2010 (4) TMI 1077 - AT - Income Tax

Family arrangements not subject to capital gains tax under Sec. 2(47) of I.T. Act

Shri Sachin P. Ambulkar, Versus. The ITO,

The Tribunal held that a valid family arrangement does not constitute a transfer under Sec. 2(47) of the I.T. Act, therefore no chargeable capital gains ... - Issues Involved:1. Validity of reopening the case u/s 147.2. Taxability of the amount received in a family settlement as capital gains.3. Applicability of Sec. 2(14), 2(47), and 45 of the I.T. Act.4. Determination of cost of acquisition for capital gains computation.5. Levy of interest u/s 234B and 234C.6. Initiation of penalty proceedings u/s 271(1)(c).Summary:1. Validity of Reopening the Case u/s 147:The return of income was filed on 29.10.2004, declaring a total income of Rs. 4,56,320/-. The case was reopened u/s 147, and notice u/s 148 was served on 1.4.2006. The assessee responded by treating the original return as filed in response to the notice u/s 148.2. Taxability of the Amount Received in a Family Settlement as Capital Gains:The assessee received Rs. 2.25 Crores as part of a family settlement. The AO held that the amount received through the family settlement in lieu of the right to receive royalty from the Govindrao Ambulkar Trust is liable to be taxed as capital gain u/s 45 of the I.T. Act. The AO reasoned that the relinquishment of the right to receive royalty constitutes a transfer as per Sec. 2(47) and is a capital asset u/s 2(14).3. Applicability of Sec. 2(14), 2(47), and 45 of the I.T. Act:The Ld. CIT(A) upheld the AO's decision, stating that the property of the trust and the income therefrom constitute an asset. The AR's contention that Sec. 2(14), 2(47), and 45 are not applicable was not supported by any reasons.4. Determination of Cost of Acquisition for Capital Gains Computation:The assessee argued that there is no cost of acquisition for the predetermined right of a lineal descendant and hence, the computation provisions for capital gains cannot be exercised. The Ld. Counsel for the assessee relied on various case laws to support this argument.5. Levy of Interest u/s 234B and 234C:The AO levied interest u/s 234B of Rs. 6,83,716/- and u/s 234C of Rs. 2034/-. The assessee contended that this was not in accordance with the provisions of the law.6. Initiation of Penalty Proceedings u/s 271(1)(c):The AO initiated penalty proceedings u/s 271(1)(c), which the assessee argued was unjustified as the additions made were based on a bonafide explanation.Judgment:The Tribunal held that a valid and bonafide family arrangement does not give rise to a transfer as mentioned in Sec. 2(47) of the I.T. Act. Therefore, there cannot be any chargeable capital gains as a result of the readjustment of pre-determined rights settled through a family arrangement. The Tribunal relied on various case laws, including CIT Vs Kay Arr Enterprises, Maturi Pullaiah & Another Vs Maturi Narasimham & Others, and CIT Vs R. Ponnammal, to conclude that family arrangements do not amount to a transfer and hence are not exigible to capital gains tax.The Tribunal found that the family arrangement was a device to settle disputes among family members and did not involve a transfer of assets. Consequently, the amount received by the assessee as part of the family arrangement was not liable to capital gains tax. The appeal filed by the assessee was allowed, and the additions made by the lower authorities were deleted.Order:The appeal filed by the assessee is allowed. Order pronounced on this 30th day of April, 2010.