2006 (10) TMI 229 - SC - Companies Law

Whether the portion of Golf Links property which at the time of settlement was occupied by Shri Narendra Nath Nanda be not allotted to him? Whether appropriate directions be given so that the appellants be made liable for payment of capital gains tax, if any, levied in future which levy shall be challenged by Respondent No. 1-Company, provided the funds are made available to it by the appellants for the purpose? Whether the judgment of the High Court could be suitably modified to provide for challenge by respondent-company to any order that may be passed in future by the tax authority imposing capital gains tax on the hypothetical transfers made under the settlement? Held that - Appeal allowed by way of remand. That the judgment and order of the High Court is modified to the extent that appellant No. 2, namely - Shri Narendra Nath Nanda shall be allotted the portion of the Golf Links house which was in his occupation on the date of settlement, and the value thereof shall be adjusted against his share. If something remains to be paid even after adjustment, the appellants shall pay such amount within a period of two months from the date of the order of the High Court. That no deduction shall be made from the value of the assets of the anticipated capital gains tax liability on the hypothetical sale under the settlement. In case a demand of capital gains tax is made by the tax authority in future against respondent-company, the aforesaid Company shall be entitled to challenge the imposition of such tax subject to appellant No. 2 providing sufficient funds to the respondent-company for this purpose. In any event, the capital gains tax, if found payable, shall be the liability of the appellants to be discharged by them. They shall furnish an undertaking before the High Court accepting such liability, and shall execute a document creating a charge on the assets allocated to them under the settlement to discharge capital gains tax liability, if found payable.

Issues Involved:
1. Portion of the Golf Links property in possession of N.N. Nanda.
2. Modification of the Division Bench order regarding the imposition of capital gains tax.

Issue-wise Detailed Analysis:

1. Portion of the Golf Links Property in Possession of N.N. Nanda:

The issue revolves around whether the portion of the Golf Links property occupied by N.N. Nanda at the time of settlement should be allotted to him. The settlement agreement included a clear provision (Clause 14) that N.N. Nanda would continue to occupy the portion of the Golf Links property he was residing in as deemed owner/owner, and the value of such portion would be adjusted against his share. The High Court, however, concluded that due to the acrimony between the parties and the impracticality of sub-dividing the leasehold property, it was not feasible for them to live in the same house. The High Court thus ruled that the entire Golf Links property should be allotted to the respondents.

The Supreme Court disagreed with the High Court's interpretation, emphasizing that the settlement terms should be honored as they were agreed upon with full knowledge of the strained relationships. The Court noted that the settlement was bona fide and not vitiated by any legal or practical impossibility. The Court held that Clause 14 of the settlement must be given effect, and the portion of the Golf Links property occupied by N.N. Nanda should be demarcated and allotted to him, with the value adjusted against his share. The Court highlighted that practical inconvenience should not override the clear terms of the settlement.

2. Modification of the Division Bench Order Regarding Capital Gains Tax:

The second issue pertains to whether the judgment of the High Court should be modified to provide for the respondent-company to challenge any future imposition of capital gains tax, provided the appellants furnish the necessary funds. The High Court had deducted an anticipated capital gains tax liability from the total value of the company's assets, assuming such a tax might be imposed on the hypothetical transfers made under the settlement.

The Supreme Court observed that no demand for capital gains tax had been made so far and agreed with the appellants' argument that such transfers, being part of a court-ordered settlement, might not attract capital gains tax. The Court ruled that if a future demand for capital gains tax arises, the respondent-company should challenge it, with the appellants providing the necessary funds for this purpose. The liability for any capital gains tax, if imposed, would be that of the appellants, who were required to furnish an undertaking to this effect and create a charge on the assets allocated to them to secure payment of any such tax.

Conclusion:

The Supreme Court allowed the appeal to the extent that:
- N.N. Nanda should be allotted the portion of the Golf Links property he occupied at the time of settlement, with the value adjusted against his share.
- No deduction should be made from the value of the company's assets for anticipated capital gains tax liability. If such a tax is imposed in the future, the respondent-company should challenge it with funds provided by the appellants, who would be liable for the tax.

The matter was remitted to the High Court for implementation of these modifications, including directing the Chartered Accountants to make necessary recalculations. The appeal was allowed to the extent indicated, with parties bearing their own costs.

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