2015 (7) TMI 1252 - AT - Income Tax

Family settlement not taxable as capital gains; tribunal rules in favor of assessee citing case law.

Urmila Mahesh Nathani C/o. Mandhania & Associates Versus ITO -14 (2) (2), Nariman Point, Mumbai

The Tribunal ruled that the amount received by the assessee under a family settlement agreement was not taxable as capital gains. It was determined that ... Amount received in lieu of relinquishment of rights in the property - as per AO it is a transfer of a capital asset taxable under the head “capital gains” - assessee had inherited 1/3rd share in the said property - family arrangement - Held that:- 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 ₹ 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. 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. As decided in the case of CIT vs Kay Arr Enterprises & Others [2007 (7) TMI 171 - MADRAS HIGH COURT] 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. 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” - Decided in favour of assessee. Issues:Taxability of amount received under family settlement as long-term capital gain.Analysis:The appeal was filed against an order by CIT(A) regarding the taxability of a sum received under a family settlement. The assessee inherited property and later relinquished her share under a family settlement agreement for a consideration of Rs. 35 lakhs. The Assessing Officer deemed the amount taxable under 'capital gains.' The CIT(A) upheld this decision, stating that the relinquishment constituted a transfer of a capital asset. The CIT(A) directed the AO to consider the fair market value as on 01.04.1981 and allow indexation benefits to the assessee. The assessee contended that the amount received should not be taxed as capital gain, citing various case laws.The Tribunal noted that the family arrangement aimed to settle conflicting claims among family members and avoid potential litigation. It was observed that the settlement did not involve a transfer of a capital asset but was a partition of family assets. Citing precedents, the Tribunal held that family arrangements do not attract capital gains tax as they aim to preserve family property and avoid disputes. Referring to the latest Bombay High Court decision, it was established that amounts received under family arrangements are not subject to capital gains tax. Consequently, the Tribunal allowed the appeal, ruling that the amount received through the family settlement should not be taxed as capital gains.In conclusion, the Tribunal held that the sum received by the assessee under the family settlement agreement did not constitute a transfer of a capital asset and thus was not taxable under the head of 'capital gains.' The appeal was allowed in favor of the assessee, emphasizing the nature of family settlements in preserving family assets and avoiding disputes.