No capital gains tax just because property docs not mutated in name of wife pursuant to family settlement

S.M. Surana, Adv. for the Appellant. Subhrajyoti Bhattacharjee, Jt. CIT, Sr. DR for the Respondent.

ORDER

Mahavir Singh, Judicial Member – This appeal of assessee arises out of the order of ld.CIT(A)-XIV, Kolkata in Appeal No.420/CIT(A)-XIV/Kol/08-09 dated 22.01.2013. Assessment was framed by I.T.O., Ward-23(2), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for A.Yr. 2006-07 vide its order dated 26.12.2008.

2. The first issue to be decided in this case is as to whether the ld. CIT(A) is right in confirming the addition made in the sum of Rs. 2,12,78,361/- towards Long Term Capital Gain assessable in the hands of the assessee on sale of property situated at Delhi.

3. The brief facts of the case are that the assessee had sold the land and building at Delhi on 04.01.2006 comprising of ground floor, first floor and second floor for Rs. 2,41,30,000/- in the following manner :—

It is pertinent to note that the assessee had executed the sale deed dated 04.01.2006 in his individual capacity for 50% share and has acted as Power of Attorney of Smt. Kankawari Nahata for the balance 50% share. It is relevant to get into the factual matrix of this case for proper disposal of this appeal.

(1) The assessee obtained the property situated at Delhi (herein after referred to as the subject mentioned property) to the extent of 50% share pursuant to a Will executed by his father in the year 1987. The balance 50% share of the subject mentioned property was given to Smt. Kankawari Nahata pursuant to the Will. The assessee obtained the possession of balance 50% share of the subject mentioned property from Smt.Kankawari Nahata on 21.06.1993 for Rs. 7,00,000/-. However, no sale deed was executed by Smt.Kankawari Nahata in favour of assessee. By this process the assessee became the absolute owner of the subject mentioned property.

(2) Pursuant to the family arrangement entered into between the family members of the assessee on 30.04.2000; which was subjected to Arbitration Award on 22.01.2001 and which award was accepted and blessed by the Hon’ble Calcutta High Court by order of the Hon’ble Calcutta High Court on 10.08.2001, the subject mentioned property inter-alia, among others , had to be transferred to assessee’s wife and assessee’s mother. In other words, the subject mentioned property had to go to assessee’s mother and wife pursuant to the family arrangement, which was accordingly done by the assessee in the implementation of the family arrangement and in accordance with the directions contained in the order of Hon’ble Calcutta High Court.

(3) The possession of the subject mentioned property situated at Delhi had been transferred by the assessee to his mother and wife pursuant to the family arrangement. The subject mentioned property was also leased out by the ladies namely his mother and wife to a third party and the lease deed was executed by them pursuant to the co- ownership vested in the hands of the ladies by family arrangement and Arbitration Award later blessed by the Hon’ble Calcutta High Court. The rental income derived thereon from the subject mentioned property were duly offered by the ladies in their respective returns and taxed accordingly.

(4) The mother (Smt. Gulab Kanwar Bhandari) and wife of the assessee (Smt.Pushpa Bhandari) actually sold the property for Rs. 2,41,30,000/- during A.Y.2006-07, but the sale deed for the same was executed by the assessee herein i.e. Shri Kamal Bhandari. This was done because in the records of the Delhi Development Authority, the subject mentioned property was not mutated in the name of assessee’s mother and assessee’s wife. The sale proceeds were received by the assessee herein and the same were invested in mutual funds and the redemption proceeds were duly handed over by the assessee to the ladies on 29.03.2006 in line with the directions of the family arrangement already agreed upon. In other words, the assessee was in receipt of sale consideration for the subject mentioned property from the buyer as he had executed the sale deed for the reasons mentioned herein above, had utilized the said sale proceeds for his personal investment purpose by way of investment in mutual funds and the redemption proceeds of mutual funds were handed over to the ladies on 29.03.2006 by the assessee. The profits derived from the mutual funds were duly offered to tax by the assessee in his return of income for A.Y.2006-07.

4. The ld. AO has added back the entire Long Term Capital Gain on sale of the subject mentioned property at Delhi in the hands of the assessee on the ground that the assessee failed to file the following documents such as :- certified copy of the Award given by the Arbitrator, certified copy of the Execution Petition, certified copy of the High Court order in confirmation with the Xerox copy of order submitted and application mentioning (a) and (b) in terms of column 10 of the Tabular Statement in original. The ld. AO further commented that the assessee failed to prove the genuineness of the alleged deed i.e. family arrangement deed.

5. Aggrieved, the assessee challenged this issue before the ld. CIT(A), who upheld the findings of the ld. AO on the ground that the sale proceeds of the property were deposited into the bank account of the assessee and the transfer of the property by the assessee to the ladies i.e. mother and wife of the assessee pursuant to the family arrangement shall not be recognized as transfer. In other words, the existence of family arrangement was also not appreciated and accepted by the ld. CIT(A).

6. Aggrieved, the assessee challenged this issue before the Hon’ble Tribunal on the following grounds:—

“1. (a) For that on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in confirming the addition of Rs. 2,12,78,361/- made by the A.O. in the hands of the assessee towards long term capital gains on sale of property.

1. (b) For that the Ld.CIT(A) ought to have considered that the property in question had been transferred to the assessee’s mother and wife through family settlement and that the said settlement was approved by the Hon’ble Calcutta High Court.

1. (c) For that on the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that the transfer of property through family settlement is not recognized as transfer for the purpose of Income Tax Act, 1961″

7. Shri S.M.Surana, Advocate, the ld. AR appeared on behalf of the assessee and Shri Subhrajyoti Bhatacharjee, JCIT, the ld. DR appeared on behalf of the revenue.

8. The ld. AR argued that the entire addition of long term capital gain on sale of the subject mentioned property was made by the assessee disbelieving the existence of family arrangement entered into by the assessee which was later subjected to an Award passed by Arbitrator and which was later blessed by the order of Hon’ble Calcutta High Court on 10.08.2001. He argued that the assessee had handed over the possession of the subject mentioned property to the ladies pursuant to the family arrangement along with other movable and immovable assets as contemplated in family arrangement. He further argued that the ladies namely mother and wife of the assessee had independently entered into a lease deed to lease out the subject mentioned property to an outsider and derived rental income thereon and which was duly offered to tax in the returns of the ladies and taxed accordingly. He further argued that in the balance sheet of the ladies i.e. Smt. Gulab Kunwar Bhandari and Smt. Pushpa Bhandari as on 31.03.2002, the subject mentioned property at Delhi has been duly reflected together with the source thereon clearly mentioning as property received pursuant to family arrangement. He further stated that similarly in the balance sheet of Shri Kamal Bhandari, the assessee herein, as on 31.03.2002, the subject mentioned property at Delhi is not reflected due to the transfer of possession to the ladies i.e. mother and wife of the assessee pursuant to the family arrangement. The ld. AR further argued that the subject mentioned property at Delhi had been duly reflected in the balance sheet of the ladies up to 31.03.2005 as the property owned and possessed by them. However, the property document was remaining in the name of the assessee and not mutated in the name of assessee’s mother and wife in the records of Delhi Development Authority, due to which the assessee had to execute the sale deed on 04.01.2006 in favour of Arpit Realtors Pvt. Ltd., Sturn Collection Agencies Pvt.Ltd and Shiv Kripa Agencies Pvt. Ltd. The ld. AR further argued that the assessee having executed the sale deed in the representative capacity, received the sale proceeds and deposited the same in his bank account and invested the same for a short span of time by investing in mutual funds and derived profits thereon. The profits derived from mutual funds were duly offered to tax by the assessee in his hands. On 29.03.2006 the assessee had duly transferred the entire redemption proceeds of mutual fund to the ladies i.e. mother and wife of the assessee as he was only acting as a custodian of the sale proceeds of the property on behalf of his wife and mother. He further argued that the transfer of monies was also made in order to comply with the terms and conditions mutually agreed upon in the family arrangement. The ld. AR further argued that the ladies i.e. Smt. Gulab Kunwar Bhandari (mother) and Smt. Pushpa Bhandari (wife) had duly disclosed this long term capital gain on sale of the subject mentioned property at Delhi in their respective returns for A.Y.2006-07 as they are the beneficial owners of the property, wherein the legal right over the subject mentioned property got vested in them pursuant to the family arrangement. He further pleaded that if the subject mentioned property is again taxed in the hands of the assessee, then it would only result in double taxation for a single sale of the property. He further argued that the copy of the Hon’ble High Court order was very much on record before the ld. AO and there is no good reason for him to doubt the genuineness of the same while framing the assessment. Accordingly, he pleaded for the deletion of long term capital gain in the hands of the assessee in the sum of Rs. 2,12,78,361/- added in the hands of the assessee.

9. In response to this, the ld. DR vehemently supported the orders of the lower authorities.

10. We have heard the rival submissions and perused the materials available on record. We have also gone through the paper book filed by the assessee numbering from pages 1 to 303 comprising of various documents such as copy of the memorandum of family arrangement, copy of Arbitration Award, copy of order of the Hon’ble Calcutta High Court, copy of Income Tax returns filed by the assessee together with the balance sheets as well as by the ladies i.e. mother and wife of the assessee from A.Y.2001-02 to 2006-07, copy of lease deed entered by the ladies on 01.04.2003 etc. It is seen from the facts and records available on record that at the outset, the ld. AO had travelled during the entire order of the assessment by disbelieving the existence of the family arrangement entered into by the family members in order to resolve their dispute and in order to promote peace and harmony among the family members. It is seen from the said family arrangement, the assessee Shri Kamal Bhandari apart from other assets had to hand over the possession of the land and building situated at Delhi to his mother and wife which was accordingly done by him. This fact is evident from the fact that the land and building situated at Delhi (the subject mentioned property) is not reflected in the balance sheet as on 31.03.2002 of the assessee. It is also seen in the balance sheet of Smt. Gulab Kunwar Bhandari (mother) and Smt.Pushpa Bhandari (wife) as on 31.03.2002, the subject mentioned property at Delhi has been reflected in their respective balance sheets pursuant to the family arrangement. However, it is also seen that in the records of Delhi Development Authority the property was not mutated in the names of assessee’s mother and wife which led the assessee to execute the sale deed on 04.01.2006 in favour of a third party for the purpose of convenience. In other words, the assessee stepped into to execute the sale deed only to avoid explaining the complete background for family arrangement vis-à-vis the total assets to be distributed among the family members which was also later approved by the Hon’ble Calcutta High Court, to the registration authorities and in order to avoid complexities thereon. We hold that mere execution of a sale deed by the assessee, receiving the sale proceeds and depositing in his bank account alone would not make him liable for capital gains tax by conferring him the ownership of the property. The assessee had transferred the right over the subject mentioned property to his family members i.e. mother and wife during A.Y.2002-03 itself which is quite evident from the order of the Hon’ble Calcutta High Court blessing the family arrangement and the balance sheets as on 31.03.2002 of the assessee and the family members i.e. mother and wife. We cannot close our eyes on the fact that the lease deed of the subject mentioned property was executed on 01.04.2003 by the ladies i.e. mother and wife and the rental income derived therein have been duly offered to tax by the ladies in their respective returns to the deed of sale and the ladies have also duly disclosed the capital gains on sale of the subject mentioned property i.e. sale deed dated 04.01.2006 in their returns for A.Y.2006-07. Hence, we find lot of force in the arguments of the ld. AR that the capital gains if added in the hands of the assessee will only result in double taxation. We also find lot of force in the arguments of the ld. AR that the genuineness of the family settlement deed cannot be doubted or disputed since the same was duly acted upon and accepted by the department from the A.Y.2002-03 to 2005-06 wherein the respective parties owned the property allotted to them (i.e. mother and wife of the assessee) in these years, income there from duly taxed by the department in their respective years. To this extent the observations of the ld. AO for justifying the long term capital gain addition in the hands of the assessee are not justified. It is also seen from the ld. CIT(A)’s order that he had concluded to justify the disallowance on the ground that the family arrangement is not recognized under the Income Tax Act. We find that this observation of the ld. CIT(A) does not draw support from the decisions rendered by various High courts and Supreme Court . It is pertinent to place reliance on the decision of Hon’ble Andhra Pradesh and Telangana High Court in P. Shankaraidh Yadav (HUF) v. ITO [2015] 371 ITR 386  wherein the lordships of Hon’ble Andhra Pradesh High Court had an occasion to go into the legal character of the family arrangement wherein it was held that:

“As regards first aspect, it needs to be noted that the family arrangement is a typical legal phenomena that does not fit into those which are specifically recognized under law. The transfer of immovable or movable property, as the case may be, does take place under the arrangement, but it is substantially different from the one that is contemplated under the Transfer of Property Act or the Sale of Goods Act. No formal registered document is executed and the nature of consideration is not amenable to any legal analysis.”

By virtue of a family settlement or arrangement members of a family descending from a common ancestor or a near relation seek to sink their differences and disputes, settle and resolve their conflicting claims or disputed titles once for all in order to buy peace of mind and bring about complete harmony and goodwill in the family. The family arrangements are governed by a special equity peculiar to themselves and would be enforced if honestly made. In this connection, Kerr in his valuable treatise Kerr on Fraud at p.364 makes the following pertinent observations regarding the nature of the family arrangement which may be extracted thus:-

“The principles which apply to the case of ordinary compromise between strangers do not equally apply to the case of compromises in the nature of family arrangements. Family arrangements are governed by a special equity peculiar to themselves, and will be enforced if honestly made, although they have not been meant as a compromise, but have proceeded from an error of all parties, originating in mistake or ignorance of fact as to what their rights actually are, or of the points on which their rights actually depend..

A social dimension which virtually commands the admiration of many social scientists was given to the concept as under:-

The object of the arrangement is to protect the family from long-drawn or perpetual strifes which mar the unity and solidarity of the family and create hatred and bad blood between the various members of the family. Today when we are striving to build up an egalitarian society and are trying for a complete reconstruction of the society, to maintain and uphold the unity and homogeneity of the family which ultimately results in the unification of the society and, therefore, of the entire country, is the prime need of the hour. A family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term family has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successionis so that future disputes are sealed forever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits.

The contemporary social scientists or those who claim to be so have to reconsider their approach towards the expressions like egalitarian society or social justice, if they happen to understand the message contained in the famous judgment. Unfortunately those two expressions have been pressed into service in the past few decades to connote not so noble and congenial ideas but only disruptive and divisive ideas.”

It is also held by the Hon’ble Andhra Pradesh and Telangana High Court in P. Shankaraiah Yadav (HUF) (supra).

“We, therefore, are of the view that the family arrangement, whatever it exists and is proved, is a sui generis i.e. a class by itself, with full legal enforceability, de hors the fact that it is not dealt with under any specific provision of an enactment. The settlement deserves to be given full effect and the legal consequences flowing there from cannot be ignored, on the ground that they do not fit into any specific provision of law.”

The purport of the family arrangement was explained by the Hon’ble Supreme Court in Kale v. Dy. Director of Consolidation AIR 1976 SC 807 wherein certain principles were laid down for family arrangement

“1. The family settlement must be a bona fide one so as to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between the various members of the family.

2. The said settlement must be voluntary and should not be induced by fraud, coercion or undue influence.

3. The family arrangements may be even oral in which case no registration is necessary;

4. It is well settled that registration would be necessary only if the terms of the family arrangement are reduced into writing A distinction should however be made between a document containing the terms of a family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making necessary mutation. In such a case the memorandum itself does not create or extinguish any rights in immovable properties and therefore does not require registration u/s 17(1)(b) of the Registration Act.

5. The members being parties to the family arrangement must have some antecedent title, claim or interest even a possible claim in the property, which is acknowledged by the parties to the settlement. Even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him to be the sole owner, then the antecedent title must be assumed and the family arrangement will be upheld and the courts will find no difficulty in giving assent to the same.

6. Even if bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable. The family arrangement is final and binding on the parties to the settlement.”

It is for this reason that a family arrangement by which each party takes a share in the property has been held as not amounting to a “conveyance of property” from a person who has the title to it to a person who has no title to it earlier.

In CIT v. A.L. Ramanathan [2000] 245 ITR 494  (Mad.), the family arrangement was held to be not a transfer for the purpose of capital gains tax.

We hold that in view of the above facts and circumstances, materials and evidences available on record and in view of the judicial precedents recognizing the family arrangement in the eyes of law, the action of the ld. AO in bringing to tax the long term capital gain of Rs. 2,12,78,361/- is illegal and is hereby directed to be deleted in the hands of the assessee.

11. The next issue is as to whether the ld. CIT(A) is justified in confirming the disallowance of Rs. 45,000/- towards interest paid on loans.

12. The brief facts of the case are that the assessee borrowed loan to re-pay his earlier loan borrowed by him during the course of his business. The interest paid on the new loan amounting to Rs. 45,000/- was claimed as deduction by the assessee which was disallowed by the ld. AO on the ground that the interest is paid on borrowed funds which was utilized for earning dividend.

Aggrieved, the assessee challenged this issue before the ld. CIT(A), who simply gave a finding that the assessee has earned dividend income of Rs. 1,76,808/- which is exempted and accordingly the interest paid on loans for earning dividend income is not allowable as deduction.

Aggrieved, the assessee challenged this issue before the Hon’ble Tribunal on the following ground:—

“2. For that on the facts and in the circumstances of the case, the ld. CIT(A) was not justified in confirming the disallowance of Rs. 45,000/- made by the A.O. on account of interest paid on loan.”

13. The ld. AR argued that the assessee only borrowed loans and utilized the same for repayment of the old loans which were duly utilised only for the purpose of business on which fact there is absolutely no dispute. He argued that AO had miscarried himself on the pretext that borrowed funds were used for earning dividend income from share transactions and accordingly prayed for deletion of this addition.

14. In response to this, the ld. DR vehemently supported the orders of the lower authorities.

15. We have heard the rival submissions. It is seen that the borrowed fund has been used for repaying the old borrowings by the assessee which has been duly used for the purpose of business. It is not in dispute that the original borrowings were used by the assessee for the purpose of his business. Hence, the interest paid by the assessee on borrowings which were utilized by repaying the old business borrowings is squarely allowable as deduction. Accordingly, we direct the ld. AO to allow the sum of Rs. 45,000/- towards interest paid on loan. This ground of appeal is allowed.

16. In the result the appeal of the assessee is allowed.