Compensation from family settlement for relinquishing settled possession and beneficial interest in a property is taxable as capital gains, not income from other sources.
Issue:
Whether an amount received by an assessee in the course of a family settlement regarding a property, in which the assessee had been in settled possession and held beneficial interest for decades (though lacking formal legal ownership), should be treated as consideration for the transfer of a “capital asset” liable to be assessed under “Capital gains” (entitling deductions under Sections 54 and 54EC), or as a “gift” taxable as “Income from other sources” under Section 56(2) of the Income-tax Act, 1961.
Facts:
- For Assessment Year 2012-13, the assessee received a certain amount from ‘U’ in the course of a family settlement concerning a property.
- The assessee declared this amount as long-term capital gain and claimed deductions under Sections 54 and 54EC (pertaining to exemption from capital gains on investment in residential property or specified bonds, respectively).
- The Assessing Officer (AO) rejected the assessee’s treatment. The AO held that since the assessee lacked formal legal ownership of the property, the received amount could not be considered as consideration for the transfer of a capital asset. Instead, the AO treated it as a “gift” under Section 56(2) and assessed it as “income from other sources.”
- It was noted that the assessee had been in “settled possession” of the property for decades.
- The receipt was not gratuitous (i.e., not a gift) but was explicitly received for relinquishing that possession and claim over the property.
- The assessee’s rights and the nature of the receipt were acknowledged in a civil suit and a subsequent agreement.
Decision:
The court held in favor of the assessee. It ruled that the possession and beneficial interest held by the assessee over a prolonged period, her assertion of rights through legal proceedings, and the receipt of consideration under a family settlement fall within the definition of “capital asset” under Section 2(14) of the Income-tax Act. Furthermore, the act of relinquishing that possession and claim constitutes a “transfer” under Section 2(47) of the Act. Therefore, the compensation received by the assessee was liable to be assessed under the head “Capital gains” and not “Income from other sources.”
Key Takeaways:
- Definition of “Capital Asset” (Section 2(14)): A “capital asset” is defined broadly to include property of any kind held by an assessee, whether or not connected with business or profession. This can include intangible rights or interests, not just formal legal ownership. The court emphasized that settled possession coupled with beneficial interest and assertion of rights over a prolonged period can constitute a capital asset.
- Definition of “Transfer” (Section 2(47)): The definition of “transfer” is also very wide and includes various modes, such as sale, exchange, or “relinquishment of the asset” or the “extinguishment of any rights therein.” Relinquishing possession and a claim over a property, even without formal title, falls within this definition.
- Family Settlement – Not Necessarily a Gift: Family settlements are recognized mechanisms for resolving disputes over property. Amounts received under a genuine family settlement for relinquishing rights or interests are typically considered consideration for transfer, not gifts. The key is that the receipt is not gratuitous but in lieu of a recognized claim or interest.
- “Income from Other Sources” (Section 56(2)): Section 56(2) taxes certain receipts, including gifts, as income from other sources. However, if a receipt constitutes consideration for the transfer of a capital asset, it is taxable under the head “Capital gains,” not as “Income from other sources.”
- Importance of Factual Context: The court critically examined the factual matrix: prolonged settled possession, beneficial interest, assertion of rights through legal channels, and the non-gratuitous nature of the payment, all of which pointed towards the existence of a transferable capital right.
- Right to Deductions (Sections 54 & 54EC): Classifying the income as capital gains is crucial as it allows the assessee to claim available deductions under various sections like 54 and 54EC, which significantly reduce or exempt the tax liability.
IN THE ITAT CHANDIGARH BENCH ‘A’
Dharampal Saghera
v.
Income-tax Officer
Laliet Kumar, Judicial Member
and Manoj Kumar Aggarwal, Accountant Member
and Manoj Kumar Aggarwal, Accountant Member
IT Appeal No. 756 (Chandi) of 2024
[Assessment year 2012-13]
[Assessment year 2012-13]
MAY 14, 2025
Tej Mohan Singh, Adv. for the Appellant. Vivek Vardhan, Sr. DR for the Respondent.
ORDER
Laliet Kumar, Judicial Member. – The instant appeal of the assessee is directed against the order of the ld. National Faceless Appeal Centre (NFAC), Delhi, dated 28.06.2024 for A.Y. 2012-13.
2. The assessee has taken the following grounds:
“1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the initiation of proceedings under section 148 in as much as there was no escapement of income leading to a reason to belief and as such the re-opening is illegal, arbitrary and unjustified.
2. That the Ld. Assessing Officer has erred in law as well as on facts in as much as there has been no reason to believe that there was an escapement of income in as much as the reasons recorded are based only on borrowed information and as such the assessment order passed is illegal, arbitrary and unjustified.
3. Without prejudice to the above, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the addition of Rs.1,75,00,000/- made by assessing officer treating the extinguishment of the right in capital asset to be in the nature of Gift under “income from other sources” as against “long term capital gains” declared by the assessee which is arbitrary and unjustified.
4. That the Ld. Commissioner of Income Tax(Appeals) has further erred in upholding the denial of deduction claimed under section 54 and 54EC claimed by the assessee which is arbitrary and unjustified.
5. That the Ld. Commissioner of Income Tax(Appeals) has further in observing that the assessee did not file any documentary evidence to demonstrate possession which is contrary to the facts of the case and as such the order passed is arbitrary and unjustified.
6. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.’
2. In the present case, the assessee had declared the amount of Rs. 1.75 crore received from Sh. Uday Partap Singh Kairon in the course of a family settlement regarding House No. 55, Sector 9-A, Chandigarh, as long-term capital gain, claimed deductions under Sections 54 and 54EC of the Act. The amount was received in lieu of relinquishment of her long-standing possessory and beneficial rights in the property which she had occupied since the 1960s.
3. The assessee, along with her sister Mrs. Manpreet Singh Saghera, had filed a civil suit asserting rights in the said property. After prolonged litigation, a compromise was reached wherein Rs. 1.75 crore and Rs. 0.25 crore were paid respectively to the assessee and her sister for handing over vacant possession and relinquishing rights. The buyer purchased the property only after resolving these claims. The assessee claimed deduction under Section 54 for reinvestment in a residential property and under Section 54EC through investment in NHAI bonds.
4. During the reassessment, the AO held that since the assessee lacked legal ownership, the amount could not be treated as consideration for the transfer of a capital asset. The AO treated it the same as a gift under Section 56(2) and assessed it as “income from other sources”.
5. In appeal, the Ld. CIT(A) upheld the AO’s action, observing that the assessee failed to file any conclusive documentary evidence of possession or ownership and that the agreement relied upon was unregistered.
6. Before us, the Ld. AR submitted that the assessee had been living in the property since the 1960s, a fact reflected in her ITRs filed from the same address up to AY 2012-13. Civil litigation was initiated asserting her share, and the compromise was reached only on her agreeing to vacate the premises. She was compensated for extinguishing her long-standing possessory and beneficial interest, which is a capital asset within the meaning of Section 2(14), and the relinquishment is a “transfer” as per Section 2(47) of the Act.
7. The AR relied upon multiple judicial precedents to establish that possession and beneficial interest are recognized as capital assets:
| o | CIT v. Neba Ram Hansraj |
| o | ACIT v. G.C. Shah & Co. |
| o | Ajay Parasmal Kothari v. ITO |
| o | Sonal Samit Vartak v. ITO [IT Appeal No. 1139 (Mum) of 2024, dated 16-8-2024] |
| o | Smt. Delihah Raj Mansukhani v. ITO [IT Appeal No. 3526 (Mum.) of 2017, dated 29-1-2021] |
8. The AR further pointed out that in the same transaction, the Revenue has accepted the capital gain treatment for the assessee’s sister, Mrs. Manpreet Singh Saghera, who received Rs. 25 lakhs under identical facts and was allowed benefit under Section 54. Copy of her assessment order was also placed in the record.
9. Per contra, the ld. DR relied upon the order passed by the lower authorities. It was submitted that the assessee was not the owner of the property and therefore was not entitled to claim long term capital gain on the amount received by her.
10. We have considered the rival contentions and perused the material on record. The facts indicate that the assessee was in settled possession of the property for decades, and the receipt was not gratuitous but for relinquishing that possession and claim, which were acknowledged in the civil suit and agreement.
11. The possession and beneficial interest held by the assessee over a prolonged period, her assertion of rights through legal proceedings, and the receipt of consideration under a family settlement fall within the definition of “capital asset” under Section 2(14), and the act of relinquishment is a “transfer” under Section 2(47). The compensation received therefrom is liable to be assessed under the head “Capital Gains” and not “Income from Other Sources”. The Hon’ble High Court in Sarfaraz S. Furniturewalla v. Afshan Sharfali Ashok Kumar (Bombay) approving the decision in the case of Ajay Parasmal Kothari (supra) held as under: –
“9. It will also be necessary to consider the two authorities referred by Mr. Pardiwala of Income Tax Appellate Tribunal viz. (i) Smt. Delilah Raj Mansukhani (supra), and (ii) Ajay Parasmal Kothari (supra) follows Delilah Raj Mansukhani (supra).
9.1. Paragraph No. 5 of the Smt. Delilah Raj Mansukhani (supra) reads as under :
“5. After hearing the rival submissions and perusing the material on record, we find that compensation received by the assessee towards displacement in terms of Development Agreement is not a revenue receipt and constitute capital receipt as the property has gone into re-development. In such scenario, the compensation is normally paid by the builder on account of hardship faced by owner of the flat due to displacement of the occupants of the flat. The said payment is in the nature of hardship allowance / rehabilitation allowance and is not liable to tax. The case of the assessee is squarely supported by the decision of the Co-ordinate Bench in the case of Shri Devshi Lakhamshi Dedhiavs. ACIT in ITA No.5350/Mum/2012 wherein similar issue has been decided in favour of the assessee, the relevant operative portion is reproduced hereunder:-
15. We have considered the rivals submissions and perused the materials on records. We note that the assessee received compensation of Rs. 19,50,873/-from the developer when the building in which the assessee owned flat went for re-development as per the agreement between the developers and flat owners dated 28.03.2008. The said compensation was paid towards hardship Rs, 13,45,278/-; rehabilitation Rs, 5,90,625/- and for shifting Rs. 15,000/-. We also note that the assessee paid Rs. 18,63,000/- to Joys Developers for acquiring additional area of 138 Sq Ft. It was also noted that the assessee shifted to his own house when the building went for re-development. Now the question before is whether the compensation upon re-development of property towards hardship, rehabilitation and shifting received by the assessee is taxable if the potential TDR/FSI is available to the land owner or society which owns the (and depending upon the terms of the dedevelopment agreement without transferring the land. In the present case the assessee who was flat owner in the building was member of the society, As per the agreement each member of the society including the assessee was to be given a flat in lieu of the old one and the each member including the assessee was given compensation. We also note that In the decisions in ITA No 72/Mum/2012 assessment year 2008-09 Bench E and ITA No 5271/Mum/2012 assessment year 2008-09 Bench “D” the Tribunal held that the amounts received as compensation for hardship, rehabilitation and for shifting are not liable to tax We, therefore, respectfully, the above decisions are of the considered view that the amounts received by the assessee as hardship compensation, rehabilitation compensation and for shifting are not liable to tax and the order passed by the first appellate authority can not be sustained. Thus the order of CIT(A) is reversed and ground is allowed in favour of the assessee.
16. In the result, appeal of the assessee is partly allowed, as above.”
[Emphasis Supplied]
9.2. Ajay Parasmal Kothari (supra) follows judgment of Smt. Delilah Raj Mansukhani (supra). I hold that the view taken by Income Tax Appellate Tribunal, in both the judgments, is a correct view.
10. The ordinary meaning of Rent would be an amount which the Tenant / Licensee pays to the Landlord / Licensor. In the present proceedings, the term used is ” Transit Rent”, which is commonly referred to as Hardship Allowance / Rehabilitation Allowance / Displacement Allowance, which is paid by the Developer / Landlord to the tenant who suffers hardship due to dispossession. Hence, in my opinion,’ Transit Renf is not to be considered as a revenue receipt and is not liable to be taxed, as a result, there will be no question of deduction of T.D.S. from the amount payable by the Developer to the tenant.”
12. In view of the above, we are of the considered opinion that the assessee is entitled to the relief claim. The assessee has rightly claimed deduction under Sections 54 and 54EC, supported by investment documents. The AO and CIT(A) erred in treating the receipt as income from other sources in the absence of legal title, disregarding settled law that ownership for tax purposes includes possessory and beneficial rights.
13. In view of the above discussion and supported by consistent judicial precedents, we hold that the receipt of Rs. 1.75 crore constitutes long-term capital gain and is eligible for deduction under Sections 54 and 54EC. The reassessment and addition made by the AO are not sustainable in law.
14. Even otherwise, if the matter is examined from a different perspective, it becomes evident that the consideration was received by the registered owner, being the legal heirs of the deceased brother, towards the sale of the property. This consideration included amounts attributable to the betterment of title and possession. A portion of the total sale consideration was paid directly by the purchaser to the relatives of the seller, who were in possession of the property and were litigating before the court, where an injunction was also operating against the seller(legal heirs of the deceased). The central issue that arises is whether the amount so paid for obtaining a better title constitutes an application of income by the registered owner, or whether it forms part of the sale consideration, and if so, whether it can be regarded as taxable income in the hands of either the recipients or the registered owner.
15. In our considered view, at best, the transaction reflects an application of income by the registered owner in favour of the possessors—her relatives—to perfect title and securing possession. Alternatively, the facts indicate that the purchaser himself paid the said amount to these possessors to obtain vacant possession and a clear title. In either scenario, the payment made does not constitute taxable income in the hands of the assessee. It either partakes the nature of a capital receipt received by the assessee for handing over the possession or was like a gratuitous transfer between close relatives—namely, the Bhabhi and Nanad (sisters-in-law)—which is exempt under the provisions of the Act.
16. It is now a well-settled proposition of law that where one close relative transfers an amount to another without consideration, such a transfer assumes the character of a gift. Consequently, the provisions of section 56(2)(x) of the Income Tax Act, 1961, would not be attracted in such circumstances. Therefore, even from this alternate perspective, we consider that the amount in question is not liable to be taxed in the hands of the assessee or the recipients.
17. It is, however, observed that the assessee has declared the entire consideration received as long-term capital gains in her income return. Based on her acceptance of possession and title, this voluntary declaration cannot now be dislodged and the assessee cannot withdraw the admitted income. In light of the factual matrix and her consistent stand before us, we find merit in the claim of the assessee. Accordingly, the appeal of the assessee is allowed, and the capital gains declared in the return are directed to be accepted.
18. In the result, the appeal of the assessee bearing ITA No. 756/Chandi/2024 is allowed.