2025 (3) TMI 990 - AT - Income Tax

LTCG - Tax on gift of movable or immovable property by means of transfer - levy of tax based on the holding period - transfer under Section 2(47) - Computation of Capital Gains pertaining to the settlement executed by the assessee in favour of his brother by reckoning the guideline value / stamp duty value as the sale consideration of the each of the property settled while taking the book value as the cost of acquisition - HELD THAT - Gift transaction that had occurred between relatives (Brothers in the present case) should be reckoned as settlement so as to reckon the same as not a transfer for the purpose of settlement in Section 2(47) r.w.s 45/48. This above fact could not be disputed by the ld. DR when the same was brought to their attention. This Tribunal is of an opinion that attempt of the CIT(A) in clubbing both the settlement deeds (one by the assessee in favour of the brother and the other by the brother in favour of the assessee) was legally erroneous for the consequential erroneous conclusion reached by further reckoning the transaction as exchange for the purpose of justifying the levy of Capital Gains tax. We find force in the argument of the Ld. AR that transaction of settlement between the assessee and his brother for preventing future disputes and transaction of settlement between the brother and the assessee executed simultaneously is to be considered as independent transactions by the stamp duty authority and hence in the light of the stamp duty authority reckoning the deeds as settlement deeds not as exchange the presumption of altering the legally executed settlement deed as exchange was not permissible in law. The settlement deed(s) as such executed as per the process known to law would definitely fall within the ambit of the exception of Section 47(iii) of the Act and consequently levy of Capital Gains tax would get negated /vitiated. In deciding the issue of settlement deed between the brothers in the case on hand we take note of the decision of SS Pillai vs. KS Pillai 1972 (5) TMI 60 - SUPREME COURT wherein it was held observed that if in the interest of the family properties and family peace the close relatives settle their dispute amicably this court will be reluctant to disturb the same. Hon ble Madras High court in the case of CIT vs. R. Ponnammal 1986 (1) TMI 26 - MADRAS HIGH COURT members of a joint family may in order to maintain peace and bring about harmony in the family enter into a family arrangement and if the arrangement is entered into bonafide and the terms thereof are fair courts will normally give assent to such an arrangement rather than avoid it. Even if a party to the settlement has no title under the arrangement but the other party relinquishes all his claims or titles in favour of such a person and acknowledges him to be the sole owner then the antecedent title must be assumed and the family arrangement will be upheld. Therefore we cannot agree with the CIT(A) for taxing the settlement deeds of the assessee with his brother considering it as transfer under section 2(47) and hence we are inclined to delete capital gains added by the AO. Assessee appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal issues considered in this judgment include:

• Whether the transactions involving the settlement deed between the assessee and his brother constitute a "transfer" under Section 2(47) of the Income Tax Act, 1961, thereby attracting capital gains tax.
• The applicability of Section 47(iii) of the Income Tax Act, which exempts certain transactions from being considered as transfers for capital gains tax purposes.
• The validity of the assessment order under Section 153C of the Income Tax Act, including issues of jurisdiction and timeliness.
• The interpretation of family settlements or arrangements and their implications for capital gains tax.

ISSUE-WISE DETAILED ANALYSIS

1. Nature of the Settlement Deed as a "Transfer" under Section 2(47)

• Relevant Legal Framework and Precedents: Section 2(47) of the Income Tax Act defines "transfer" to include exchange, relinquishment, or extinguishment of rights. The court considered precedents such as CIT vs. Nagaraja Rao and CIT vs. R. Ponnammal, which discuss the nature of family arrangements and their exclusion from the definition of transfer.
• Court's Interpretation and Reasoning: The Tribunal found that the settlement deeds executed between the assessee and his brother, which involved the exchange of properties, should not be considered as transfers under Section 2(47) because they were part of a family arrangement aimed at avoiding disputes.
• Key Evidence and Findings: The Tribunal noted that the properties involved were not inherited HUF properties but were jointly held by the brothers. The transactions were executed as part of a family settlement, and no monetary consideration was involved.
• Application of Law to Facts: The Tribunal applied the legal principle that family arrangements are not considered transfers for capital gains purposes, as established in various precedents.
• Treatment of Competing Arguments: The Revenue argued that the transactions constituted a transfer and were subject to capital gains tax. The Tribunal rejected this view, emphasizing the nature of the transactions as family arrangements.
• Conclusions: The Tribunal concluded that the transactions did not amount to a transfer under Section 2(47) and were therefore not subject to capital gains tax.

2. Applicability of Section 47(iii)

• Relevant Legal Framework and Precedents: Section 47(iii) exempts certain transactions, including gifts, from being considered transfers for capital gains tax purposes.
• Court's Interpretation and Reasoning: The Tribunal reasoned that the settlement deeds should be considered as gifts under Section 47(iii), thereby exempting them from capital gains tax.
• Key Evidence and Findings: The Tribunal found that the transactions were executed without consideration and were intended to settle family disputes, aligning with the characteristics of a gift.
• Application of Law to Facts: The Tribunal applied Section 47(iii) to conclude that the transactions were exempt from capital gains tax.
• Treatment of Competing Arguments: The Revenue's argument that the transactions were taxable was dismissed based on the interpretation of Section 47(iii).
• Conclusions: The Tribunal held that the transactions were exempt under Section 47(iii) and not subject to capital gains tax.

3. Validity of the Assessment Order under Section 153C

• Relevant Legal Framework and Precedents: Section 153C of the Income Tax Act pertains to assessments in cases where assets or documents are seized.
• Court's Interpretation and Reasoning: The Tribunal did not specifically address the validity of the assessment order under Section 153C, focusing instead on the nature of the transactions.
• Key Evidence and Findings: The Tribunal's decision primarily revolved around the nature of the transactions rather than procedural aspects of the assessment.
• Application of Law to Facts: The Tribunal's decision on the nature of the transactions rendered the question of the assessment order's validity moot.
• Treatment of Competing Arguments: The Tribunal focused on substantive tax issues rather than procedural challenges to the assessment order.
• Conclusions: The Tribunal's decision effectively negated the need to address the assessment order's validity under Section 153C.

SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "The settlement deed(s) as such executed as per the process known to law would definitely fall within the ambit of the exception of Section 47(iii) of the Act and consequently levy of Capital Gains tax would get negated /vitiated."
• Core Principles Established: Family arrangements intended to settle disputes and executed without consideration do not constitute transfers for capital gains tax purposes. Such transactions may qualify as gifts under Section 47(iii).
• Final Determinations on Each Issue: The Tribunal allowed the appeal, concluding that the transactions were not transfers under Section 2(47) and were exempt under Section 47(iii), thereby negating the capital gains tax liability.