2025 (10) TMI 80 - AT - Income Tax

Owelty payment for undivided ancestral property not taxable as long-term capital gain under Section 45; assessment set aside

ITAT DELHI (AT) allowed the appeal, holding that the sum received by the assessee as owelty for her share in an undivided ancestral property on transfer ... Long-term capital gains - Assessee transferred her share to the real sister - revenue vehemently argues that once the assessee has transferred her right or title in the residential house coming from her mother, we ought to confirm the impugned long-term capital gain’s addition - HELD THAT:- We find no merit in the Revenue’s foregoing vehement contentions as such an amount that was received by the claimant/legal heir in lieu of the share in the undivided estate of deceased ancestor in the nature of owelty, does not amount to taxable income in light of CIT Vs. Ashwani Chopra [2013 (1) TMI 651 - PUNJAB & HARYANA HIGH COURT] We adopt their lordship’s above detailed discussion mutatis mutandis to reverse the learned lower authorities’ action making the impugned long-term capital gain. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the lump-sum amount received by a legal heir in lieu of her share in an undivided ancestral house as ordered/accepted in settlement (characterised as owelty or compensation to equalize partition) constitutes taxable income by way of long-term capital gains. 2. Whether the reception of such owelty/compensation amounts to a 'transfer' of capital asset for the purposes of charging capital gains tax, or whether it is in the nature of immovable property (substituted property) and therefore outside the ambit of capital gains. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of owelty/compensation as long-term capital gains Legal framework: Capital gains provisions require a 'transfer' of a capital asset resulting in income chargeable to tax. Principles governing partition, family settlements, and the concept of owelty inform whether an amount paid in lieu of physical division is a transfer or an allotment of property value. Precedent treatment: The Court followed established decisions treating owelty/compensation paid to equalize partitions as representing property (or substituted property) and not as income - relying on authorities that include a Supreme Court exposition of owelty and multiple High Court decisions that held such payments are not exigible to capital gains tax. These precedents were followed, not distinguished or overruled. Interpretation and reasoning: The Court reasoned that an amount paid to equalize shares on partition is the cash value of the portion of immovable property allotted to the payee (owelty), and functions as part of the partitioned property rather than an independent income receipt. The payment, whether by decree, settlement or family arrangement, effects an adjustment of proprietary rights (crystallisation of shares) and operates as substituted immovable property or creates a lien/charge on the allotted property. Treating such amount as taxable income would upset the equities of partition by diminishing the net share of the recipient to the extent of tax, contrary to the compensatory and equitable nature of owelty. Ratio vs. Obiter: Ratio - owelty/compensation paid to equalize partition is not income chargeable to capital gains; it represents immovable property or substituted property and thus does not attract capital gains tax. Observations concerning ancillary procedural facts (e.g., deposit conditions, pendency of proceedings) are incidental. Conclusion: The impugned addition of long-term capital gains on the lump-sum amount characterized as owelty/compensation is not sustainable and must be set aside. Issue 2 - Whether receipt of owelty/compensation amounts to a 'transfer' of capital asset Legal framework: Capital gains liability arises only upon a 'transfer' as defined under the law. Partition, family arrangements and settlements commonly result in realignment/crystallisation of rights; whether this constitutes a transfer depends on substance - whether there is alienation or merely an internal readjustment of proprietary interests among co-sharers/heirs. Precedent treatment: The Court relied on authorities holding that partition is not a transfer, and that adjustments of shares or family arrangements intended to settle disputes and equalize interests do not amount to alienation so as to attract capital gains. These authorities were applied to the facts of the case. Interpretation and reasoning: The Court held that the lump-sum received in lieu of share is an element of the partition settlement - effectively substituting or representing immovable property - and not the result of an alienation to a stranger triggering a transfer. The payment is intended to implement equitable division where physical partition is impracticable or where values differ; it operates as part of the partition process and carries with it implied charges/liens where appropriate. The Court noted that where a final determination resulted in receipt of a lump sum in lieu of physical share, that sum is the cash equivalent of property rights rather than taxable income. Ratio vs. Obiter: Ratio - adjustment/crystallisation of proprietary rights in partition by payment of owelty/compensation does not constitute a 'transfer' for capital gains purposes; it is part of the partitioning process and represents property value. Remarks addressing procedural constraints on use of deposited funds or interim orders are obiter in relation to the core taxability issue. Conclusion: There was no transfer liable to capital gains tax when the assessee received the lump-sum owelty/compensation in settlement of her share; the assessment to long-term capital gain must be reversed. Cross-references and application The Court expressly adopted the detailed judicial exposition of owelty and partition law from leading authorities mutatis mutandis, applying those principles to the facts (inheritance, will, family dispute, settlement/award resulting in lump-sum payment). The decision holds that such payments are not exigible to capital gains and therefore authorises reversal of the impugned tax addition. Other issues pleaded by the assessee were rendered academic by this conclusion.