2022 (7) TMI 1140 - AT - Income Tax

Capital gain on transfer of shares - capital gains arising from the transfer of shares because of family arrangement - appellant claimed that no tax should be levied on a sum being long term capital gains arising from the transfer of shares out or family arrangement as per CLB order - HELD THAT - 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. We observe 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. As held in the case of R Nagaraja Rao 2012 (5) TMI 184 - KARNATAKA HIGH COURT observed that 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. 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 as held in the case of Goetze India 2006 (3) TMI 75 - SUPREME COURT - Appeal of assessee allowed.

Summary

Issues Involved:
1. Levy of tax on Long Term Capital Gains (LTCG) arising from the transfer of shares due to family arrangement.
2. Validity of the claim without filing a revised return.
3. Classification of the transaction as a family arrangement or buyback of shares.
4. Applicability of legal precedents and judgments on family arrangements and capital gains tax.

Detailed Analysis:

1. Levy of Tax on LTCG from Family Arrangement:
The primary issue was whether the sum of ?2,08,64,396/- arising from the transfer of shares under a family arrangement should be taxed as LTCG. The assessee argued that this amount should not be taxed as it was part of a family arrangement endorsed by the Company Law Board (CLB). The ITAT noted that the shares were transferred under a family arrangement scheme endorsed by CLB orders dated 30.03.2006, 13.04.2006, and 26.02.2007. The assessee had initially included this amount in the taxable income due to ignorance of the legal position. The ITAT directed the Assessing Officer (AO) to reconsider this claim based on the materials already on record.

2. Validity of the Claim Without Filing a Revised Return:
The AO rejected the assessee's claim on the technical ground that no revised return was filed under Section 139 of the Income-tax Act, 1961. The ITAT, however, accepted the additional ground raised by the assessee, citing the Supreme Court decision in National Thermal Power Co. Ltd., which allows legal grounds to be raised at any stage if all related facts are already on record. The ITAT restored the issue to the AO for a fresh decision.

3. Classification of the Transaction as Family Arrangement or Buyback:
The AO and CIT(A) treated the transaction as a buyback of shares rather than a family arrangement. The AO contended that the transaction was taxable as LTCG since it involved the exit of a large stakeholder/director from the company. However, the ITAT found that the transfer of shares was indeed part of a family arrangement to settle disputes within the family, as evidenced by the CLB orders and the petition filed by the assessee before the CLB. The ITAT disagreed with the CIT(A)'s observation that it was merely a buyback of shares, emphasizing that the transfer was directed by the CLB to restore family harmony.

4. Applicability of Legal Precedents and Judgments:
The assessee relied on several judgments, including CIT Vs. Kay Arr Enterprises, CIT Vs. AL Ramanathan, and CIT Vs. R. Ponnammal, which support the view that transfers under family arrangements are not taxable as capital gains. The ITAT also referred to the Supreme Court decisions in Ram Charan Das v. Girja Nandini Devi and Kale v. Deputy Director of Consolidation, which held that family settlements do not constitute transfers and are aimed at maintaining family harmony. The ITAT accepted these precedents and directed the AO to allow the assessee's claim, recognizing the transaction as a family arrangement.

Conclusion:
The ITAT concluded that the transfer of shares by the assessee under the family arrangement endorsed by the CLB was not taxable as LTCG. The AO was directed to allow the assessee's claim, even though the assessee had initially paid tax on the capital gains under a mistaken belief. The ITAT emphasized that appellate authorities have the power to direct the AO to allow legal claims, as held in the case of Goetze India. The appeal of the assessee was allowed, and the order was pronounced in the open court on 13th July 2022.