2022 (9) TMI 1682 - AT - Income Tax

Revenue appeal dismissed; deletion of addition under s.56(2)(vii) upheld as inheritance not taxable transfer per precedent

ACIT Non-Corporate Circle-15, Chennai. Versus Ms. Anitha Kumaran

ITAT CHENNAI - AT dismissed the revenue's appeal and upheld deletion of an addition under s.56(2)(vii). The Tribunal found the property had been received ... Addition u/s 56(2)(vii) - assessee purchased a property from GTPL for a consideration of Rs.10 Lacs as against its stamp duty value which was much higher -assessee submitted that the provisions of Section 56(2)(vii) of the Act would not apply for any property received under a will or by way of inheritance - HELD THAT:- This Tribunal in the case of SKM Shree Shivkumar [2014 (10) TMI 693 - ITAT CHENNAI] has held that when there is any distribution of assets pursuant to family arrangement or HUF partial / total partition, such transactions will not amount to ‘transfer’ of asset attracting tax liability in the hands of the recipient under the provisions of the Act. In that case, on piercing the corporate veil with respect to the two private limited companies viz. M/s. SKM Animals Feeds and Foods (India) Ltd. and M/s. SKM Siddha and Ayurvedic Medicines India Pvt Ltd., it was held that the entire Intermingled transactions could be seen only as the family settlement arrived at through Arbitration Award amongst Hindu family members. There would be no transfer of assets with respect to the public limited company M/s. SKM Egg Products Exports (India) Ltd. Finally, it was held that the provisions of section 2(22)(e), 2(24)(iv) or Sec.56(2)(vi) could not be invoked and the Assessing Officer's addition was deleted. This decision has been arrived at after considering various binding judicial precedents of higher judicial authorities. We would hold that the property was received by the assessee under a will / by way of inheritance and therefore, the provisions of s.56(2)(vii) would not apply to the case of the assessee. Hence, the impugned order could not be faulted with. The regular grounds of appeal as well as additional ground of appeal as filed by the revenue stand dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether provisions of section 56(2)(vii) apply where an individual receives immovable property from a closely held family company pursuant to a family settlement/oral will, when the registered consideration is substantially lower than stamp duty/market value. 2. Whether a transfer effected by a family-owned corporate entity to a family member pursuant to a family arrangement can be treated as a transfer between distinct persons attracting taxation under section 56(2)(vii), or whether the corporate veil may be pierced to treat the transaction as a devolution by inheritance/family settlement. 3. Whether the proviso to section 56(2)(vii) excluding property 'under a will or by way of inheritance' applies where the property was held in the name of a family company and later transferred to a family member to effect the deceased head's last wish. 4. Admissibility of market/stamp duty valuation for determining 'income from other sources' under section 56(2)(vii) when the assessee asserts that the low consideration merely met transfer/registration expenses as part of a family settlement. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 56(2)(vii) to property received pursuant to family settlement/oral will Legal framework: Section 56(2)(vii) treats receipt of immovable property by an individual/HUF for consideration less than stamp duty value as 'income from other sources' equal to the difference, subject to provisos excluding property received from relatives, on marriage, under a will or by way of inheritance. Precedent treatment: Supreme Court and High Court authorities have consistently held that bona fide family settlements/arrangements, even oral or subsequently embodied in writing, do not amount to a 'transfer' and effect realignment of pre-existing joint or equitable interests rather than creation of new interests; family arrangements have been held valid without registration in certain contexts. Tribunal and High Court decisions permit piercing of the corporate veil where a company is effectively family-owned and assets represent joint family investments, treating distributions pursuant to family arrangements as non-transfers for tax purposes. Interpretation and reasoning: The Court examined facts showing the deceased father held overwhelming shareholding in the family company and investments were made from joint family funds. Documentary evidence (death certificate, legal heirship certificate, declaration-cum-undertaking, director's certificate, company filings) supported that the property devolved under a family settlement/oral will and that the low declared consideration was for transfer/registration expenses. Applying the proviso to section 56(2)(vii), the Court read the statute to exempt property 'under a will or by way of inheritance' from the charging provision, and concluded that an immovable property devolved on the assessee pursuant to the deceased head's last wish falls squarely within the exemption. The Court further reasoned that the policy behind section 56 (to curb money laundering/gifts between unrelated parties) does not contemplate bona fide intra-family devolution covered by the proviso. Ratio vs. Obiter: Ratio - The proviso to section 56(2)(vii) excludes from tax property received 'under a will or by way of inheritance,' and where facts establish that an asset held by a family company devolved on a family member pursuant to the deceased family head's wish and family settlement, section 56(2)(vii) does not apply. Obiter - Observations on the general rationale of section 56 as anti-money-laundering and on the nature of family settlements as resolving foreseeable disputes are supportive but ancillary. Conclusion: Section 56(2)(vii) is inapplicable; no addition arises where property is received under a will or by way of inheritance pursuant to bona fide family settlement/oral will evidenced by contemporaneous documents. Issue 2 - Piercing the corporate veil and treatment of transfers by a family-owned company as family settlement devolution Legal framework: Corporate separate legal personality is a fundamental principle, but Courts have permitted lifting the corporate veil where necessary to ascertain the real nature of transactions and prevent injustice; tax treatment depends on substance over form where family-owned corporate entities are used as vehicles for family property holdings. Precedent treatment: Decisions cited and applied permit piercing the corporate veil to treat interposed private companies as instrumentalities of family settlement when shareholding and funding indicate joint family ownership and assets are acquired from joint family funds; earlier Tribunal decisions applied similar reasoning to disallow invoking tax provisions in such contexts. Interpretation and reasoning: The Court analysed shareholding (95% held by the deceased father), nature of investments (from joint family funds), and documentation of family settlement. Given these facts, the company was treated as a family-owned vehicle and the transfer pursuant to the family's decision was viewed in substance as distribution of family property, not a market sale between unrelated persons. The Court held that piercing the corporate veil was justified to look at the actual transaction and the parties' real relationship, thereby bringing the transaction within the proviso exclusion. Ratio vs. Obiter: Ratio - Where a closely held company merely holds family assets acquired from joint family funds and a transfer by that company effectuates a bona fide family settlement/oral will, the corporate veil may be pierced to treat the transfer as devolution by inheritance/family settlement (not a taxable transfer under section 56(2)(vii)). Obiter - Distinctions with cases where family ownership is partial or facts differ (cited authorities inapplicable) are explanatory. Conclusion: Piercing the corporate veil was warranted; the company's transfer must be viewed as part of the family settlement/oral will, and therefore not within section 56(2)(vii). Issue 3 - Characterisation of consideration and valuation under section 56(2)(vii) Legal framework: Section 56(2)(vii) uses stamp duty/market value for determining the taxable differential where inadequate consideration exists, but provisos exclude certain familial transmissions. Precedent treatment: Authorities recognize that bona fide family settlements may involve nominal consideration to meet registration formalities; where the substance is inheritance/settlement, formal low consideration does not trigger tax even if stamp duty valuation is higher. Interpretation and reasoning: The Court accepted the assessee's explanation that the Rs.10 lakh consideration was to meet transfer/registration expenses and not true sale consideration, corroborated by the transferor director's certificate and the family declaration. Because the transaction was held to be an inheritance/family devolution, the stamp duty/market valuation could not be invoked under section 56(2)(vii) to create taxable income. The Court rejected the Revenue's contention that corporate separate existence precludes such treatment, given the family-owned nature of the company. Ratio vs. Obiter: Ratio - Where a transfer by a family-owned company effectuates a family settlement/oral will, a nominal registered consideration does not attract section 56(2)(vii) even if stamp duty/market value is higher; valuation provisions do not apply because the proviso exemption operates. Obiter - Discussion of inapplicability of certain cited cases factually distinguishable. Conclusion: Stamp duty/market value is not to be taken as taxable differential under section 56(2)(vii) where the transfer is an inheritance/family settlement and the low consideration merely covers transfer formalities. Issue 4 - Evidentiary sufficiency and bona fides of family settlement/oral will Legal framework: Validity of family settlements may rest on oral arrangements evidenced subsequently by deeds or contemporaneous conduct; essentials include bona fides, voluntariness, and fair/equitable distribution to resolve disputes or avoid future disputes. Precedent treatment: Supreme Court and High Court decisions recognize oral family arrangements and later memorials as valid; courts will uphold bona fide family settlements even if the parties' legal rights are not adjudicated at the time the settlement is entered into. Interpretation and reasoning: The Court reviewed documentary evidence (death certificate, legal heirship certificate, deed of declaration-cum-undertaking, director's certificate, company filings) and factual matrix (shareholding pattern, joint family funding) and found the settlement bona fide and voluntary. The Court accepted that family arrangements may be oral and need not be registered where reduced to memorandum of understanding, and that the declaration-cum-undertaking and subsequent sale deed served to effect the devolution in conformity with the family settlement. Ratio vs. Obiter: Ratio - Documentary evidence and consistent conduct demonstrating a bona fide family settlement/oral will suffice to bring a transfer within the proviso exemption; such family settlements are not to be treated as taxable transfers. Obiter - Comments on the role of panchayatdars and mediation evidence are illustrative. Conclusion: The evidence established a bona fide family settlement/oral will; the transfer was not a taxable transfer and the addition under section 56(2)(vii) was not warranted. Overall Conclusion On the cumulative analysis, the transaction was a family settlement/oral devolution of property held in a family-owned company; piercing the corporate veil to view the substance of the transaction was justified; the proviso to section 56(2)(vii) excluding property received 'under a will or by way of inheritance' applies; therefore section 56(2)(vii) does not operate to create taxable 'income from other sources' and the Revenue's additions are not sustainable.