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July 23, 2022

Capital gain on partition or family settlement is not payable

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Capital gain on partition or family settlement is not payable

Facts and Issues of the case

Assessee has filed its return of income on 01.08.2007 declaring total income of ₹.2,81,83,911/-. Subsequently case was selected for scrutiny and an assessment order was passed by the then Assessing Officer wherein the then Assessing Officer did not allow the claim of the assessee that No tax should be levied on a sum of ₹.2,08,64,396.72/- as long term capital gain admittedly arising from transfer of shares out of family arrangement by CLB order, although the same was included in the total taxable income calculated by the assessee in his return of income. Assessing Officer rejected the claim of the assessee during the assessment proceeding on the technical ground that the return of income of the assessee filed originally was not revised on this account u/s. 139 of the Act and therefore this plea cannot be considered. On appeal the Ld. CIT(A) vide order dated 06.03.2009 upheld the decision of the Assessing Officer with regards to payment of tax on sum of ₹.2,08,64,397/- which was voluntarily declared in the ITR filed by the assessee as long term capital gain.

Aggrieved by the decision, assessee preferred appeal before ITAT and the ITAT restored the issue of levy of tax on LTCG of ₹.2,08,64,396.72/- to file of the Assessing Officer.

Observations by the Court

The Court  observes that the assessee is one of the family member of the Parikh Group and the above group has two divergent groups identified as SAP Group and ANP Group represented by the respective family heads. The assessee being one of the family head, who was representing the SAP Group. Due to dispute in the functioning of the company NPIL and other group concerns, in order to restore the peace and harmony in the family, all have agreed to family arrangements by filing petition before CLB. It is fact that based on the direction of the CLB and their resolutions, the  assessee, representing the SAP Group, agreed to transfer the shares either to ANP Group or to the company itself. On agreed terms, the assessee transferred to the shares to company on buy back agreement and received the compensation. These facts were brought on record by the assessee before the AO and CIT(A). Ld CIT(A) agreed that the assessee has transferred the shares on family arrangement only however, he refused to entertain the claim of the assessee by observing that it is an arrangement for buyback of shares by the assessee. We do not agree with the above observation since the assessee has transferred the shares only on the direction of the CLB.

As per the direction of CLB, the assessee has to either transfer the shares to ANP Group or to the company whichever is acceptable to the ANP Group. As far as assessee is concerned, he has agreed to transfer the shares, it is irrelevant for him how the shares to being transferred, as long as he receives the compensation as set out by the CLB. In this case, the ANP Group has decided to buy back the shares in the NPCL itself. Therefore, it is not proper on the part of the tax authorities to take divergent view without their being proper reasons.

The Court observes that in the case under consideration, there is no doubt that there is a family arrangement and based the condition specified in the order passed by CLB, the shares were transferred to the company on the buyback terms. In the given case, the transferor is an individual whereas in the case relied by the CIT(A) in which the transferor is the legal entity. When there is no transfer there is no capital gain and consequently no tax on capital gain is liable to be paid. Therefore, in the given case, the assessee has transferred the shares based on the family settlement as per the direction of CLB, which the Ld CIT(A) has accepted in his order. Therefore, we are incline to accept that the assessee has transferred the shares under family arrangements only.

Therefore, we direct the Assessing Officer to allow the claim of the assessee even though the assessee has paid the tax by calculating the capital gain under mistaken belief that this transaction is taxable. The appellate authorities can direct the Assessing Officer to allow the legal claim of the assessee

Conclusion

Partition or family settlement is not transfer. When there is no transfer there is no capital gain and consequently no tax on capital gain is liable to be paid.

Sujan-Azad-Parikh-Vs-DCIT-ITAT-Mumbai

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