2010 (8) TMI 1136 - AT - Income Tax

Appellant not liable for capital gains tax in family arrangement, Tribunal rules based on legal precedents.

Shri R. Manogar Versus The Assistant Commissioner of Income Tax, Circle III, Coimbatore.

The Tribunal held that the appellant is not liable to pay capital gains tax on the amount received under the family arrangement. The decision was based on ... - ISSUES PRESENTED AND CONSIDERED 1. Whether sums received pursuant to a family arrangement, described as payment for 'release' or 'relinquishment' of shares/interest in family property, constitute a 'transfer' within the meaning of section 2(47) and thereby give rise to chargeable capital gains. 2. If held to be a transfer, whether the receipt qualifies as short-term or long-term capital gain and the correct mode of computing cost of acquisition. 3. Whether a memorandum of family arrangement prepared to record an antecedent settlement creates fresh proprietary rights requiring registration and taxable consequences, or is merely a record of an already effected family realignment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether receipt under family arrangement amounts to 'transfer' under section 2(47) Legal framework: Section 2(47) defines 'transfer' in relation to a capital asset and expressly includes 'relinquishment' of rights. Capital gains are chargeable only upon a 'transfer' as so defined. Precedent treatment: Authorities include decisions holding that where a family arrangement is bona fide, voluntary, and intended to avoid litigation, it does not amount to a taxable 'transfer' attracting capital gains (jurisdictional High Court decision in Kay Arr Enterprises; Tribunal precedents and regional High Court decisions cited favourably). Other decisions cited by revenue (e.g., Shanthi Chandran) address cost of acquisition issues but are factually distinguishable. Interpretation and reasoning: The Court examined the family arrangement's character - entered into voluntarily, bona fide, and for family harmony - and emphasized substance over form. The memorandum was treated as recording an internal family settlement rather than creating a new alienation to a third party. Where consideration is paid within the family to realign pre-existing rights and avoid litigation, the payment is not a transfer in the commercial sense contemplated by section 2(47)(a). The use of words 'release' or 'relinquish' in the document is not determinative; the document must be read as a whole to ascertain whether parties intended a settlement or an alienation generating taxable transfer. The Tribunal relied on binding and persuasive authorities holding that peaceful family settlements entered into voluntarily do not attract capital gains tax because there is no transfer as envisaged by the Act. Ratio vs. Obiter: Ratio - Family arrangements, bona fide and voluntary to avoid litigation, do not constitute 'transfer' under section 2(47) and therefore do not give rise to capital gains. Obiter - Observations distinguishing other case law on cost of acquisition and emphasizing non-materiality of the words 'release/relinquish'. Conclusion: The receipt under the family arrangement is not a 'transfer' within section 2(47) and is not chargeable to capital gains tax. Issue 2 - If a transfer, characterization as short-term or long-term capital gains and computation of cost Legal framework: Capital gains classification depends on period of holding of the capital asset; cost of acquisition for assets received by succession, inheritance or family settlement may be governed by principles laid down in precedent law (including attribution of previous owner's cost). Precedent treatment: Revenue relied on decisions treating receipt in settlement as transfer and applying prior owner's cost (e.g., Shanthi Chandran). The Tribunal contrasted these with decisions holding family settlements non-taxable where no transfer is found (Kay Arr Enterprises; Tribunal bench decisions; Delhi High Court decision cited). Interpretation and reasoning: Having concluded there was no transfer (Issue 1), the Tribunal did not need to determine classification as short-term or long-term nor compute cost of acquisition. The Assessing Officer's treatment of the entire receipt as short-term capital gain with nil cost of acquisition was rejected as premised on an incorrect finding of transfer. The Tribunal noted that decisions invoked by revenue were distinguishable on facts and framing; where transfer is accepted in other contexts, cost attribution issues remain relevant but are inapplicable to the present factual matrix. Ratio vs. Obiter: Ratio - Not applicable because primary finding (no transfer) renders further classification and computation unnecessary. Obiter - Critique of A.O.'s approach to treating receipt as short-term gain with nil cost where family arrangement facts differ. Conclusion: No capital gains arise; therefore, issues of short-term/long-term status and cost computation do not arise and A.O.'s computation is set aside. Issue 3 - Effect of memorandum/recording of family arrangement on creation of rights and registerability Legal framework: Principles distinguishing a memorandum that records a pre-existing family settlement from instruments that create fresh proprietary rights; statutory registration requirements attach to instruments creating rights in immovable property. Precedent treatment: Cited authority (Kale v. Deputy Director of Consolidation) and subsequent High Court/Tribunal decisions hold that a memorandum prepared to record an already effected family arrangement does not create fresh rights requiring compulsory registration, and such documents should be read in context to determine their legal effect. Interpretation and reasoning: The Tribunal observed that the memorandum in question merely recorded the family settlement and the payment made to avoid future litigation. It did not, in substance, create a new proprietary transfer to a stranger. The document's language must be read in its entirety; isolated terms like 'release' or 'relinquish' cannot be dispositive if the overall context shows an internal family compromise. Where the arrangement is bona fide and not tainted by fraud or coercion, courts will ordinarily uphold it and treat it as a reallocation of family rights rather than a fresh transfer taxable as capital gains. Ratio vs. Obiter: Ratio - Memoranda recording bona fide family settlements do not, by themselves, create registerable proprietary rights or taxable transfers when they merely memorialize an internal family realignment. Obiter - Remarks on registerability and the non-materiality of particular words in the document. Conclusion: The memorandum did not create fresh rights or a taxable transfer; it is a record of a family arrangement and does not attract capital gains tax or compulsory registration implications for the purpose of taxation. Cross-reference and overall conclusion Cross-reference: Issues 1-3 are interdependent - the factual character of the family arrangement (Issue 3) informs whether a 'transfer' occurred (Issue 1), which in turn determines whether classification and cost questions (Issue 2) arise. Overall conclusion: The sums paid pursuant to the bona fide, voluntary family arrangement to realign family interests do not amount to a 'transfer' under section 2(47); consequently, no capital gains tax arises and the assessment treating the receipt as taxable capital gains is set aside. The Tribunal follows applicable High Court and Tribunal precedents distinguishing cases where genuine family settlements are excluded from the scope of 'transfer.'