SUPREME COURT

IN RAM CHARAN DAS V. GIRJANANDINI DEVI AIR 1966 SC 323 AND  IN THE CASE OF KRISHNA BIHARI LAL V. GULAB CHAND

Summarised Judgement

Apart from the Income Tax Act, 1961, the word family has no where been defined. The courts have in addition to the aforesaid definition given a wider meaning to the word family, to exclude persons who have common tie or relation to be a part of family.

The Hon'ble Supreme Court held that the word family had a much wider meaning. The court in Paragraph 7 held: "...the word "family" in the context of a family arrangement is not to be understood in a narrow sense of being a group of persons who are recognized in law as having a right of succession or having a claim to a share in the property in dispute."

Therefore, the requirement of existence of legal/succession of the family property has been subsequently dispensed with in the view of the aforesaid judgements and a broad interpretation.

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PUNJAB AND HARYANA HIGH COURT

BANSARI LAL V. CGT, 1998 230 ITR 114 (P&H)

Summarised Judgement

The entire purpose of having a Family Arrangement is to secure and settle the rights of a person on a family's property. For the purpose of Family Arrangement, there must be some ancestral right over the property in dispute. Subsequently, individual and self-acquired property are not taken into consideration as 'property' for the purpose of Family Arrangement, until and unless some ancestral title or claim is shown in the property.

In this the Court disregarded a family arrangement as being collusive, in which the property in dispute was an individual property. The court had held that mere antecedent title or claim or interest on an individual property and subsequent family arrangement would be set aside as being collusive and obtained with a view to avoid payment of tax.

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SUPREME COURT

SHAMBHU PRASAD V. PHOOL KUMAR AIR 1971 SC 1337

Summarised Judgement

Dispute in a family property is a prelude to Family Arrangement. The entire purpose of having an arrangement is to settle the 'dispute' to maintain the harmony of the family system. The dispute can be either in present or in future depending upon the nature of the dispute.

Court had held that for a family arrangement there must a dispute in property, either actual or possible in future. Thus, a bona fide dispute, which has not arisen yet but could arise in future is sufficient to arrive at Family Arrangement.

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SUPREME COURT

SK. SATTAR SK. MOHD. CHOUDHARI V. GUNDAPPA AMABADAS BUKATE (1996) 6 SCC 373

Summarised Judgement

The definition of the phrase 'Family Arrangement', has been elaborately explained by the Supreme Court. The Hon'ble Court held that: "...A family arrangement is a transaction between members of the same family for the benefit of the family so as to preserve the family property, the peace and security of the family, avoidance of family dispute and litigation and also for saving the honour of the family."

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SUPREME COURT

RAM CHARAN DAS V. GIRJA NANDINI DEVI AIR 1966 SC 323

Summarised Judgement

It held that the transaction amongst family members to put an end to bona fide dispute would not amount to 'transfer' or creation of any interest. The court held: "...here the transaction in question is a family settlement entered into by the parties bona fide for the purpose of putting an end to the dispute among family members.

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GAUHATI HIGH COURT

ZIAUDDIN AHMED VS COMMISSIONER OF GIFT-TAX ON 5 AUGUST, 1975

Summarised Judgement

Question of Law -  "(1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of Section 4(1)(a) of the Gift-tax Act, 1958, were attracted and that there was a deemed gift taxable in the hands of the assessee ?

(2) Whether, on the facts, the Tribunal was correct in law in holding that in considering the quantum of taxable gift under Section 4(a) of the Gift-tax Act, 1958, the transfer of shares standing in the name of his minor son was not to be considered ?."

Court Observation:

From the findings of the Tribunal in the instant case as quoted herein-above, it is found that the allocation of 425 shares belonging to the deceased assessee was made by way of family arrangement to settle existing and future disputes regarding the shares in the two tea estates amongst the members of the family of the deceased assessee and it has also been found by the Tribunal that there was some arbitration and the shares were transferred at an agreed consideration and such agreed consideration for 425 shares belonging to the deceased-assessee was Rs. 3,00,050.

Applying the observations of the Supreme Court in Ram Char an Das's case, we find that the allocation of 425 shares in the tea estate concerned has been by way of family settlement and the transaction has been made bona fide to put an end to the dispute amongst the members of the family of the deceased-assessee and, therefore, this transaction is not a transfer. In order to bring a case within the scope of Section 4(1)(a) of the Gift-tax Act, 1958, first there must be a transfer for consideration and such consideration must be found to have been inadequate consideration. That being the case, in our opinion, the provisions of Section 4(1)(a) (Section 4(a) unamended) of the Gift-tax Act are not attracted to the facts and circumstances of the present case and there was no deemed gift taxable in the hands of the assessee.

In the result we answer the first question of law in the negative and in favour of the assessee.

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BOMBAY HIGH COURT

B.A. MOHOTA TEXTILE PVT. LTD V. COMMISSIONER OF INCOME TAX - INCOME TAX APPEAL NO.73 OF 2002

Summarised Judgement

Question of Law:

a) Whether in the facts and circumstances of the case and in law the Tribunal was right in holding that the transaction of transfer of shares by the assessee company in pursuance of family arrangement amounted to transfer and was exigible to capital gains tax?

b) Whether in the facts and circumstances of the case and in law the Tribunal was right in not accepting the fact that the transfer of shares by the assessee company being only incidental and in consequence of allotment and control of management of companies in pursuance of family arrangement, took the transaction out of purview of Section 2 (47) of I.T. Act, 1961 ?

c) Whether in the facts and circumstances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement ?

In the case of B.A. Mohota Textile Traders Pvt. Ltd. v. Commissioner of Income Tax Income Tax Appeal No. 73 of 2002 (Bombay), pursuant to a family settlement (by way of an arbitration), the appellant/assessee transferred the shares held by him in a company in favour of his family members collectively in the year 1995.

During the assessment proceedings in the year 1995-1996, the appellant filed return of income of Rs. 58 lakhs contending that the same was done in pursuance of family arrangement and was not exigible for any capital gain tax.

However, the Assessing Officer refuted the contentions of the assessee and held that the same was liable to capital gain tax as the Company being a separate legal entity was distinct from its shareholder and was not a part of family settlement/ arrangement.

Court Decision:

Further, lifting of corporate veil at the instance of the assessee would mean that it is denying it's corporate existence. This, after taking advantage of the separate existence of a Company under the Act. Therefore, after having incorporated the Limited Company and given it separate existence from it's share holders, it is not open to the Company to urge “Please ignore my separate existence and look at the persons behind me.“ If that be so, the Appellant/Company must opt for voluntarily winding up and then the shares being allotted to the individual members on liquidation would be governed by the family arrangement/settlement.

In the above view, the Tribunal was correct in holding that the transaction of transfer of shares by the independent corporate entity was assessable to capital gain tax. Therefore, the substantial questions of law which arise for our consideration are all decided in favour of the respondent/revenue and against the appellant/assessee. Accordingly, the appeal is dismissed.

The decision of Bombay High Court cannot be held to be final position of law and the matter is still pending before the Supreme Court.

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PUNJAB AND HARYANA HIGH COURT

CIT V. ASHWANI CHOPRA (2013) 352 ITR 620 (P&H).

Summarised Judgement

In that case the assessing officer found that the assessee (Group A) had received compensation from Group B at the time of partition of properties of group of M/s. Hind Samachar Ltd. and that the said amount has been kept in fixed deposits as per the orders passed by the High Court as well as by the Supreme Court.

The assessing officer considered the family settlement and found that 8.56% of Rs. 24 crores of compensation is the share of the assessee and accordingly, levied long term capital gain on the said amount.

The CIT (A) upheld the action of the assessing officer which was subsequently affirmed by the Tribunal.

Court Decision:

In view of the aforesaid principles of law, we find that the payment of Rs.24 crores to Group A is to equalize the inequalities in partition of the assets of M/s Hind Samachar Ltd. The amount so paid is immovable property. If such amount is to be treated as income liable to tax, the inequalities would set in as the share of the recipient will diminish to the extent of tax.

Since the amount paid during the course of partition is to settle the inequalities in partition, therefore deemed to be immovable property. Such amount is not an income liable to tax. Thus, the amount of owelty i.e. compensation deposited by Group B is to equalize the partition represents immovable property and will not attract capital gain.

The argument that the assessee is liable to tax being interest on cash, suffice it to say, that such question or fact does not arise from the orders of the Tribunal. Consequently, the question of law is answered against the Revenue and in favour of the assessee leading to the dismissal of appeal though on different grounds.

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MADRAS HIGH COURT

COMMISSIONER OF INCOME TAX V. KAY ARRT ENTERPRISES 299 ITR 348

Summarised Judgement

Question of Law:

(i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the family arrangement as arrived by the assessee to rearrange the share holdings to avoid possible litigation themselves will not attract Capital Gains Tax under the Income-tax Act, 1961 ?

(ii) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that, the re-arrangement of share holdings in the company to avoid possible litigation among family members to be a prudent arrangement, the same cannot be held as a transfer of shares which is exigible to Capital Gains Tax ?"

It held that transfer of shares by way of family arrangement would not amount transfer and therefore would not attract capital gain tax.

Court Decision:

In the instant case also, the Tribunal found that the re-arrangement of shareholdings in the company to avoid possible litigation among family members is a prudent arrangement which is necessary to control the company effectively by the major share holders to produce better prospects and active supervision or otherwise there would be continuous friction and there would be no peace among the members of the family. Such a family arrangement intended either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour cannot be concluded as any other dealings between strangers, as such a family arrangement is for the interest of the family and for the harmonious way of living.

Therefore, such a re-alignment of interest by way of effecting a family arrangement among the family members would not amount to transfer.

Hence, the Tribunal has righly found that the impugned transfer of shares by way of family arrangement would not attract Capital Gains Tax, as the same is a prudent arrangement to avoid possible litigation among the family members and is made voluntarily and not induced by any fraud or coercion and therefore, cannot be doubted.

In view of the settled propositions of law, we hold that the Tribunal was justified in arriving at the conclusion that the family arrangement among the assessees does not amount to any transfer and hence, not exigible to capital gains tax.

Accordingly, finding no substantial question of law arises for our consideration in these appeals, the same are dismissed. Consequently, connected miscellaneous petitions are also dismissed.

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KARNATAKA HIGH COURT

CIT VS. M/S. MILLENNIA DEVELOPERS (P) LTD - 19-11-2018

Summarised Judgement

Facts of the Case:

The assessee is a private limited company carrying on the business as a developer/builder. It commenced a project known as woodsvage at Nandidurga Road, Bangalore. It constructed 25 flats.

In respect of the Assessment Year 2003-2004, the assessee filed the return of income claiming a sum of Rs.6,03,08,000/- as bad debts, which are written off.

The Assessing Officer disallowed the claim for bad debts. Aggrieved by the same, an appeal was filed before the CIT (Appeals)-VI, Bangalore, which was allowed. The claim of the assessee was allowed and the addition was deleted.

The plea of the assessee is that it is a private limited company consisting of two Directors. That even though there was a partition effected between the brothers of one of the Directors, the other brothers were demanding a share in the properties.

One of such properties, standing in the name of the Director, was located at No.78, Nandidurga Road, Bangalore, which was purchased by the assessee-Company consisting of the Director shareholders. The entire property was divided into three blocks.

Thereafter, an order was passed under Section 171 of the Income Tax Act, 1961 (Act for short). A copy of the family arrangement dated 05.08.2002 and partition deed dated 18.03.2003 were also filed along with the return of income.

The Assessing Officer came to the conclusion that it cannot be said that the balance of sale consideration is not recoverable. That the only ground that there could be future disputes/quarrels/ differences between the members of HUF cannot constitute a ground to hold that the same are bad debts. That the future disputes are only apprehended and it is not a definite event. That even before the debt became due, it came to be written off for the very same year in which the debt arose. Therefore, he came to be conclusion that all these are created documents and hence, disbelieved the case of the assessee.

The CIT (Appeals) considered the documents produced by the assessee. In terms of the partition effected, it held that the assessee came to know that the debts could not be recovered.

That the family arrangement has been made only to avoid future disputes between the family members since some of them were Directors of the assessee-Company.

It was of the view that a debt may become bad and irrecoverable either by an order of the court of law or by the act of contracting parties. That in the normal circumstance, a creditor tries to get back the loan amount, but when he fails to get, he writes it off.

However, in exceptional circumstances, the creditor may himself write off the bad debt. That there is no provision under the Act which postulates any situation where such an act cannot be performed by the assessee.

Therefore, the appeal was allowed and the order of the Assessing Officer being reversed, relief was granted to the assessee.

Therefore, in the facts and circumstances of the case, it can be clearly seen that the reason for entering into a family arrangement was with the hope to avoid all future disputes and litigations inter se between the members of the HUF. It is for this reason, the family arrangement was entered into. Therefore, it cannot be said that it is a colorable device and, therefore, the allowance should not be granted to the assessee.

With regard to colorable device adopted by the assessee, we find strength from the judgment of the Supreme Court in the case of commissioner of income tax, gujarat vs. A.raman and co., reported in (1968) 67 ITR 11 wherein, it was held as follows: But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under section 147(b) may be made out. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited.

A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations or morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statues may not, except on peril of penalty, be violated, but it may lawfully be circumvented.

Court Decision:

In the circumstances, we do not find any ground to interfere with the orders of the CIT (Appeals) as well as the Tribunal. Therefore, the first substantial question of law in ITA No.734 of 2009 is answered by holding that both the authorities were right in holding that the amount claimed as bad debts to an extent of Rs.6,03,08,000 should be treated as bad debts.

Insofar as the Circular is concerned, we are of the view that the contentions of the Revenue cannot be accepted. The Circular clearly suggests that all pending appeals should be withdrawn. Merely relying on the first sentence of the Circular, that it pertains only with regard to filing of appeals on the issue of allowability of bad debts that are written off as irrecoverable cannot be accepted. The matter pertains to grant of disallowance with regard to bad debts. Hence, even insofar as the Circular is concerned, the appeal would have to be dismissed.

Both the substantial questions of law raised in ITA No.734 of 2009 are, therefore, answered against the Revenue and in favour of the assessee.

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MADRAS HIGH COURT

CIT V. KAY ARRT ENTERPRISES 299 ITR 348:

Summarised Judgement

It held that transfer of shares by way of family arrangement would not amount transfer and therefore would not attract capital gain tax.

The court held: "the Tribunal had rightly found that the transfer of shares by way of family arrangement would not attract capital gains tax, as the same was a prudent arrangement to avoid possible litigation among the family members and was made voluntarily and not induced by any fraud or coercion and therefore, could not be doubted. The Tribunal was justified in arriving at the conclusion that the family arrangement among the assessee did not amount to any transfer and hence was not exigible to capital gains tax."

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SUPREME COURT

MANGAMMAL THULASI VS. T.B. RAJU - 19-04-2018

Summarised Judgement

Hindu Succession Act, 1956 (HUF Law): U/s 29-A of the TN Amendment, only daughters of a coparcener who were not married at the time of commencement of the amendment of 1989 are is entitled to claim partition in the Hindu Joint Family Property. Married daughters are not coparceners and are not entitled to institute suit for partition and separate possession.

Any property inherited upto four generations of male lineage from the father, father’s father or father’s father’s father i.e. father, grand father etc., is termed as ancestral property. In other words, property inherited from mother, grandmother, uncle and even brother is not ancestral property. In ancestral property, the right of property accrues to the coparcener on birth. The concept of ancestral property is in existence since time immemorial.

In the State of Tamil Nadu, in order to give equal position to the females in ancestral property, in the year 1989, the State Government enacted the Hindu Succession (Tamil Nadu Amendment) Act, 1989 effective from March 25, 1989 which brought an amendment in the Hindu Succession Act, 1956 (for brevity “the Act”) by adding Section 29-A vide Chapter II-A under the heading of Succession by Survivorship.

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SUPREME COURT

DANAMMA SUMAN SURPUR VS AMAR - 01-02-2018

Summarised Judgement

The very factum of birth in a coparcenary creates the coparcenary. Therefore the sons and daughters of a coparcener become coparceners by virtue of birth. The amendment to s. 6 of the Hindu Succession Act, 1956 in 2005 statutorily recognizes the rights of coparceners of daughters as well since birth. Consequently, married daughters can be said to be the coparceners in the HUF and are entitled to the ancestral property even if they were born prior to the amendment to the Hindu Succession Act.

Section 6, as amended, stipulates that on and from the commencement of the amended Act, 2005, the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son.

It is apparent that the status conferred upon sons under the old section and the old Hindu Law was to treat them as coparceners since birth. The amended provision now statutorily recognizes the rights of coparceners of daughters as well since birth.

The section uses the words in the same manner as the son. It should therefore be apparent that both the sons and the daughters of a coparcener have been conferred the right of becoming coparceners by birth. It is the very factum of birth in a coparcenary that creates the coparcenary, therefore the sons and daughters of a coparcener become coparceners by virtue of birth.

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ITAT AHMEDABAD

GYANCHAND M. BARDIA V. ITO [2018]

Summarised Judgement

The assessee claimed that gift of certain amount received from his Hindu undivided family (HUF) was exempt from tax under section 56(2)(vii). However, the Assessing Officer held that the term 'relative' in Explanation (e) to Section 56(2)(vii) does not include HUF as donor and, therefore, added the impugned amount to assessee's income under Section 68.

On further appeal, the Tribunal held in favour of revenue that as per Explanation to Section 56(2)(vii) members of an HUF are its relatives. Therefore, if HUF receives any sum from any of its member, such sum shall not be chargeable to tax. However, in vice-versa cases when member receives any sum from the HUF, same would be chargeable to tax as the term ‘relatives’ defined under said Explanation does not include HUF as a relative of such individual. The legislative intent is very clear that an HUF is not to be taken as a donor in case of an individual recipient. Thus, the assessee's plea of having received a valid gift from his HUF was rightly declined and impugned addition was to be upheld.

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HIGH COURT HYDERABAD

PENDURTHI CHANDRASEKHAR V. DCIT [2018]

Summarised Judgement

In the Instant case, additions were made under section 68 on the grounds that assessee had failed to show why, without any occasion, Rs. 73 Lakhs had been gifted by the maternal aunt without any consideration. The appellate authorities also upheld the action of the Assessing Officer. On further apeal, the High Court held in favour of assessee that an occasion is not necessary to accept a gift from a relative. Section 56 does not envisage any occasion for a relative to give a gift, it was almost impermissible for any authority and even  for the Court to import the concept of occasion and develop a theory based on such concept.

The Court further held that when donor had given a confirmation letter that she had transferred Rs. 73 lakhs to her nephew as a gift out of natural love and affection, the AO should not have further doubted her. The donor in instant case was assessee's own maternal aunt and was covered within the definition of 'relative' defined under explanation to section 56(2)(v). Therefore, unexplained addition under section 68 with respect to gift of Rs. 73 lakh received by assessee from his maternal aunt was to be deleted.

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