2005 (7) TMI 336 - AT - Income Tax

Capital Gains - Transfer - rearrangement of shareholdings in the companies - whether, in view of family arrangement as arrived at by the assessees to rearrange their shareholdings to avoid possible litigation among themselves will attract capital gain or not and whether it is a transfer or not ? - HELD THAT - The expression 'family' had a very wide connotation and it is not as held by the learned departmental representative that there is no family as such but the word 'family' in the context of a family arrangement is not to be understood in a narrow sense of being a group of persons who are recognized in law as having a right of succession or having a claim to a share in the property in dispute. If it is settled in one between near relations then the settlement of such a dispute can be considered as a family arrangement. It is also to be noted that a family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term 'family' has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successionis so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The Courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the Courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits. Admission of this transaction as a transfer and, accordingly, paid capital gain, it is well-settled in law that admission is best evidence of a point in issue and though not conclusive, is decisive of the matter unless successfully withdrawn or proved erroneous. An admission is an extremely important piece of evidence but it cannot be said that it is conclusive and it is always open to the person who made the admission to show that it is incorrect. In the present case, the admission is not made by the assessee rather the other party has accepted the transaction as a transfer and; accordingly, paid capital gains tax that will not debar the assessee from contesting the issue from the facts and circumstances of the case. It is clear that this is an admission of other party which will not bind the present assessees. Accordingly, we reject this argument of the Revenue. We are of the view that the rearrangement of shareholdings in the companies to avoid possible litigation among family members seems to be a prudent arrangement which is necessary to control the companies effectively by the major shareholders to produce better prospects and active supervision. Accordingly, the same cannot be held as a transfer of shares which is exigible to capital gain tax. No doubt this family arrangement is not reduced into writing and there is no need to reduce this family arrangement in writing compulsorily and it need not be registered in view of the ratio of the decision of the Hon'ble Supreme Court in Kales case 1976 (1) TMI 172 - SUPREME COURT . Thus, it is clear that these two families are part of bigger families which is very clear from the family tree produced above. Accordingly, we hold that these transactions are not exigible to capital gain tax. Accordingly, the orders of the authorities below are reversed. In the result, the appeals of the assesses are allowed.

Issues Involved:
1. Whether the rearrangement of shareholdings among family members to avoid possible litigation constitutes a transfer.
2. Whether such rearrangement attracts capital gains tax under the Income-tax Act.
3. The validity and enforceability of an oral family arrangement in the absence of a written agreement.

Issue-wise Detailed Analysis:

1. Whether the rearrangement of shareholdings among family members to avoid possible litigation constitutes a transfer:

The primary issue in these appeals is whether the rearrangement of shareholdings within a family to prevent potential litigation qualifies as a transfer under the Income-tax Act. The assessees argued that the rearrangement was part of a family arrangement to avoid disputes and ensure better management of the companies. They contended that such rearrangements do not constitute a transfer and hence should not attract capital gains tax. The Assessing Officer, however, did not accept this contention, arguing that there was no written family arrangement and that the family had already divided long back, with smaller families operating independently. The Assessing Officer considered the transactions as transfers, noting that the assessees received monetary consideration for the shares transferred.

2. Whether such rearrangement attracts capital gains tax under the Income-tax Act:

The Tribunal examined the nature of the family arrangement in detail. The assessees relied on various legal precedents to support their claim that family arrangements, even if oral, are valid and do not constitute transfers for capital gains tax purposes. They cited the Supreme Court's decision in Maturi Pullaiah v. Maturi Narasimham, which held that family arrangements to maintain peace and harmony are valid even without a written agreement. The Tribunal also considered the decision in Kale v. Dy. Director of Consolidation, which emphasized that family arrangements are governed by special equity and should be upheld if made honestly to avoid litigation and preserve family peace. The Tribunal concluded that the rearrangement of shareholdings was a prudent arrangement to avoid possible litigation and was necessary for effective control and management of the companies. Therefore, it did not constitute a transfer under section 2(47) of the Income-tax Act and was not subject to capital gains tax.

3. The validity and enforceability of an oral family arrangement in the absence of a written agreement:

The Tribunal addressed the issue of whether a family arrangement needs to be in writing to be valid and enforceable. The assessees argued that an oral family arrangement is sufficient and does not require registration, citing the Supreme Court's decision in Kale's case. The Tribunal agreed, noting that family arrangements can be oral and do not need to be registered to be valid. The Tribunal emphasized that the family arrangement in this case was entered into between near relations to avoid disputes and ensure better management of the companies. The Tribunal concluded that the absence of a written agreement did not invalidate the family arrangement.

Conclusion:

The Tribunal held that the rearrangement of shareholdings among family members to avoid possible litigation was a valid family arrangement and did not constitute a transfer under the Income-tax Act. Consequently, the transactions were not subject to capital gains tax. The Tribunal reversed the orders of the lower authorities and allowed the appeals of the assessees. The judgment underscores the importance of family arrangements in maintaining peace and effective management within business families and clarifies that such arrangements do not necessarily constitute taxable transfers.

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