dismissed.
16. In the result, the appeals of assessee in [ITA No.985, 986, 987 & 988/16 and the appeal of Revenue in 1038/16 are partly allowed for statistical purposes, and the appeal of Revenue in 1037/Mds./16 is dismissed.”
8. Aggrieved by the order of the Chennai Tribunal, the revenue preferred an appeal at Hon’ble High Court of Madras. On perusal of the submissions made by the revenue the Hon’ble High Court of Madras, set aside the order of the Tribunal by allowing the appeal of the revenue and remitted the matter back to the CIT(A) by holding as under in TCA No.234 of 2018 dated 08.07.2020. “….23. The Revenue, being aggrieved by such an order, filed the appeal before the Tribunal. The Tribunal also did not consider the matter in a proper perspective and the discussion is only in paragraphs14 and 15 of the impugned order. The Tribunal concluded that the artificial definition made by Lower Authorities with reference to gift and settlement was not appropriate. The Tribunal was of the opinion that for the purpose of Section 49(1)(1) of the Act, there was no difference between gift and settlement and that in the instant case, the settlement made with the assessee's brother could not attract capital gains on this count. There are no reasons as to how the Tribunal came to such a conclusion, we are unable to find any such reasoning in paragraph 15 of the impugned order. Therefore, the sad finding is not supported by reasons and hence, not sustainable.
24. The Tribunal referred to the decision of the Coordinate Bench in the case of Mr. Abdul Hameed Khan Mohammed [ITA. No.1782/ Mds/2015 dated 29.12.2015] for the assessment year 2011-12. The Tribunal did not assign any reason as to how the said decision of the Coordinate Bench would apply to the assessee's case. Paragraph14 of the impugned order is also devoid of reasons.
- 8 - ITA No.626//Chny/2024
Accordingly, the above tax case appeal is allowed, the impugned order is set aside and the matter is remitted back to the CIT(A) for a fresh consideration in accordance with law. Considering the fact that the year, in which, the search and seizure operations were conducted in the place of business of the assessee namely 2011,we direct the CIT(A) to give priority to this case and dispose of the same as expeditiously as possible after hearing both the assessee and the Departmental Representative….” 9. The ld. CIT(A) taking note of the order of Hon’ble High Court (supra) issued notice to the assessee for adjudicating the case afresh. In response assessee filed a detailed reply along with the statement of facts, grounds and objections and the case laws relied upon in support of their claim. Further, in his reply the assessee submitted the following: i) Family settlement is basically an agreement wherein all the family members mutually workout the mode of distributing the wealth amongst themselves. Undeniably all the parties to the settlement or well related to each other and have valid legal claim over the disputed assets.
ii) The settlement deed was executed in order to avoid family disputes and in consequence of family arrangements. The settlement arrived at between the co-owners/brothers were Bonafide. Therefore, the settlement of joint holding properties between brothers would not fall under “transfer” as defined in section 2(47) of Act. iii) The properties received under gift would not attract tax. The transactions of settlement of properties clearly falls under gift to relatives and it would not attract tax. Even settlement of properties amongst various co-owners would not be covered by section 4(1)(c) of the Gift Tax Act. iv) The section 2(24) of the Indian Stamp Act 1899 reads “settlement” means any non-testamentary disposition, in writing, of movable or immovable property made a) In consideration of marriage; b) For the purpose of distributing property of the settler amongst his family or those for whom desires to provide or for the purpose of providing for some person dependent on him, or c) For any religious or charitable purpose; From the above definition it is very clear that settlement deed is possible for consideration of marriage or purpose of distribution property among family members or for religious or charitable purpose. v) Transactions not regarded as transfer as per section 45 of the Act “Nothing contained in section 47 shall apply to the following transfers:-
(i) Any distribution capital assets on the total or partial partition of HUF; (ii) ….. (iii) any transfer of the capital asset under a gift or Will or irrevocable trust (iv) …..” vi) There were no monetary consideration either received or paid in these transactions between the brothers warranting to invoke the rigors of relinquishment as contemplated u/s.2(47) and to bring the family arrangement to tax. vii) The assessee relied on the following judicial precedents in support of his claim: - Saravana Stores (Tex) order of tribunal in - of 2011 dated 10.01.2013 of CIT vs Ashwani Chopra (Hon’ble Punjab and Haryana High Court) - CIT vs Nagaraja Rao ITA No.3038 of 2005 dated 19.02.2012 (Hon’ble Karnataka High Court) - Kale vs Dy. Director of Consolidation, AIR 1976 SC 807 (Hon’ble SC) - SS Pillai vs KS Pillai AIR 1972 SC 2069 (Hon’ble SC) - CIT vs R.Ponnammal 164 ITR 706 (Hon’ble Madras High Court) - R. Manohar in ITA No 138/MDS/2010 (Chennai Tribunal)
- Jothi Rakesh Kapoor vs ITO, (Mumbai Trib) - CIT vs Atul Jain (2008) 299 ITR 383 (Hon’ble Delhi High Court) - Mrs. Urmila Mahesh Nathani Vs. ITO, ITA No.5921/Mum/2012 (Mumbai Tribunal) - Sonal A.Zaveri vs.ITO, ITA No.5968/Mum/2013(Mumbai Trib) - DCIT-2 (3), Mumbai Vs. Shri Paras D. Gundecha 2015 (10) TMI 2120 – ITAT Mumbai Further, the assessee stated that the Hon’ble High Court of Madras in our case did not reach any conclusion that the impugned transactions is not settlement perse, but is calling for more reasoned order or to checking for the judicial decisions relied upon by the assessee is applicable to be circumstances of the case and moreover the assessee’s matter was not represented and put forward before the Hon’ble High Court. In light of the above submission the assessee prayed to consider the case on merit to allow the appeal and delete the addition made by the AO.
On perusal of the submission made by the assessee the ld. CIT(A)-18, Chennai confirmed the additions made by the AO in respect of the capital gains on transactions of the settlement by passing an order dated 12.01.2024 as detailed below: “….16. ln view of the foregoing, the findings in this case are summarized below:- i) The assessee had transferred his holding in respect of 30 properties to his brother and his brother transferred 55 properties to the assessee. The assessee also paid an amount of Rs.17 crores to his brother. The impugned properties in this case are not joint family properties and they were held by two individuals (though closely related) in their names with distinct shares. ii) The assessee affirmed that the properties are held by them without any dispute and are on freehold. iii) No evidence has been produced by the assessee to show that there was some dispute or even possibility of any future dispute. No evidence has been produced that the properties are under any dispute. Hence, the claim that it is case of family arrangement has not borne out of facts of the case. iv) The deed of family partition has been drawn in respect of individual properties of the assessee and his brother with none of the other family members have any say in them which is confirmed by the assessee. Thus, the camouflaged family partition deed is made in respect of non- inherited properties and hence, cannot be considered as family partition at all. v) Therefore, the deeds of settlement would come within the ambit of the definition transfer' u/s 2(47) of the Income-tax Act, 1961 as it is an inclusive definition and not exhaustive one. vi) The deeds of settlement taken together exhibit clear case of 'exchange' and therefore, even on this count, it is a case of transfer' u/s 2(47) of the Income-tax Act, 1961. vii) As the impugned transactions through deeds of settlement are transfer as per section 2(47) of the Act, they would be chargeable to capital gains u/s 45 of the Act. viii) The exemption provided u/s 47(ii) is not applicable, since the combined reading of the deeds of settlement, clearly show that it is not a case of gift and provisions of Section 122 of the Transfer of Property Act related to gift of properties is not satisfied. ix) Therefore, determination of capital gains would arise on the properties transferred by the assessee under 'exchange'.
In respect of the treatment of exchange', the assessee has not given any submissions (though it was asked for the purpose of consideration) without prejudice to the position taken by the assessee in appeal, to take into the views of the assessee. However, the issue is taken up for consideration here. The assessee and his brother are holding the properties as their capital asset only and not as their current asset/stock. Therefore, the provisions of Section l45A or ICDS-II do not have any application. Similarly, Ind-AS-115 which applies for revenue transactions also do not apply for the reasons that the transactions are not on revenue account and further the said Ind-AS-115 apply only in respect of goods and does not apply to immovable property. Therefore, the term 'exchange' is to be applied strictly in the sense it is defined under the Transfer of Property Act, 1882 and as per the said provisions of the Transfer of Property Act as well as under the provisions of the Income-tax Act,1961, it is a transfer, Therefore, 'exchange' in the case of the assessee is taxable under capital gains….”
10. Aggrieved by the order of the ld.CIT(A) the assessee preferred an appeal before us. The ld. AR for the assessee assailed the action of the ld. CIT(A), stated that the ld.CIT(A) have erred in interpreting the settlement/gift among the brothers of properties as transfer as per the provisions of the Act and confirming the action of the AO. The ld.AR reiterated the submissions made before the ld.CIT (A) in the second round of appeal and submitted a paper book containing 309 pages consisting of written submission made before the ld.CIT(A) after remanded the case by the Hon’ble Madras Court, copies of judicial precedents relied by the assessee, copy of settlement deed by S.Yogarathinam to S.Rajarathnam, settlement deed by S.Rajarathnamto S.Yogarathinam, death certificate of S.Yogarathinam, Legal heir certificate of S.Yogarathinam, copies of financial statements of S.Yogarathinam and S.Rajarathnam and the Journal Extract for list of properties settled between parties on 05.03.2010. Further, the ld. AR argued that the ‘gift’ includes settlement as per the erstwhile Gift Tax Act, 1958 and Section 2(xii) of the same Act defines gift of movable or immovable property by means of transfer while the transfer of the property is defined in Section 2(xxiv) of the said Act so as to include settlement. Therefore, the ld.AR submitted that there was no confusion in understanding the scope of gift and the settlement deed under consideration should be viewed as gift falling within the provisions in Section 47 (iii) of the Act and the exception being such transaction not to be regarded as transfer for the purpose of imposing Capital Gains tax would tilt the entire case in favour of the assessee herein. Furthermore, ld. AR had brought to our attention that a gift attracts stamp duty and on the contrary, settlement attracts concessional rate of stamp duty. However, the gift transaction that had occurred between relatives (Brothers in the present case) should be reckoned as settlement so as to reckon the same as not a transfer for the purpose of settlement in Section 2(47) r.w.s 45/48 of the Income Tax Act, 1961. The ld.AR stated that the settlement deed(s) as such executed as per the process known to law would definitely fall within the ambit of the exception of Section 47(iii) of the Act and consequently levy of Capital Gains tax would get negated /vitiated. The ld.AR relied on the following decisions to buttress his argument in favour of the assessee to demonstrate that the settlement deeds entered between assessee and his brother cannot be treated as transfer and hence not liable to tax under the Act.
Saravana Stores (Tex) order of tribunal in
2. ITA No.353 of 2011 dated 10.01.2013 of CIT vs Ashwani Chopra (Hon’ble Punjab and Haryana High Court) 3. CIT vs Nagaraja Rao ITA No.3038 of 2005 dated 19.02.2012 (Hon’ble Karnataka High Court) 4. Kale vs Dy. Director of Consolidation, AIR 1976 SC 807 (Hon’ble SC) 5. SS Pillai vs KS Pillai AIR 1972 SC 2069 (Hon’ble SC) 6. CIT vs R.Ponnammal 164 ITR 706 (Hon’ble Madras High Court) 7. R. Manohar in ITA No 138/MDS/2010 (Chennai Tribunal) 8. Jothi Rakesh Kapoor vs ITO, ITA No.583/Mum/2018 (Mumbai Trib) 9. CIT vs Atul Jain (2008) 299 ITR 383 (Hon’ble Delhi High Court) 10. Mrs. Urmila Mahesh Nathani Vs. ITO, ITA No.5921/Mum/2012 (Mumbai Tribunal) 11. Sonal A.Zaveri vs.ITO, ITA No.5968/Mum/2013(Mumbai Trib) 12. DCIT-2 (3), Mumbai Vs. Shri Paras D. Gundecha 2015 (10) TMI 2120 – ITAT Mumbai In view of the above arguments, the ld.AR prayed for setting aside the order of the ld.CIT(A) and allow the appeal of the assessee by deleting the addition made on account of capital gains.
Per contra, the ld. DR supported the orders of the AO and that of the ld. CIT(A) and prayed for confirming the same.
We have heard rival contentions perused the material available on record and gone through the orders of the authorities below. The impugned order of ld.CIT(A) was passed in consequent to the decision of Hon'ble Madras High Court in the first round proceedings in TC Appeal No.234 of 2018 dated 08.07.2020 filed under Section 260A of the Act by the revenue against the this Tribunal order dated 15.03.2017 in ITA No.1037/MDS/2016.
The Hon'ble High Court vide their judgement at para 25 had set aside the order of First Appellate Authority rendered in the first round of proceedings as well as the decision of this Tribunal in remanding the matter to the file of the First Appellate Authority for a fresh consideration of the issues emanating from the assessment order dated 31.03.2014 passed in terms of Section 153C r.w.s 143(3) of the Act.
The impugned order passed by the ld.CIT(A) in the remand / 2nd round of proceedings had squarely summarised the entire issues for adjudication at para 15.2 of the said order forming part of page no. 67. Thus, it can be said that the major issue involved in the present appeal is on the correctness of levy of Capital Gains on the transaction between the assessee and his brother through the settlement deed dated 05.03.2010.
15. The Ld.CIT(A) in the impugned order at para 15.6.13 had considered the settlement of undivided share in certain properties in favour of the assessee's brother and simultaneous settlement of certain other properties in his favour from the said brother, if considered together, would constitute exchange for the purpose of transfer in Section 2(47) of the Act.
The Ld.CIT(A) while holding so, had concluded that there would be a marked difference between a gift and a settlement and a gift is not made for any consideration, while on the contrary, a settlement would be for consideration inasmuch the ld.CIT(A) observed at para 15.6.9 that gift could be made to any person, whereas a settlement would mostly be made in favour of the dependents.
17. Accordingly, the ld.CIT(A) concluded by validating the computation of Capital Gains pertaining to the settlement executed by the assessee in favour of his brother by reckoning the guideline value / stamp duty value as the sale consideration of the each of the property settled while taking the book value as the cost of acquisition.
The ld.CIT(A), as a consequence, had confirmed the levy of tax based on the holding period, either as Long Term or Short Term in the impugned order before us.
19. The ld. AR had argued that the gift includes settlement as per the erstwhile Gift Tax Act, 1958 and Section 2(xii) of the same Act defines gift of movable or immovable property by means of transfer while the transfer of the property is defined in Section 2(xxiv) of the said Act so as to include settlement.
Therefore, it was argued that there was no confusion in understanding the scope of gift and the settlement deed under consideration should be viewed as gift falling within the provisions in Section 47 (iii) of the Act and the exception being such transaction not to be regarded as transfer for the purpose of imposing Capital Gains tax would tilt the entire case in favour of the assessee herein. Furthermore, ld. AR had brought to our attention that a gift attracts stamp duty and on the contrary, settlement attracts concessional rate of stamp duty. However, the gift transaction that had occurred between relatives (Brothers in the present case) should be reckoned as settlement so as to reckon the same as not a transfer for the purpose of settlement in Section 2(47) r.w.s 45/48 of the Income Tax Act, 1961. This above fact could not be disputed by the ld. DR when the same was brought to their attention.
This Tribunal is of an opinion that attempt of the ld. CIT(A) in clubbing both the settlement deeds (one by the assessee in favour of the brother and the other by the brother in favour of the assessee) was legally erroneous for the consequential erroneous conclusion reached by further reckoning the transaction as exchange for the purpose of justifying the levy of Capital Gains tax.
We find force in the argument of the Ld. AR that transaction of settlement between the assessee and his brother for preventing future disputes and transaction of settlement between the brother and the assessee executed simultaneously is to be considered as independent transactions by the stamp duty authority and hence in the light of the stamp duty authority reckoning the deeds as settlement deeds not as exchange, the presumption of altering the legally executed settlement deed as exchange was not permissible in law.
The settlement deed(s) as such executed as per the process known to law would definitely fall within the ambit of the exception of Section 47(iii) of the Act and consequently levy of Capital Gains tax would get negated /vitiated.
Further, we note that the transactions are not regarded as transfer as per section 45 of the Act as extracted below: “Nothing contained in section 47 shall apply to the following transfers:- (i) Any distribution capital assets on the total or partial partition of HUF; (ii) ….. (iii) any transfer of the capital asset under a gift or Will or irrevocable trust (iv) …..”
25. The above fact was not appreciated by the Ld. CIT(A) and while not taking into consideration the correct position of law, the ld. CIT(A) had proceeded to confirm the addition made by the AO. Therefore, the transaction of settlement deeds entered between the assessee and his brother cannot be termed as ‘transfer’ for the purpose of section 2(47) and hence we cannot countenance the action of the ld.CIT(A) in bringing the settlement transactions under the ambit of taxation under the head capital gains.
The reliance placed by the ld.AR in the case of CIT vs Nagaraja Rao in of 2005 dated 19.02.2012 (Hon’ble Karnataka High Court) wherein their Lordship has endorsed that, it is a well settled law that the partition is not transfer. What is recorded in family settlement is nothing but partition. Adjustment of rights in family properties, shares, crystallization of the respective rights in the family properties and therefore it cannot be construed as a transfer in the eyes of law. When there is no transfer there is no capital gain and consequently no tax on capital gain is liable to be paid.
In deciding the issue of settlement deed between the brothers in the case on hand, we take note of the decision of the Hon’ble Apex court in the case of SS Pillai vs. KS Pillai AIR 1972 SC 2069 (SC), wherein it was held observed that if in the interest of the family, properties and family peace, the close relatives settle their dispute amicably, this court will be reluctant to disturb the same.
- 19 - ITA No.626//Chny/2024
The Hon’ble Madras High court in the case of CIT vs. R. Ponnammal 164 ITR 706, gone one step ahead and witnessed that when the parties enter into a family arrangement, the validity of the family arrangement is not be judged with reference to whether the parties who raised disputes or rights or claims in certain properties had in law any such right or not. The members of a joint family may, in order to maintain peace and bring about harmony in the family, enter into a family arrangement and if the arrangement is entered into bonafide and the terms thereof are fair, courts will normally give assent to such an arrangement rather than avoid it. Even if a party to the settlement has no title under the arrangement but the other party relinquishes all his claims or titles in favour of such a person and acknowledges him to be the sole owner, then the antecedent title must be assumed, and the family arrangement will be upheld.
Therefore, respectfully following the decision of the jurisdictional High court decision, we cannot agree with the ld.CIT(A) for taxing the settlement deeds of the assessee with his brother considering it as ‘transfer’ under section 2(47) of the Act and hence we are inclined to delete capital gains added by the AO.
Hence, in the present facts and circumstances of the case and respectfully following the various judicial precedents discussed(supra), we are of the considered view for the reasons stated above, the ld.CIT(A) has erred in confirming the disputed addition made by the AO and hence we are setting aside the order of the ld.CIT(A) by allowing the grounds of appeal of the assessee by directing the AO to delete the additions of long-term Capital Gain of Rs.6,48,31,420/- and short-term capital gain of Rs.4,74,82,926/- in the computation of total income pertaining to the Assessment Year 2010-11.
In the result the appeal of the assessee is allowed. Order pronounced on 17th March, 2025.