2024 (7) TMI 1046 - AT - Income Tax

Capital gain on partition among family members - determining market value of the property - compromise decree resulted in the assessee acquiring the shares of others - AO treating the capital gains arising in respect of the 6/8th share in respect of which the assessee paid sum to the co-sharers as short term capital gains on the premise that the assessee acquired the share of others under the compromise deed - whether there is any transfer of property from the other co-sharers to the assessee in respect of such 6/8th share on the assessee paying Rs. 102.50 lakhs within the meaning of Section 45 / 47(i) of the Act? HELD THAT - With the passing of the preliminary decree and for that matter, with the passing of any final decree, the partition does not reach its logical conclusion. It is only with the allottees of the shares putting in possession of the respective property, the partition is complete. Till then, the shares themselves are liable to be varied on account of the intervening events, if any. Whatever the directions that the civil court gives and whatever the payment that would be made by the parties to each other or the variances in the size of shares by metes and bounds, till the partition proceedings reach the logical conclusion, are only the process of adjusting the equities. Compromise decree clearly shows that it is not a record of mere payment transaction in respect of 6/8th share of other coparceners, but it deals with other items of property and the obligations of other parties also. More particularly it deals with the other movable and immovable property and also and rights and obligations of other defendants also. It is the record of adjustment of equities and not a document recording the simple payment and acquisition of the rights of the 6/8th shareholders in one item of the property. It is only the compromise decree that gives a quietus to the issue of partition and, therefore, the assessee must be deemed to have acquired the property under such decree on devolution of the same from the father, but not through the other coparceners. Such an event gives rise to the legal fiction that when the assessee alienated the property on 21/01/2016, the assessee did so while in the shoes of the other coparceners, for the purposes of computing the capital gains. Thus, we hold that the assessee is entitled to offer the entire capital gains as long term capital gains, and consequently direct the learned Assessing Officer to treat the entire impugned capital gains as long term capital gains. Decided in favour of assessee.

Summary

Issues:
1. Treatment of capital gains arising from partition among family members.
2. Interpretation of transfer within the meaning of Section 45/47(i) of the Act.
3. Dispute regarding acquisition of share from co-parceners as 'transfer'.
4. Determination of short term vs. long term capital gains in the case.

Analysis:
1. The case involved a dispute over the treatment of capital gains arising from a partition among family members. The assessee inherited property from his father and subsequently acquired additional shares through a compromise decree. The Assessing Officer treated the acquisition as short term capital gains, leading to an appeal by the assessee.

2. The main issue revolved around the interpretation of 'transfer' within the meaning of Section 45/47(i) of the Act. The Revenue argued that the acquisition of shares from co-parceners by paying consideration constituted a transfer, resulting in short term capital gains. The contention was whether such acquisition should be considered a transfer under the Act.

3. The Revenue disputed that the acquisition of shares from co-parceners should be treated as a transfer, distinguishing it from devolvement from the father. The argument was that while devolvement from parents resulted in long term capital gains, acquiring shares from co-parceners led to short term capital gains.

4. The Tribunal analyzed the legal principles and previous court decisions regarding partition among family members. It emphasized that until the partition process reached its logical conclusion with the allottees taking possession of the property, variations in shares were possible. The Tribunal referred to a Supreme Court decision to support this view.

5. Upon reviewing the compromise decree, the Tribunal concluded that it was not merely a payment transaction but an adjustment of equities among family members. It held that the assessee acquired the property under the decree from the father, not directly from co-parceners. Therefore, the entire capital gains were deemed as long term capital gains, directing the Assessing Officer to treat them as such.

6. In the final decision, the Tribunal allowed the appeal of the assessee, stating that the entire capital gains should be treated as long term capital gains. The judgment was pronounced on October 31, 2023, in favor of the assessee.