Monday, July 15, 2013

CIT v. Ashwani Chopra (2013) 85 DTR 40(P&H) (High Court)

S.45 : Capital gains – Transfer – Family settlement – A family settlement does not result in a "transfer" and compensation received to equalise inequalities in family settlement is not taxable as "income". (S. 2(47), 4)

There was a dispute between two groups of a family. During the pendency of litigation, the parties agreed to divide the assets and businesses of the family into two lots i.e. lot-1 containing the Jalandhar and Ambala units and lot-2 containing the Delhi and Jaipur units. In terms of such settlement, lot-1 fell to the share of Group ‘A’ and lot-2 fell to the share of Group ‘B’ with the condition of payment of ` 24 crores. A dispute regarding the date of split of the said amount was pending. The AO assessed the said sum in the hands of the assessee. This was reversed by the CIT(A) and Tribunal on the ground that the distribution of assets including the sum of ` 24 crores was not complete as the matter was sub-judice and the amount did not accrue to the income of the group ‘A". On appeal by the department to the High Court, the Court had to consider whether the compensation paid to the assessee to settle inequalities in partition, being a provision of "owelty" represents immovable property and is not an income exigible to tax. 

On appeal by revenue, High Court dismissing the appeal held that, A family partition which results in an adjustment of shares and of the respective rights in the family properties is not a "transfer" in the eyes of law. When there is no transfer of asset, there is no capital gain and consequently there is no liability to pay tax on capital gains. In a family partition, a situation arises where an item of property is not capable of physical partition or is such that, if divided, it will lose its intrinsic worth. In such a case, with a view to ensure an equitable partition, the item is allotted to one party and he is asked to pay compensation in money value to the other party. This amount is called "owelty". As the amount of compensation is only to equalise the inequalities in the partition it is nothing but a share in the immovable property itself (though paid in cash) and cannot be treated as income liable to capital gain. If such amount is to be treated as income liable to tax, inequalities would set in as the share of the recipient will diminish to the extent of tax. On facts, the payment of ` 24 crores to Group A is to equalise the inequalities in partition of assets. The amount so paid is immovable property and is not income liable to tax (T.S. Swaminatha Odayar v. Official Receiver AIR 1957 SC 577, CIT v. A. L. Ramanathan (2000) 245 ITR 494 (Mad), CIT v. Kay Arr Enterprises (2008) 299 ITR 348, CIT v. R. Nagaraja Rao (2012) 207 Taxman 74 (Kar) & Ziauddin Ahmed v. CGT (1976)102 ITR 253 (Gau), Parvathi Amma v. Makki Amma AIR 1962 Kerala 85 reviewed)(A.Y. 2007-08)

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