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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI G.S. PANNU, HONBLE & SHRI C.N. PRASAD, HONBLE
PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals) – 27, Mumbai dated 19.07.2013 for the Assessment Year 2007-08.
The assessee has raised the following grounds in her appeal: - (1) The CIT(A) has erred in holding that the assessment is validly reopened. It is submitted that the notice u/s. 148 as well as the reopening proceedings u/s. 147 suffer from 2 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri inherent technical defects and since reopening proceedings are also not applicable on merits, the CIT(A) ought to have held that he assessment is wrongly reopened u/s. 147/148. (2) Without prejudice to above, the CIT(A) has erred in not adjudication /disposing off the ground on the issue of family settlement not being covered under the definition of transfer and thereby impliedly rejecting the ground. It is submitted that since there is a bonafide, genuine, equitable, equivocal and just family settlement to save reputation of the family by not going to the Court of law and to buy peace of mind, the CIT(A) ought to have held that family settlement does not amount to transfer as defined u/s. 2(47). (3) Without prejudice to above, the CIT(A) has erred in holding that ₹.1,36,00,000/- received for possessory right/right of occupancy amounts to transfer of tenancy right and that it also has a cost of acquisition ₹.56,00,000 and correctly taxed as capital gains. It is submitted that since possessory right / right of occupancy cannot be regarded as tenancy right and also, since the possessory right /occupancy right does not have a cost of acquisition, the CIT(A) ought to have held that provision of Sec. 45,48 and 55(2)(a)(i)/(ii) are not applicable. (4) Without prejudice to above, CIT(A) has erred in not granting indexed cost of acquisition as a deduction while working out taxable capital gains. It is submitted that CIT(A) having held that possessory right/occupancy right has a cost, the CIT(A) ought to have granted indexed cost of acquisition as a deduction in working out taxable capital gains.
Briefly stated the facts are that, the assessee along with her brother and sister was in possession of a flat which was owned by a company
3 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri known as Industrial Jewels P. Ltd. The said fiat came in possession of the assessee, her brother and sister by virtue of Deed of Family Settlement dated 9th November 2006. There were certain disputes in the larger family of which the assessee was part of and the said family controlled companies known as Industrial Jewel Pvt. Ltd., Hindustan Jewels Pvt. Ltd. and Acrysil Ltd. A family arrangement was entered into between the parties vide family settlement agreement dated 9th November 2006. As per clause 6(xvi) of the said family settlement the assessee along with her brother and sister had to surrender their occupancy/possessory rights in the said flat and handover the vacant and peaceful possession of the said flat within a period of 90 days from the date of execution of the Family Settlement Deed. In lieu of the surrender of their occupancy/possessory rights the assessee along with her brother and sister was to receive a lumpsum amount of ₹.4,08,00,000/- as per the family settlement i.e. ₹.1,36,00,000/- each directly from the purchaser of the said flat. The said arrangement was entered into as the other faction of the family did not have adequate cash flow to pay to the assessee, her brother and sister for giving the vacant possession of the property. It was understood between the parties of the family settlement that the assessee, her brother and sister had a charge and an overriding title over the sale consideration of the said flat.
4 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri 4. The assessee is an individual deriving income in the form of remuneration from partnership firm and interest income, filed return on 29.10.2007 declaring taxable income of ₹.1,36,000/-. The assessment was completed under section 143(3) r.w.s. 147 on 20/12/2011 determining total income at ₹.57,36,000/- after making an addition of ₹.56,00,000/- as long term capital gains arising out of sale of the right pursuant to the family settlement. While finalizing the assessment the AO did not accept the submissions of the assessee that the amount of ₹.1,36,00,000/- received by her pursuant to the family settlement was not taxable as he was of the opinion that only the occupancy/possessory right was recognized by the family settlement and capital gain of ₹.1,36,00,000/- by way of relinquishment of right in the said flat. However, as the assessee was entitled to claim exemption under section 54EC to the extent of ₹.80,00,000/- for investment made in approved bonds, the AO deducted the sum of ₹.80,00,000/- from ₹.1,36,00,000/- and added only the balance sum of ₹.56,00,000/- to the total income of the assessee.
Aggrieved by the order of the AO the assessee filed an appeal before the Ld.CIT(A) and raised various contentions/propositions before the Ld.CIT(A). The Ld.CIT(A) upheld the action of the Assessing Officer holding as under: -
5 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri (a) The assessee continued to enjoy the possession of the property right from childhood as her father was the Virtual Tenant of the said fiat. With the effluence of time, the right vested in the assessee and her family got firmed up and assumed the proportion of an owner. It was only because of such rights that in the family settlement, these rights were brought out in black and white. Hence the Ld.CIT(A) affirmed the order of the AO (Page 29 of order of the Ld.CIT(A)). (b) The right being enjoyed by the assessee was a type of tenancy rights having been given to the assessee's father after whose death the family including the assessee continued to occupy and possess the property in question. The assessee's case squarely falls under the definition of the term 'tenancy' according to the conduct of the parties over more than three decades. Accordingly cost of acquisition of the possessory/occupancy right is deemed to be NIL by virtue of the deeming fiction under section 55(2)(a) of the Act. (page 30 of the order of the Ld.CIT(A)). (c) Without Prejudice the very fact that the payments were made to Sonal Zaveri Group due to the express wordings of the family settlement as per which the said group being occupants of the said flat, had a charge and over riding title over the sale consideration of the said fiat and were entitled to receive the aforesaid amount of Rs. 4,08,00,000/- does give rise to some kind of estimation regarding the cost of acquisition. Thus if at any stage, it is held by a higher appellate forum that the assessee's case is not covered by the definition of the term tenancy as referred to above, the cost of acquisition of the said flat in the hands of the entire Sonal Zaveri Group shall be Rs.9,30,000/- only and her share of capital gain shall be computed proportionately (page 31 and 32 of the order of the Ld.CIT(A)) 6. The Learned Counsel for the assessee before us submits that the said sum of ₹.1,36,00,000/- has been received by the assessee pursuant to the family settlement. As per clause 6(xvi) pursuant to the family
6 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri settlement, the assessee had to vacate and handover the peaceful possession of the said flat and in lieu of which the assessee was entitled to receive the lumpsum money. The flat was sold to an outsider to generate adequate cash flow to pay to the assessee and others which they were eligible to receive by virtue of family settlement. The other fact as stated in the said clause that the assessee has an overriding title over the sale consideration and not flat, clearly shows that it was not that the assessee’s right that was recognized by the family settlement as stated by the AO and Ld.CIT(A) while confirming the order but the right of the assessee was relinquished by virtue of the said family settlement in favour of the other members of the family.
The Learned Counsel for the assessee further submits that it is now settled by Hon’ble Supreme Court and various High Courts that under a family arrangement if a settlement is agreed amongst the members then it cannot be held that it's a case of transfer of a capital asset. In case of a family settlement it only settles the conflicting claims which had pre-existing joint interest, to a separate interest and there is no conveyance of property or transfer of a property. In such a case it is not a transfer of a capital asset but an arrangement for settling the interest and rights of the family member. The Learned Counsel for the assessee relied on the decision of Hon'ble ITAT Mumbai Bench in the case of 7 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri Mrs.Urmila Mahesh Nathani v. ITO in A.Y. 2009- 2010 dated 10/07/2015 (copy submitted during the course of hearing), wherein after referring to various decisions of the Hon'ble Supreme Court and Hon'ble High Court it was held that the amount received by the assessee in terms of family settlement agreement cannot be treated on account of transfer of a capital asset which cannot be said to be chargeable to tax under the head 'capital gain'.
The Learned Counsel for the assessee submits that the assessee as stated above relinquished her right under the family settlement in favour of the other members of the family and received a sum of ₹.1,36,00,000/- pursuant to the family settlement. Only the mode of payment for lack of adequate cash flow payment was made by the buyer of the said flat to the assessee, hence it was submitted that since the amount is received under the family settlement there is no transfer of any capital asset hence no capital gains arises.
Without Prejudice it was submitted that the assessee has transferred her possessory right and not tenancy right as held by the Ld.CIT(A). The Learned Counsel for the assessee submits that there is no concept of Virtual Tenancy as brought out by the Ld.CIT(A) nor the assessee or any of her family members had acquired any tenancy or were 8 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri paying any rent. Therefore, Learned Counsel for the assessee submits that the Ld.CIT(A) was wrong in stating that the assessee has transferred tenancy rights and is covered by the provisions of section 55(2)(a) of the Act. It is further submitted that possessory rights/occupancy rights cannot be equated with tenancy right as the said rights are different from each other. The assessee had possessory/occupancy right which is also acknowledged in the family settlement. The Learned Counsel for the assessee referring to the Hon’ble Kerala High Court in the case CIT v. M. Appukutty [253 ITR 0159 (ker)] submits that possessory rights are a self-generated asset and there is no guideline on the basis of which possessory right, which is different from tenancy right can be valued. Therefore, the amount received by the assessee as consideration for transfer of possessory right was not chargeable to tax as capital gains. In view of the above the counsel submits that without prejudice if it is held that the assessee is not covered under the family settlement then the assessee has transferred possessory right which is not chargeable to capital gains.
It is further submitted that the said flat came into the possession of the assessee by adverse possession as there is neither any agreement nor assessee is paying any rent for tenancy hence no value as calculated by the Ld.CIT(A) can be attributed towards the cost of acquisition of the 9 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri said flat. The counsel submits that it is now well settled the cost of acquisition in case of adverse possession is NIL and hence capital gains cannot be brought to tax. He relied upon the decision of Hon’ble Mumbai ITAT in the case of Smt. Seetha S. Shetty v. Dy.CIT in A.Y. 2006-2007 dated 11/09/2015 (copy submitted during the course of hearing) wherein the Hon’ble ITAT after discussion held that no capital gain is chargeable to tax in relation to the asset acquire by way of adverse possession. He further submitted that the Hon’ble ITAT has also considered the decision of Vijay Singh R. Rathod [106 lTD 153 (Ahd) (special bench)] which has been relied upon by the Ld.CIT(A) for calculating the cost of acquisition and has held there cannot be any cost of acquisition in case of adverse possession. Therefore, the Learned Counsel for the assessee submits that from whichever angle the case of the assessee is seen the sum of ₹.1,36,00,000/- received by the assessee is not taxable.
The Ld.DR submits that property is in the name of the company and Company cannot be party to settlement. Assessee’s father has no right on property. Ld.DR submits that the right to title cannot improve by settlement deed. Settlement deed excluded the other parties. Ld.DR submits that there were no claims and counter claims in the settlement deed so it is not a valid deed. The quantification made in the settlement
10 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri deed is only a device not a bonafide deed. Decisions relied on by the Learned Counsel for the assessee are not applicable.
In reply the Learned Counsel for the assessee submits that bonafides of the settlement deed are not in doubt and the settlement deed is entered into to settle the family disputes. Learned Counsel for the assessee submits that none of the authorities have doubted the genuineness of the settlement deed. Therefore the submissions of the Ld.DR that settlement deed is not bonafide is baseless and only a surmise.
We have heard the rival submissions, perused the orders of the authorities below and material available on record and the case laws relied on. Genuineness of the settlement deed is never doubted by any of the authorities. It is the finding of the Assessing Officer that by virtue of family settlement agreement dated 09.11.2006, the assessee derived her entitlement for continuing to have occupancy rights over the flat which was owned by the company Industrial Jewel Pvt. Ltd., The Assessing Officer also took note of the fact that she derived the occupancy rights and since the said flat was sold to an outside party there was a transfer within the meaning of section 2(47) of the Act and the amount realized on surrender of occupancy right in the said flat according to the Assessing Officer falls
11 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri within the meaning of definition of transfer and would accordingly be subject to capital gains tax. This view of the Assessing Officer was affirmed by the Ld.CIT(A).
On a reading of the family settlement deed, we observe that it was entered into by the five groups namely MMP Group, JMP Group, RMP Group, AMP Group and ARP Group which were carrying on various businesses jointly as family members through various companies namely Industrial Jewel Pvt. Ltd., Hindustan Jewels Pvt. Ltd., and Acrysil Ltd. Assessee belongs to MMP Group. MMP represents Mansukhlal Mohanlal Parekh who is the father of the assessee and he was the Chairman and Managing Director of Industrial Jewel (P) Ltd., Mansukhlal Mohanlal Parekh was occupying the flat owned by the company since 1972 till he died on 30.01.1979. Thereafter his family i.e. wife, two daughters and only son were in occupation of the said flat. As there were some disputes in the family of these groups the family settlement deed was entered into. Clause 11 of the deed suggest that the company Industrial Jewel Pvt. Ltd., (for short IJPL) owns the flat at Rashmi Cooperative Housing Society Ltd., and it was under the possession and occupation of the assessee’s father and after the demise of the assessee’s father, property is in possession of assessee and her brother and sister. As per Clause 16 of this deed of settlement it was agreed that the occupants of the said flat shall surrender
12 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri their occupancy/possessory rights in the said flat and shall handover the vacant and peaceful possession of the said flat within a period of 90 days from the date of execution of the deed, when the property is sold and in lieu of which occupants shall be entitled to receive aggregate monetary lumpsum compensation of ₹.4,08,00,000/- in equal proportions. This settlement deed was recognized by the Assessing Officer but according to him since the flat was sold there was a transfer within the meaning of section 2(47) of the I.T Act. It is not the case of the Assessing Officer that the assessee possessed any tenancy rights nor the settlement deed is ingenuine. There is no tenancy as no rent was paid by either the assessee’s father late Mansukhlal M. Parekh or the occupants of the said flat including the assessee. Therefore, the contention of the Ld.CIT(A) that there is tenancy is wrong and not based on any evidence on record. The assessee in this case was having only occupancy/possessory rights over the said flat.
In the case of CIT v. M. Appukutty [253 ITR 0159 (ker)] the Hon'ble Kerala High Court held that the amounts received by the assessee as consideration for transfer of possessory rights was not chargeable to tax as capital gains. While coming to said conclusion the Hon'ble High Court took note of the decision in the case of CIT v. B.C. Srinivasa Setty [126 13 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri ITR 294 (SC)] and A.R. Krishnamurthy & Anr. v. CIT [176 ITR 417 (SC)]. The Hon'ble High Court finally concluded as under: - “8. So far as this case is concerned, Appukutty was in possession on the building as tenant and he was conducting his proprietary concern in that building. That was converted into partnership. Thus, the partnership came into possession of the building in 1962. Apparently, no amount was paid for getting possession. It can be said to be as self- generated asset. It is true that possessory right is different from tenancy right. Salmond on Jurisprudence, 12th Edn at P 266 it is stated as follows: “Possession differs from ownership in another quite different respect. Ownership, as we saw, consists of a combination of legal rights, same or all of which may be present in any particular instance; and such rights imply the existence of legal rules and a system of law. With possession this is not so. A possessor is not so much one who has certain rights as one who actually has possession. Whether a person has ownership depends on rules of law; whether he has possession is a question that could be answered as a matter of fact and without reference of law at all. According to us, there is no guideline on the basis of which this right can be valued. Further, in this case, it cannot be said that any cost was incurred for acquiring possessory right.
In the case of Mrs. Urmila Mahesh Nathani v. ITO in A.Y. 2009-2010, dated 10.07.2015, Mumbai Bench of the Tribunal considered a situation where by virtue of family arrangement property inherited by the assessee and relinquished rights whether amounts to transfer in relation to a capital asset and the Coordinate Bench following the decision of the Hon'ble Madras High Court in the case of CIT v. Kay Arr Enterprises & Others [299 ITR 348] and the Hon'ble Jurisdictional High Court in the case of CIT v. Sachin B. Ambulkar
14 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri held that amount received by the assessee in terms of family settlement agreement cannot be treated on account of transfer of capital asset and cannot be said to chargeable tax under the head of capital gains observing as under: “We have heard the rival contention and perused the relevant material on record. The assessee inherited 1/3rd property in the estate of her deceased husband’s father (i.e. her father- in-law) after the death of her minor son. A family arrangement was arrived to partition the interest of the assessee by paying her lump sum amount of Rs. 35,00,000/- to relinquish the right in the properties. A family settlement agreement was arrived at on 28th April, 2008 wherein, it was agreed that the assessee shall ceased to have any rights, title, interest, claims in any of the properties of late Shri R. L. Maheshwari i.e. her father-in-law. To complete the transaction of settlement, following instruments were also drawn and executed: - a. A release deed by Smt. Urmila of the rights, title & interest in the property 340, Sardarpura Road No. 4, Jodhpur favouring Shri F.L. Maheshwari & Shri Jitendra Maheshwari. b. A Gift deed by Smt Urmila of her interest in property at 3 A Pokran House Jodhpur favouring Smt. Shashi Maheshwari W/o Shri Jitendra Maheshwari c. Shri Jitendra Maheshwari to transfer all his rights/title/ interest in property at 4A & 4B Pokran House by way of gift in favour of Shri F L. Maheshwari”. In lieu of her surrendering of her rights, the assessee was paid a sum of Rs. 35 lakhs which is the subject matter of dispute before us in this appeal. The said relinquishment of rights has to be seen from the angle, whether this would have created a 15 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri possible litigation or may be harassment to the assessee, later on from the other family members of her deceased husband. Under a family arrangement, if a settlement is agreed, amongst the members then it cannot be held that it’s a case of transfer of a capital asset. The assessee had merely inherited the share on behalf of her late husband from the property belonging to her father-in-law. This share had been relinquished under the family arrangement, wherein all the parties who had antecedents’ rights have mutually agreed upon for settlement of the shares. Such a family settlement or arrangement does not tantamount to any transfer of a title, albeit it is akin to a partition of the family asset amongst the members, which is not regarded as a transfer u/s 47(i). In case of a family settlement, it only settles the conflicting claims which had pre-existing joint interest, to a separate interest and there is no conveyance of a property or transfer of a property. Here it is not a transfer of a capital asset but an arrangement for settling the interest and rights of the family members. The Hon’ble Madras High Court in the case of CIT vs Kay Arr Enterprises & Others, reported in [2008] 299 ITR 348, held that when the parties entered into a family arrangement, that would not attract capital gain as the same was prudent arrangement to avoid possible litigation among family members. Further, a family arrangement has to be seen as an agreement between the Members of the same family for settling doubtful or disputed or preserving the family property or the members and security of the family by avoiding litigation or by saving its owner. Similar view has been taken in various decisions as relied upon by the Ld. Counsel. In the latest decision of Hon’ble Bombay High Court in the case of CIT vs Sachin B. Ambulkar, the Hon’ble High Court upheld that if there is no transfer of asset and amount has been received by the assessee as part of family arrangement, does not gave rise to liability of capital gain tax. Thus, we hold that the amount received by the assessee in terms of family settlement agreement cannot be treated on account of transfer of a capital asset which cannot be said to chargeable to tax under the head “capital gain”. Accordingly ground raised by the assessee is treated as allowed.”
16 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri 17. Further in the case of Smt. Seetha S. Shetty v. Dy.CIT, Coordinate Bench of the Tribunal in dated 11.09.2015 considered a situation where the assessee acquired the assets by way of adverse possession and later on entered into a development agreement and received part consideration and a flat and in such circumstances whether assessee is liable for long term capital gain tax on the basis of the development agreement and the Coordinate Bench following the decision of the Hon'ble Jurisdictional High Court in the case of DCIT v. Star Chemicals (Bombay) Pvt. Ltd., in Income Tax appeal No. 1110 of 2009 & Income Tax Appeal No. 1153 of 20009 dated 14th August, 2009, it was held that no capital gains is chargeable to tax in relation to asset acquired by way of adverse possession. The Hon'ble Bombay High Court while answering the question of chargeability of capital gains in relation to asset/property which was acquired by way of adverse possession has held that the Tribunal was right in holding that for want of acquisition cost capital gains tax would not arise.
Admittedly in the case before us the assessee’s father late Mansukhlal M. Parekh was living in the said property since 1972 and the assessee, her brother and sister were also residing in that flat after the demise of her father till the settlement deed was effected. The property is not under any tenancy agreement. Assessee’s father nor the assessee
17 ITA.No.5968/MUM/2013 (A.Y: 2007-08) Sonal A. Zaveri were paying any rent nor any agreement has been entered into for tenancy of the property. The assessee entered into family settlement deed and by way of this family settlement the company sold the property and since assessee was under possession of the property lumpsum amount was paid for surrendering her possessory rights over the property. Therefore, since amount has been received by the assessee as part of family arrangement, in view of the above decisions there would not be any transfer of asset and it does not give rise to liability of capital gains tax. Therefore, in view of what is discussed above we hold that the amount received by the assessee in terms of family settlement agreement cannot be treated on account of transfer of capital asset and cannot be chargeable to tax under the head capital gains.
In the result appeal of the assessee is allowed.
Order pronounced in the open court on the 15th November, 2017.