Court-approved family settlement governs acquisition of disputed property and blocks section 49(1)(iii) capital gains treatment

A bona fide court-approved family settlement that finally determines disputed rights is treated as the operative source of title for capital gains purposes. Jewellery received under such a settlement was held not to have been acquired by succession, inheritance or devolution, because the parties' rights were settled through compromise rather than pre-existing statutory succession. On that basis, section 49(1)(iii) of the Income-tax Act, 1961 did not apply, and the capital gains addition was deleted. The date of acquisition was therefore linked to the family settlement itself, not to the deceased's estate.

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Issues: Whether jewellery received under a court-approved family settlement was acquired by succession, inheritance or devolution so as to attract section 49(1)(iii) of the Income-tax Act, 1961 for capital gains purposes.

Analysis: The parties had competing claims over the estate of the deceased, and no adjudication on merits took place before the compromise was reached. The settlement was entered into to end the dispute and preserve family peace, and it was approved by the Court. A family settlement of this nature is recognised in law and is not to be treated merely as a device or as a transfer arising from pre-existing statutory succession rights. The assessee's title to the assets, including the jewellery, became final only under the settlement, and the date of acquisition had to be linked to that settlement. Since the property was received by way of family settlement and not by succession, inheritance or devolution, the statutory deeming provision for capital gains did not apply.

Conclusion: Section 49(1)(iii) of the Income-tax Act, 1961 was not attracted, and the capital gains addition was rightly deleted in favour of the assessee.

Final Conclusion: The family settlement was treated as the source of title, so the sale of the jewellery did not give rise to taxable capital gains on the basis adopted by the revenue.

Ratio Decidendi: A bona fide family settlement approved by court, which finally determines the parties' rights in disputed property, is the operative source of acquisition for capital gains purposes and does not amount to acquisition by succession, inheritance or devolution.

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