1986 (2) TMI 116 - AT - Income Tax

Summary

Issues Involved:

1. Applicability of Section 49(1)(iii) of the Income-tax Act, 1961.
2. Nature of acquisition of property (inheritance, succession, devolution, or family settlement).
3. Validity and recognition of family settlement.
4. Computation of capital gains.
5. Revenue's right to go behind the family settlement.

Detailed Analysis:

1. Applicability of Section 49(1)(iii) of the Income-tax Act, 1961:

The revenue appealed against the AAC's decision that the provisions of section 49(1)(iii) were not applicable to the assessee's case. The revenue argued that the jewellery sold by the assessee was acquired by succession, inheritance, or devolution, thus attracting section 49(1)(iii). The AAC, however, held that the properties were received by way of family settlement, which is not covered under section 49(1)(iii).

2. Nature of Acquisition of Property:

The assessee claimed that the jewellery was acquired through a family settlement approved by the court, not by inheritance or succession. The AAC supported this, stating that family settlement is a recognized mode of acquiring property, and thus the properties were not received by the means mentioned in section 49(1)(iii). The revenue contended that the family settlement was a mere cover and the properties were actually inherited.

3. Validity and Recognition of Family Settlement:

The court recognized the family settlement as a legitimate means of resolving disputes and avoiding litigation. The family settlement was approved by the court to maintain peace and honor among the families. The court emphasized that family settlements are generally favored as they ensure goodwill among family members and are not necessarily based on existing legal rights but on mutual agreement and affection.

4. Computation of Capital Gains:

The ITO computed the capital gains by considering the jewellery as acquired by succession, applying section 49(1)(iii). The AAC, however, concluded that since the jewellery was acquired through a family settlement, the date of acquisition should be the date of the family settlement. Consequently, the AAC determined that no significant capital gains arose from the sale of the jewellery.

5. Revenue's Right to Go Behind the Family Settlement:

The revenue argued that the ITO could investigate the intent and purpose behind the family settlement, suggesting it was a device to avoid tax. The court, however, found no evidence of such intent. The family settlement was a result of natural events and mutual agreement, not an artificial device to defraud the revenue. The court upheld the AAC's decision, stating that the family settlement was binding and could not be impeached by the revenue.

Conclusion:

The court dismissed the revenue's appeal, affirming the AAC's decision that the jewellery was acquired through a family settlement, not by succession, inheritance, or devolution. The family settlement was recognized as valid and binding, and the computation of capital gains based on the date of the family settlement was upheld. The revenue's arguments were found to be without substance, and the AAC's order was deemed unassailable on both facts and law.