2012 (5) TMI 184 - HC - Income Tax

Family Arrangement Excludes Capital Gains Tax

Commissioner of Income-tax Versus R. Nagaraja Rao

The Tribunal held that the sale proceeds from shares held in private limited companies were not subject to capital gains tax due to a family arrangement ... Family arrangement by a deed – settlement of dispute by Arbitrator lead to resign and transfer of shares of assessee for a consideration – AO held there was a transfer, there was a capital gain and therefore the assessee is liable to pay the tax – Held that:- What is recorded in a family settlement is nothing but a partition and that the word ‘transfer' does not include partition or family settlement - The sale proceeds earned by the assessee out of sale of shares held in private limited companies cannot be treated as the income of the assessee and brought to capital gains tax - in favour of assessee. Issues:1. Whether the sale proceeds from the shares held in private limited companies can be treated as income and subjected to capital gains tax.2. Whether the transfer of shares occurred due to a family arrangement, and if family disputes negate the transfer.3. Whether the Assessing Officer's finding on the sale of shares for capital gains tax was correctly upheld by the Appellate Commissioner.Analysis:1. The Tribunal held that the transactions and family arrangement among the family members cannot be considered a transfer, hence no liability for capital gains tax. A family arrangement was made between the children of the deceased, outlining the management of family properties and business shares independently by each party. Disputes arose, leading to an arbitrator's settlement where the appellant resigned from a partnership firm and transferred shares. The assessing authority deemed it a transfer, resulting in capital gains tax. The Tribunal, referencing legal precedents, concluded that the family arrangement was not a transfer, setting aside the lower authorities' orders.2. The Court referred to a previous case where it was established that a partition or family settlement does not constitute a transfer under the law. The Tribunal correctly determined that the family arrangement in question did not involve a transfer, thereby no capital gains tax liability. The Court affirmed that in family settlements, there is an adjustment of shares and crystallization of property rights, not constituting a transfer. Consequently, the Tribunal's decision favoring the assessee was upheld, dismissing the Revenue's appeal.3. The substantial questions of law raised in the appeal were addressed in favor of the assessee. The Court reiterated that in the absence of a transfer, there is no capital gain, and thus no tax liability. The Tribunal's finding that the transaction was a family arrangement, not subject to capital gains tax, was upheld as per legal principles. The appeal by the Revenue was deemed to lack merit, and accordingly, it was dismissed by the Court.