No difference between gift and settlement for capital gain. Holding period of previous owner (settlor) transferring capital asset u/s 2(42A) to be counted

No difference between gift and settlement for capital gains purposes.

In a recent judgment, ITAT, Chennai has held that  there is no difference between a gift and settlement and for the purpose of computing capital gains, the holding period of the capital asset (Trade Mark) transferred,  the holding period of the previous owner i.e. Settlor shall be counted as per Explanation-1(i)(b) to Sec.2(42A) of Income Tax Act, 1961.

Case Law Details:
ITA No. 2074/Mds/2015   (Assessment year : 2012-13)
T.T.Siddarth, vs. Deputy Commissioner of Income Tax
ITA No. 2075/Mds/2015 (Assessment year : 2012-13)
Smt.Maya Varadarajan vs. The Deputy Commissioner of Income Tax
Date of Judgment: 11/05/2016

Important Case Laws Cited:
ITO Vs. Shri Abdul Hameed Khan Mohammed,Chennai ITA No.1782/Mds./2015
S.Krishnan Vs. DCIT  ITA No.2075/Mds./2014
Manjula J. Shah reported in (2012) 204 Taxman 691 (Bombay HC)
ACIT Vs. Anjana Mohan (2013) 36 CCH 0008(Cochin)
Redington (India) Ltd. Vs. JCIT reported in 40 CCH 527 (Chennai).

Brief Facts of the Case:
In both the appeals, the common issue was the treatment of capital assets transferred viz. “Trade Mark” as short term capital gains and disallowing the claim u/s.54F.

ITA No. 2074/Mds/2015
For the assessment year 2012-13, the assessee filed his return of income showing among other things, long term capitaL gains of Rs. 12,00,00,000/- and claimed exemption under Section 54F of  Rs. 8 crores. During the course of assessment proceedings, the AO found that the assessee had been gifted trade mark by Mrs Malathi Rangaswami and Mr TT Varadarajan by deed of settlement dated 19.12.2010. The capital asset being trademark was settled without any consideration of any money or money’s worth and was transferred out of natural love and affection for the assessee. The assèssee claimed exemption under Section 49(1)(ii) since the period during which the previous owners held the right over the Trade mark was also to be considered for deciding whether the asset is of tong term, The Assessing officer however rejected the assessee’s claim for deduction u/s 54F by treating the period of holding of the assets as short term on the following grounds-

(a) the assessee had not acquired the capital assets either through gift or through a will but by a settlement deed, therefore, Explanation-1(i)(b) to Section 2(42A) read with Section 49(1)(ii) was not applicable
(b) in view of the above the the holding period of the asset was less than the period of 36 months preceding the date of transfer and deduction u/s 54F is not available on short term capital gains
(c) Meaning of gift is to be strictly adhered to and definition given in the Gift tax Act cannot be imported into the Income tax Act (d) Transfer of trade mark was done with mala fide intention to evade tax.

Therefore, the AO disallowed the claim u/s.54F both for the assessee in this appeal and also in respect of the assessee viz. Shri Maya Varadarajan, Aggrieved with the action of the AO, the assessees filed appeals before the CIT(A).

On appeal, CIT(A) observed that the primary issue was whether the capital asset received by the assessee through a settlement deed was a gift, if so, whether the provisions of section 49(1) of the Income Tax Act could be applied to this case. CIT after giving a details analysis  of the distinction between settlement and other related instruments held that settlement can not be equated to a gift. CIT(A) further observed that once it was held that the capital asset was a short term capital asset, the provisions of sec 54F were not applicable. Accordingly, the appeal of the assessee was dismissed.

Important Excerpts from ITAT Judgment:

In our opinion, the distinction made by the lower authorities is not correct. The Tribunal in the case of Shri S.Krishnan Vs. DCIT in ITA No.2075/Mds./2014 vide order dated 15.05.2015 observed that though the assessee got the landed property while settlement dated 23.01.2004 from his mother for the purpose of computation of indexed cost of acquisition from 01.04.1981 by following the judgment of Bombay High Court in the case of Manjula J. Shah reported in (2012) 204 Taxman 691. Further the Co-ordinate Bench in the case of Mr.Abdul Hameed Khan Mohammed (supra), it is categorically held that transfer of property made voluntarily and without consideration by way of Settlement Deed, all within the definition of Gift and there is no difference between the Gift and Settlement u/s.49(1)(ii) of the Act. While adjudicating this, the Tribunal placed reliance on Sec.122 of the Transfer of Property Act, 1882 and also from the Cochin Bench of Tribunal in the case of ACIT Vs. Anjana Mohan (2013) 36 CCH 0008(Cochin) and also Redington (India) Ltd. Vs. JCIT reported in 40 CCH 527 (Chennai). 

……. in our opinion the artificial distinction made by the lower authorities with reference to the Gift and Settlement is not appropriate and we are of the opinion that for the purpose of Sec.49(1)(ii), there is no difference between the gift and settlement and in the present case, the settlement made by Mrs.Malathy Rangaswami & Mr.T.T.Ashok in favour of Mrs.Maya Varadarajan to be considered as Gift in terms of Sec.49(1)(ii) of the Act and accordingly, Explanation-1(i)(b) to Sec.2(42A) to be applied so as to compute the holding period of the asset after considering the holding period of the said capital asset by previous owner i.e. SETTLOR.

No difference between gift and settlement for capital gains

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