2014 (10) TMI 693 - AT - Income Tax

Piercing the corporate veil - Application of section 2(22)(e) and 56(2)(vi) - Realignment of the assets between family - Whether the realignment of the assets between the family members/HUF will give arise to taxable income U/s. 2(22)(e) and 56(2)(vi) or any other provisions of the Act Held that - For understanding the true nature of the transactions, the corporate veil of the intermingled companies in the transactions needs to be pierced - In the case of the Public Limited company M/s. SKM Egg Products Export (India) Ltd., only the equity shares of M/s. SKM Egg Products Export (India) Ltd., held by M/s.SKM Animal Feeds and Foods (India) Limited were transferred to Shri SKM Shree Shivkumar and not any assets held by the company were transferred, therefore the issue of piercing the corporate veil of this company will not arise and also being a public limited company, that may not be permitted - In the case of both the other companies, the entire shares are held by the family members only - on piercing the corporate veil of both these companies; it becomes clear that all the transactions intermingled were due to the family settlement arrived at either pursuant to Arbitration Award or oral agreements - various higher judiciaries have also validated the oral agreements in the case of Family/HUF partial or total partition. 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 - 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 - the addition made by the AO 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) is to be deleted Decided in favour of assessee.

Issues Involved:
1. Taxability of Rs. 2,26,00,000 received pursuant to an Arbitral award under Section 56(2)(vi) of the Income Tax Act.
2. Applicability of Section 2(22)(e) (Deemed Dividend) and Section 56(vi) on the amount received.
3. Validity of family arrangement and its impact on taxability.
4. Applicability of interest under Sections 234B and 234C.
5. Penalty under Section 221(1) for default in payment of tax.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 2,26,00,000 received pursuant to an Arbitral award under Section 56(2)(vi) of the Income Tax Act:
The assessee argued that the amount received was part of a family settlement and should be considered a capital receipt, not taxable under Section 56(2)(vi). The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the amount received was without consideration and taxable under Section 56(2)(vi). The Tribunal, however, found that the family arrangement was a bona fide one aimed at resolving disputes and maintaining harmony, thus the amount received should be treated as a capital receipt and not taxable under Section 56(2)(vi).

2. Applicability of Section 2(22)(e) (Deemed Dividend) and Section 56(vi) on the amount received:
The AO applied Section 2(22)(e) and Section 56(vi), arguing that the amount received was a deemed dividend and income from other sources. The assessee contended that the amount was received due to a family settlement and should not be taxed under these sections. The Tribunal agreed with the assessee, stating that the realignment of assets due to family arrangements does not attract tax under Section 2(22)(e) or Section 56(vi), as it is a capital receipt resulting from family settlement.

3. Validity of family arrangement and its impact on taxability:
The Tribunal emphasized that family arrangements are recognized under law to maintain peace and harmony among family members. It cited several judicial precedents to support that family arrangements, even if oral, are valid and do not constitute a transfer attracting tax liability. The Tribunal concluded that the family arrangement in this case was bona fide and aimed at resolving disputes, thus the amount received should not be taxed.

4. Applicability of interest under Sections 234B and 234C:
The assessee argued that the interest under Sections 234B and 234C should not be levied as the amount received was not taxable. The Tribunal, having concluded that the amount received was not taxable, dismissed the applicability of interest under these sections as consequential.

5. Penalty under Section 221(1) for default in payment of tax:
The assessee contended that the penalty under Section 221(1) should not be levied as there was a bona fide belief that the amount received was not taxable. The Tribunal, having decided that the amount received was not taxable, dismissed the appeal regarding the penalty as redundant.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the amount received pursuant to the family arrangement and Arbitral award was a capital receipt and not taxable under Sections 2(22)(e) or 56(2)(vi). Consequently, the interest under Sections 234B and 234C and the penalty under Section 221(1) were also dismissed.

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