TaxTMI 
TaxTMI 
2014 (10) TMI 693
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....ance of the contract (implementation of the Arbitration Award during the assessment year under consideration as a capital receipt and not hence does not fall within the ambit of chargeable section 4 of the Income Tax Act, 1961. It is the order of the Arbitrating authority which is an Alternate Disputes Redressal Forum and which is equally good to all applicable laws of the land, the Company which is being a party to the Arbitration award has lawfully respected the arbitrational award by fulfilling the conditions of the same. 2. The learned Commissioner of Income Tax (appeals) erred in upholding the order of the AO that the sum of Rs. 2,26,00,000/- received by the appellant pursuant to the Arbitral award consequent to the family arrangement and settlement of family disputes constitutes a "Deemed Gift" under Sec.56(vi) on the ground that the amount received is without any consideration ignoring the very Definition of consideration as per the Indian Contract Act 1872. 3. The learned Commissioner of Income Tax (appeals) ought to have appreciated the fact that the payments paid by the company and received by the appellant is based on the agreements entered in to by the parties to ....
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....as a direct bearing on the penalty proceedings and also since there was no disposal of the stay petition by the Ld. Assessing Officer the stay of demand exists and hence he cannot be treated as assessee in default so as initiate the proceeding u/s 221(1)." ITA No.1965/Mds./2011 3. The brief facts of the case are that the assessee Shri SKM Shree Shivkumar, is an individual, earning income from salary, short term capital gain and income from other sources, filed his return of income for the assessment year 2008-09 on 31.07.2008 admitting total income of Rs. 24,88,930/-. Initially the same was processed U/s. 143(1) of the Act and latter the return was taken for scrutiny and assessment was made U/s. 143(3) of the Act on 30.12.2010. The assessee is the Managing Director of the company, M/s. SKM Egg Products Exports (India) Ltd., and Director in the company M/s.SKM Animal Feeds and Foods (India) Limited. During the course of scrutiny assessment proceedings, it was noticed that the assessee had received an amount of Rs. 5,76,00,000/- from the company M/s.SKM Animal Feeds and Foods (India) Limited out of which an amount of Rs. 2,26,00,000/- has been received during the Financial Year....
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.... also be attracted for the amount of cash and other assets received. The assessee had raised the following objections against the opinion aired by the Ld. A.R.:- (i) The entire receipt of cash, land and equity shares by the assessee was due to the family partition in compliance with the Arbitration award. (ii) The payments mentioned in Sec.2(22)(e) of the Act does not include transfer of shares and land. (iii) The payments mentioned in Sec.2(22)(e) of the Act only includes advances or loans extended to the shareholders. (iv) The cash received by the assessee is not paid on behalf, or for the individual benefit of any such shareholders. (v) The assessee is not substantial shareholders of the company, thought the shares were registered in his name. 6. The Ld. Assessing Officer rejected the explanation offered by the assessee and held that provisions of Sec. 2(22)(e) and Sec.56(vi) of the Act will be applicable to the case of the assessee for the entire amount of Rs. 3,50,00,000/- and value of asset received. Since for the relevant assessment year 2008-09 the assessee has received Rs. .2,26,00,000/-, by invoking both the aforesaid provisions of the Act, Ld. Assessing....
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.... of the assessee. The relevant portion of the order of the Ld. CIT (A) is extracted herein below for reference:- "I hold that for the reasons stated above the family arrangement, partition dated 09/07/2008 and the arbitration award dated 08/06/2008 are not taken into consideration for adjudicating the taxability of the sum of Rs. 2,26,00,000 received by the appellant in the assessment year under consideration. No the issue is narrowed down to taxability of Rs. 2,26,00,000 received by the appellant from M/s.SKM Animal Feeds and Foods (India) Limited U/s. 56(2)(vi). In the written submissions filed, it was submitted that "in the instant case, the amount is admittedly, received by the appellant pursuant to the arbitration award and the family arrangement arrived at based on the Arbitration award". As held by me that since the arbitration award dated June 2008 is effectively the only award, since the earlier one dated October, 2007 has been superseded as found in the award dated June 2008, the same is not taken reckoning. Consequently, the family arrangement arrived at based on the arbitration award is also not taken into consideration for adjudicating the taxability of the sum rece....
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....particular receipt . Thus it is the duty of the AO when it chooses to issue a reassessment notice with regard to a particular receipt, to make the necessary allegations in that regard so as to establish that such receipt is "income" taxable under the Act. It was so held in by the Hon'ble High Court of Madras in the case of (Carry forward .Kil Kotagiri Tea and Coffee Estates Co. Limited Vs. State of Tamil Nadu reported in (1998) 2234 ITR 252, 257 (copy of the case law enclosed). Since in this case, the receipt of assets by the assessee is not an 'income' within the meaning of the Income Tax Act 1961, the very re-opening is bad in law. A detailed submission as to why the receipt of assets by the assessee sought to be taxed U/s. 2(24)(iv) of the Income Tax Act 1961 is not an "income" is furnished elsewhere in the letter. Submission Number 2: During the assessment year 2008-09 relating to the financial year 2007-08, the assessee had received only a sum of Rs. 2.26 crores from the Company M/s.SKM Animal Feeds and Foods (India) Limited under a family settlement arrangement as per the award of the Arbitrator under the Arbitration and Conciliation Act 1996 and no other as....
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....ing joint-interests as separate interests, there is no conveyance. Such arrangements are recognized even under the English Law and for all communities irrespective of their personal laws. Since there is no conveyance, there is no need for registration of such arrangements, when orally made, even if alter reduced to writing. So it is the family alone that benefits and not any particular member since they already possesses right over the joint properties and which are only subsequently earmarked to different members. FAMILY ARRANGEMNT AKIN TO A PARTITION: Where an asset is acquired on a family arrangement, it is on par with an asset acquired on partition or any other succession. It was so held in Ld. CIT v. Shanthi Chandran [2000] 241 ITR 347 by the Hon'ble Madras High Court. In the following cases, it has been held that where properties including stock-in-trade of a Joint Hindu family are allotted to its members on a partition of the family, the allotment towards the properties allotted to a member would ordinarily be capital in his hands. 1. S.T.S. Swaminathan Chettiar v. CIT [1966] 62 ITR 125 (Mad.) 2. KM.PR.KM Firm v. CIT [1966] 62 ITR 159 (Mad.) 3. M.S.M.M.....
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....Dr. M. Chandrasekar. More so by Shri SKM Maielanandhan and they had collectively acquired both moveable and immovable properties. (2) The different companies owned by SKM group and the family members had acquired immovable properties comprising of land, factory buildings and windmills. The initial source for various businesses has come from Shri SKM Maielanandhan, while as all the business have been developed by the personal efforts of the Shri SKM Maielanandhan and his two sons. (3) Though the investments have been made and held in individual names, the assets and properties have been developed over a period of years by the combined efforts of the father and his two sons, and the assets including shares in all the companies and the movable assets and immovable properties held in the name of the companies are the joint properties of the family members irrespective of the name in which such assets and properties are held. (4) Though Shri SKM Maielanandhan, the father of Shri SKM Shree Shivkumar and Dr. M. Chandrasekar has adopted a neutral stand with regard to the disputes, he had joined in the arbitration proceedings in so far as the settlement of the dispute and division ....
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....6,90,000/- 2. Property situated at Chennimalai Road(Car shed),Erode town in TS No.95,96,97B to the extent of 13,825.75 Sq.ft valued at Rs. 1,38,25,750/-. 3.Cash of Rs. 5,76,00,000/- (Rupees Five Crore Seventy Six Lakhs Only) as per clause 33 of the award. M/s.SKM Animal Feeds and Foods (India) Limited in two years. (B) Assets transferred to Dr. M. Chandrasekar as per the Award - as per Schedule-II of the Arbitration award:- 1212 (One Thousand Two Hundred and Twelve) equity shares of Rs. 1,000/- each fully paid in M/s.SKM Animal Feeds and Foods (India) Limited from Shri SKM Shree Shivkumar, the assessee. (C) Assets Transferred to Shri SKM Maielanandhan as per the Award - as per Schedule III of the Arbitration award dt.08.06.2008:- 276 (Two Hudred and Seventy Six) equity shares of Rs. 1,000/-each fully paid in M/s.SKM Siddha and Ayurvedic Medicines India Private Limited held by Dr.M.Chandrasekar. (D) Assets Transferred to M/s. SKM Siddha and Ayurvedic Medicines India Private limited - as per Schedule IV of the Arbitration Award dt.08.06.2008:- 1. Land at Saminathapuram (Near Siddha Unit) in S.F.No.210/5 to the extent of 5.435 Acres. 2. Windmills ( 5 Nos. ha....
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....ar 2008-09 accepted the submission of the appellant concerning the disallowance U/s. 2(22)(e) of the Act and this has been accepted by the Department." Page-7 Company becoming a party tot the family settlement/arrangement:- "In the present case in order to preserve comity and harmony amongst the family members, the Arbitral Court itself has lifted the Corporate Veil in order to prevent present and possible future disputes relating to the controlling interest amongst the warring shareholders. The Commissioner of Income Tax (Appeals) has in fact, accepted the submission that the provisions are not applicable in the present case. The conclusion has not been challenged by the Department that has accepted the same. The issue has thus attained finality." Page-11 Inapplicability of Sec/56(2)(vi) of the Income Tax Act, 1961:- "With regard to Sec.2 (24)(iv), the Department has accepted the submission that the provisions are not applicable in the present case. The issue has thus attained finality." 12. Now the moot question before us is that whether the realignment of the aforesaid assets between the family members/HUF will give arise to taxable income U/s. 2(22)(e) and 56(2)(....
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.... viewing the true nature of the entire transactions. Moreover with regard to applicability of section 2(22)(e) of the Act, it is relevant to note that if the family settlement had not taken place there was a peril for the dissolution of the family owned companies for the sake of partition. In order to prevent such a precarious situation the assets of the family owned companies had to be realigned. Thus there was a commercial exigency for the family owned companies to transfer some of its assets and liquid assets in order avoid extinction. Thus, from the overall facts and circumstances of the case, we hereby hold that the entire transactions between the family members and their wholly owned companies were due to the family arrangement/partition/ settlement etc and also the provisions of Section 2(22)(e) of the Act would not apply following the various decisions of Hon'ble Higher Judiciary. Having held so, provisions of Sec 2(24)(iv) of the Act will also not be applicable to the case of the assessee in these circumstances. On these premises based on the following decisions of the various higher judiciary, let us examine the issue that whether any distribution of assets resulting ....
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....ispute, but also dispute which is possible or is likely to occur in future. This court also in Ziauddin Ahmed's case [1976] 102 ITR 253 (Gauhati) quoting the decision of the Supreme Court in Ram Charan Das' case, AIR 1966 SC 323, held that family dispute includes future dispute. IN a very recent decision in CIT v. Mrs. Bibijan Begum [1966] 221 ITR 836 (Income tax Reference No.43 of 1990), this court held thus (at page 841)" "Family arrangement presupposes either an existing dispute likely to occur in future and to resolve those disputes such family arrangement can be made." In view of the above, we answer question No.1 in the affirmative, {"Qn.No.1. Whether the Tribunal was justified in facts as well as in law in holding that so-called agreement dated December 5, 1979, is a valid family settlement, specially in view of the fact that it was made simply to avoid future disputes between the two sons of the late Rahim Buksh?} against the Revenue and in favour of the assessee.' 13.3. The Hon'ble Madras High Court in the case of CIT v. AL. Ramanathan reported in [1998] 2 45 ITR 494 held as follows:- "Held, that the dispute arose in the family and the fam....
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..... 15. On perusing all the above decisions, it is abundantly clear 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 the given case before us, 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., the entire intermingled transactions can be seen only as the family settlement arrived at through Arbitration Award amongst Hindu family members. Further there are no transfers of assets with respect to the public limited company M/s.SKM Egg Products Exports (India) Ltd. Therefore, considering the facts and circumstances of the case the provisions of section 2(22)(e), 2(24)(iv) or Sec.56(2)(vi) cannot be invoked. Accordingly, the addition made by the Ld. A.O in the case of the assessee which is further sustained by the Ld. CIT (A) on account of deemed dividend U/s. 2(22)(e) of the Act and income from other sources U/s. 56(2)(vi) for Rs. 2,26,00,000/-....