2013 (1) TMI 651 - HC - Income Tax

Family arrangement - Capital gain on the compensation received - Whether the amount of compensation paid to the assessee to settle inequalities in partition represents immovable property and is not an income exigible to tax? - Held that - As decided in R. Nagaraja Rao s case (2012 (5) TMI 184 - KARNATAKA HIGH COURT) partition is not a transfer and adjustment of shares, crystallization of the respective rights in the family properties cannot be construed as a transfer in the eye of law. When there is no transfer of asset, there is no capital gain and consequently there is no liability to pay tax on capital gains. In view of the above payment of Rs.24 crores to Group A is to equalize the inequalities in partition of the assets of M/s Hind Samachar Ltd. The amount so paid is immovable property. If such amount is to be treated as income liable to tax, the inequalities would set in as the share of the recipient will diminish to the extent of tax. Since the amount paid during the course of partition is to settle the inequalities in partition, therefore deemed to be immovable property. Such amount is not an income liable to tax. Thus, the amount of owelty i.e. compensation deposited by Group B is to equalize the partition represents immovable property and will not attract capital gain. The argument that the assessee is liable to tax being interest on cash, suffice it to say, that such question or fact does not arise from the orders of the Tribunal - question of law is answered against the Revenue.

Issues Involved:
1. Whether the ITAT was correct in confirming the relief allowed by the CIT (A) regarding the addition of Rs.2,09,47,604/- as capital gain on the compensation received?
2. Whether the ITAT was correct in holding that the assessee had only an inchoate right to receive the compensation until the final decision of the Supreme Court?
3. Whether the compensation paid to the assessee to settle inequalities in partition represents immovable property and is not taxable as income?

Issue-wise Detailed Analysis:

1. Addition of Rs.2,09,47,604/- as Capital Gain:
The Revenue questioned whether the ITAT was correct in confirming the relief allowed by the CIT (A) about the addition of Rs.2,09,47,604/- as capital gain on the compensation received. The Assessing Officer had levied long-term capital gain on the compensation amount received by Group A from Group B during the partition of properties of M/s Hind Samachar Ltd. The CIT (A) and the Tribunal held that the distribution of assets, including the Rs.24 crores, was not complete during the relevant year as the matter was sub-judice, and the assessee was not allowed to use the money by the order of the High Court. Therefore, the sum did not accrue as income to the assessee.

2. Inchoate Right to Receive Compensation:
The ITAT held that the assessee had only an inchoate right to receive the compensation until the final outcome of the Supreme Court's decision. The compensation amount was deposited with the Company Law Board, and the dispute regarding the date of the split was pending before various forums, including the Supreme Court. The Tribunal affirmed that the assessee could not use the money due to the ongoing legal proceedings, and hence, it did not constitute income for the relevant assessment year.

3. Compensation as Immovable Property:
The primary question was whether the compensation paid to the assessee to settle inequalities in partition represents immovable property and is not taxable as income. The Court elaborated on the principle of owelty, which is a payment made to equalize the partition of properties. The Court referred to various judgments, including T.S. Swaminatha Odayar Vs. Official Receiver of West Tanjore, where it was held that owelty represents an adjustment or equalization of shares and is not considered income. The Court concluded that the Rs.24 crores paid to Group A was to equalize the inequalities in partition and should be deemed immovable property. Therefore, it is not an income liable to tax. The Court also mentioned that treating this amount as taxable income would diminish the recipient's share, thus creating further inequalities.

Conclusion:
The Court answered the question of law against the Revenue and in favor of the assessee, leading to the dismissal of the appeal. The compensation paid to settle inequalities in partition was deemed immovable property and not subject to capital gain tax. The argument regarding the assessee's liability to tax on interest on cash did not arise from the Tribunal's orders and was not addressed.

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