2019 (9) TMI 732 - AT - Income Tax

Addition u/s 56(2)(vii)(b) and Section 69B - Family Settlement Deed - on perusal of the Memorandum of Family Settlement (MFS) noted that assessee has acquired the Bungalow due to relinquishment of rights in the said property by three brothers of the assessee for Rs.NIL. - HELD THAT - In this case, since there was a Family Settlement between the assessee and three brothers and they have acted upon Family Settlement Deed and distributed various properties among themselves and necessary rights and title are transferred in favour of each brother would show that parties have entered into genuine transaction. As per the Family Settlement Deed, it was agreed that property in question with superstructure shall be taken by the assessee and that as per the Settlement Deed, the assessee has to contribute a sum of ₹ 20 crores from his own resources/ capital or through the borrowed funds as part of the Family Settlement to balance the settlement between brothers. Therefore, no commercial transaction have been entered into between the assessee and his brothers and there is no colourable device. We may also note that admittedly settlement was executed for distribution of different properties between the assessee and his brothers which was having no commercial purpose. It may also be noted here that authorities below rejected the claim of assessee because the transaction was not executed out of natural love and affection. The word natural love and affection have not been specified in Section 56(2)(vii)(b) of the I.T. Act. Therefore, this term has no consequence to the above provisions in which the A.O. made the addition. Since the amount of ₹ 12 crores have been taken by assessee as loan from the Bank through the respective agreements referred to above, therefore, it could not be treated as undisclosed income of the assessee. The assessee has explained source of ₹ 12 crores through the loan taken from the Bank. Therefore, provisions of Section 69B would not apply to the case of the assessee. Further, it was not the case of the A.O. that provisions of Section 69B are attracted in the case of assessee. CIT(A), could not have bring to tax the aforesaid amount through new source of income. Considering the above discussion in the light of above decisions, it is clear that provisions of Section 56(2)(vii)(b) and Section 69B of the I.T. Act are not applicable in this case. In this view of the matter, there was no justification for the authorities below to make the addition against the assessee under the above provisions of Law.

Summary

Issues Involved:
1. Addition under Section 56(2)(vii)(b) of the Income Tax Act, 1961.
2. Alternate addition under Section 69B of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition under Section 56(2)(vii)(b) of the Income Tax Act, 1961:
The primary issue revolves around the addition of ?28.65 crores under Section 56(2)(vii)(b) of the Income Tax Act, 1961. The Assessing Officer (A.O.) noted that the assessee acquired a bungalow due to the relinquishment of rights by his three brothers without any consideration. However, it was observed that the assessee had sanctioned a bank loan of ?15 crores, out of which ?4 crores each were disbursed to the three brothers, indicating a consideration for the relinquishment. The A.O. concluded that the transaction was not out of "love and affection" but for consideration, thus attracting the provisions of Section 56(2)(vii)(b).

The assessee contended that the transaction was a family settlement and not a transfer, arguing that the provisions of Section 56(2)(vii)(b) do not apply among relatives. The CIT(A) dismissed this argument, stating that the family settlement deed was not registered and had no evidentiary value, and upheld the A.O.'s addition.

Upon appeal, it was noted that the transaction was indeed among relatives (brothers) and thus fell under the exception provided in the proviso to Section 56(2)(vii)(b). The Tribunal observed that the family settlement deed and the release deed were executed, and the loan was obtained after the execution of these deeds. It was concluded that the family settlement was genuine and not a commercial transaction. The Tribunal relied on the judgments of various High Courts to assert that family settlements are not transfers and thus not taxable under the said provision.

2. Alternate Addition under Section 69B of the Income Tax Act, 1961:
The CIT(A) alternatively noted that the assessee was bound to explain the source of investment in the property and suggested that the difference in the circle rate and the investment of ?12 crores would be taxable under Section 69B. The assessee argued that the loan of ?12 crores was taken from the bank and thus could not be treated as undisclosed income.

The Tribunal agreed with the assessee, stating that the source of ?12 crores was adequately explained as a bank loan. It was also noted that the A.O. did not initially consider the provisions of Section 69B, and thus the CIT(A) could not introduce a new source of income. Consequently, the Tribunal held that the provisions of Section 69B were not applicable.

Conclusion:
The Tribunal concluded that the provisions of Section 56(2)(vii)(b) and Section 69B of the Income Tax Act, 1961, were not applicable in this case. The addition of ?28.65 crores was deleted, and the appeal of the assessee was allowed. The judgment emphasized that family settlements among relatives do not constitute transfers and are not taxable under the specified provisions.