2017 (11) TMI 1211 - AT - Income Tax

Capital gain tax - amount received by the assessee in terms of family settlement agreement - amount realized on surrender of occupancy right - Held that - Admittedly in the case before us the assessee s father late Mansukhlal M. Parekh was living in the said property since 1972 and the assessee, her brother and sister were also residing in that flat after the demise of her father till the settlement deed was effected. The property is not under any tenancy agreement. Assessee s father nor the assessee were paying any rent nor any agreement has been entered into for tenancy of the property. The assessee entered into family settlement deed and by way of this family settlement the company sold the property and since assessee was under possession of the property lumpsum amount was paid for surrendering her possessory rights over the property. Therefore, since amount has been received by the assessee as part of family arrangement, in view of the above decisions there would not be any transfer of asset and it does not give rise to liability of capital gains tax. Therefore, in view of what is discussed above we hold that the amount received by the assessee in terms of family settlement agreement cannot be treated on account of transfer of capital asset and cannot be chargeable to tax under the head capital gains. Appeal of the assessee is allowed.

Summary

Issues Involved
1. Validity of reopening the assessment under sections 147/148.
2. Treatment of family settlement under the definition of "transfer" as per section 2(47).
3. Classification of ?1,36,00,000 received for possessory/occupancy rights as capital gains.
4. Granting indexed cost of acquisition as a deduction while computing taxable capital gains.

Detailed Analysis

1. Validity of Reopening the Assessment under Sections 147/148
The assessee contested the reopening of the assessment, arguing that the notice under section 148 and the proceedings under section 147 were flawed due to inherent technical defects. The CIT(A) upheld the validity of the reopening. The Tribunal did not find any merit in the assessee's argument against the reopening of the assessment.

2. Treatment of Family Settlement under the Definition of "Transfer" as per Section 2(47)
The assessee argued that the family settlement did not amount to a "transfer" as defined under section 2(47) of the Income Tax Act. The family settlement was intended to resolve disputes and maintain family reputation without resorting to legal action. The Tribunal observed that the family settlement deed was genuine and recognized by the Assessing Officer. It was concluded that the assessee relinquished her possessory rights over the flat as part of the family settlement, which does not constitute a transfer of a capital asset. The Tribunal cited precedents, including the Hon'ble Supreme Court and various High Courts, to support the view that family arrangements do not amount to a transfer of a capital asset.

3. Classification of ?1,36,00,000 Received for Possessory/Occupancy Rights as Capital Gains
The CIT(A) and the Assessing Officer classified the amount received for possessory/occupancy rights as capital gains. The Tribunal, however, held that the possessory rights over the flat were not equivalent to tenancy rights and were not acquired through any tenancy agreement or rent payment. The Tribunal referred to the case of CIT v. M. Appukutty, where it was held that amounts received for transferring possessory rights are not chargeable to tax as capital gains. The Tribunal also noted that the assessee's father had adverse possession of the property since 1972, and no cost of acquisition could be attributed to such possession.

4. Granting Indexed Cost of Acquisition as a Deduction while Computing Taxable Capital Gains
The assessee argued that if the possessory/occupancy rights are considered to have a cost, the indexed cost of acquisition should be allowed as a deduction. The Tribunal, however, concluded that since the possessory rights were not considered a capital asset transfer, the question of indexed cost of acquisition did not arise.

Conclusion
The Tribunal allowed the appeal of the assessee, concluding that the amount received under the family settlement did not constitute a transfer of a capital asset and thus was not chargeable to tax under the head of capital gains. The Tribunal emphasized the genuine nature of the family settlement and the lack of tenancy or rental agreements, supporting the view that the possessory rights were self-generated and not taxable.