Consideration received on Family Settlement chargeable to capital gain tax in absence of preexisting right in property

Consideration received on Family Settlement chargeable to capital gain tax in absence of ‘preexisting right’ in property. SLP dismissed by SC

ABCAUS Case Law Citation
ABCAUS 3487 (2021) (04) SC

Important case law relied referred:
Commissioner of Income-tax, Mumbai vs. Schin P. Ambulkar
Kale and others vs. Deputy Director of Consolidation and others
Maturi Pullaiah vs. Maturi Narasinham AIR 1966 SC 1836
Commissioner of Income-tax vs. Kay Arr Enterprises
Union of India vs. Playworld Electronics (P.) Ltd.
Banarsi Lal Aggarwal vs. Commissioner of Gift-tax
B. A. Mohota Textiles Traders (P.) Ltd. vs. Deputy Commissioner of Income-tax
Commissioner of Income-tax vs. B.M. Kharwar

The Appellant was a Power of Attorney holder to a Non-Resident Indian (NRI). The present Appellant and her sister were involved in a dispute relating to an immovable property.

They had instituted of Special Civil Suit against their relatives which was disposed of by a Consent Decree. In terms of the Consent Decree, the Appellants received an amount which was sought to be brought under capital gain tax by the Revenue by way of issue of notice u/s 148 of the Income Tax Act, 1961 (the Act).

The appellant who was the Power of Attorney holder was proposed to be treated as the agent of the NRI Assessee as provided in Section 163 of the Act.

Appeals of the assessee was dismissed by CIT(A) and also by the Income Tax Appellate Tribunal (ITAT/Tribunal).

The case of the appellant before the Hon’ble High Court was that the appellant had entered into a ‘family settlement’ or ‘family arrangement‘, which was perfectly bonafide and the consideration received under the family settlement, even upon transfer of right and interest in the family property, is not taxable as capital gain under Section 145 of the Act.  

The case of the Revenue was that parties with whom the Assessees had chosen to settle the dispute had no preexisting right in the immovable property which was the subject matter of the dispute.

The Hon’ble High Court noted that the Assessing   Officer, Commissioner   of   Income-tax   (Appeals)   and   the   ITAT had concurrently returned a finding of fact that notwithstanding the nomenclature of the settlement, or the fact that the settlement was incorporated in the Consent Decree, the same was not a family settlement as such.

The Hon’ble High Court observed that the in the case law relied upon by the appellant, the ITAT followed the decision of the Hon’ble Supreme Court and held that where there is no transfer of assets in the family arrangement and the amount received by the Assessee was part of the family arrangement and not towards the transfer of any capital assets, such amount cannot be regarded as a capital gain and no capital gains tax liability arises.

The Hon’ble High Court stated that as per findings, there was no issue of any ‘preexisting right’ as between the Appellants and their two relatives who had no right whatsoever to the immovable property in question, which was partitioned in favour of their predecessor-in-title for almost three generations.

The Hon’ble High Court opined that since, there was no issue of any ‘preexisting right’ as such between the Appellants and the two relatives, it could really not be said that the settlement arrived at between the Appellants and the said two persons qualify the same as bonafide family settlement and the consideration received was not capital gains.  

As a result, the appeal had been dismissed by the Hon’ble High Court.

Aggrieved by the judgment of the High Court, the appellants filed Special Leave Petitions (SLP) before the Hon’ble Supreme Court.

However, the Hon’ble Supreme Court had dismissed the SLPs.

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