MADRAS HIGH COURT
CIT V. KAY ARRT ENTERPRISES 299 ITR 348
Summarised Judgement (Scroll for Complete
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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Complete Judgement
MADRAS HIGH COURT
CIT V. KAY ARRT ENTERPRISES 299 ITR 348
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 06.07.2007
CORAM
THE HON'BLE MR.JUSTICE P.D.DINAKARAN
AND
THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA
T.C.(A) Nos.520 to 522 of 2007
The Commissioner of Income Tax
Coimbatore. ..Appellant
in all T.Cs.
Vs.
M/s.KAY ARR Enterprises
No.694
Avanashi Road
Coimbatore. ..Respondent
in TC.520/07
R.Jayanthi ..Respondent
in TC.521/07
K.Rajagopal (HUF) ..Respondent
in TC.522/07
Appeals under Section 260A of the Income Tax Act,
1961 against the order of the Income Tax Appellate Tribunal, Madras 'D' Bench
dated 26.7.2005 in ITA Nos.930, 928 and 931/Mds/2000 for the assessment year
1996-97.
For
Appellant : Mr.J.Narayanasamy, Stg.Counsel for IT
J U D G M E N T
(Delivered by P.D.DINAKARAN,J.) The Revenue has
preferred the above tax case appeals against the common order of the Income Tax
Appellate Tribunal dated 26.7.2005 made in ITA Nos.930, 928 and 931/Mds/2000,
raising the substantial questions of law, viz., "(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 ?"
under the following facts and circumstances of the
case, which are common in all the three appeals.
2. The assessment year involved in these appeals is
1996-97. There was a transfer of shares between the assessee-firm, which
consists of partners, who are family members, in that, certain new shares were
acquired in exchange of old shares, as also some consideration in cash.
According to the assessees, the transfer was consequent to a family
arrangement. But, the Assessing Officer, after analysing the facts of the case
and the legal aspects on the same, concluded that there was indeed a transfer
involved and thus, subjected the Capital Gains Tax. Aggrieved by the same, the
assessees filed appeals before the Commissioner of Income-tax (Appeals), who
upheld the orders of the assessing officer. Exasperated by the same, the
assessees preferred second appeals before the Tribunal and the Tribunal, by the
impugned common order dated 26.7.2005, allowed the appeals on the ground that
the re-arrangement of share holdings 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 and accordingly, held that such family
arrangement cannot be held as transfer, which is exigible to Capital Gains Tax.
Hence, the present appeals by the Revenue raising the substantial questions of
law referred to above.
3. The core issue that arises for consideration in
these appeals is whether the transfer of shares pursuant to the family
arrangement to avoid a possible litigation among the family members would
attract the Capital Gains Tax.
4. The law on the point is well settled by the
decisions of the Apex Court in Maturi Pullaiah and another v. Maturi Narasimham
and others [A.I.R. 1966 (SC) 1836], and in Kale and Others v. Deputy Director
of Consolidation and others [A.I.R. 1976 (Supreme Court) 807] which are
followed by this Court in Commissioner of Income-tax v. Ponnammal [(1987) 164
I.T.R. 706], and in Commissioner of Income-tax v. AL.Ramanathan [(2000) 245
I.T.R. 494]. It is a settled law that when parties enter into a family
arrangement, the validity of the family arrangement is not to be judged with
reference to whether the parties who raised disputes or rights or claimed
rights in certain properties had in law any such right or not.
5.1. In Maturi Pullaiah and another v. Maturi
Narasimham and others [A.I.R. 1966 (SC) 1836], cited supra, the Apex Court has
held as follows:
" Briefly stated, though conflict of legal
claims in praesenti or de futuro is generally a condition for the validity of a
family arrangement, it is not necessarily so. Even bona fide disputes, present
or possible, which may not involve legal claims will suffice. Members of a
joint Hindu family may, to maintain peace or to bring about harmony in the
family, enter into such a family arrangement. If such an arrangement is entered
into bona fide and the terms thereof are fair in the circumstances of a
particular case, courts will more readily give assent to such an arrangement
than to avoid it."
5.2. In Kale and Others v. Deputy Director of
Consolidation and others [A.I.R. 1976 (Supreme Court) 807], cited supra, the
Apex Court has laid down the propositions which are the essentials of a family
arrangement and the same read as follows:
" (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.
5.3. This Court, in Commissioner of Income-tax v.
Ponnammal [(1987) 164 I.T.R. 706], referred supra, held that, "... the
family arrangement had been brought about by the intervention of the panchayatdars
and this clearly showed that the sons and daughters of the assessee were laying
claims to the property which the assessee got under the will of her father and
it was not relevant at the time when the family arrangement was entered into to
find out as to whether such claims if made in a court of law would be sustained
or not. If the assessee found it worthwhile to settle the dispute between
herself, her sons and daughters by making the family arrangement, the said
arrangement could not be ignored by a tax authority. In view of the finding of
the Tribunal, the family arrangement dated December 17, 1971, had to be held to
be a valid piece of document and, hence, the Tribunal was right in its view
that no transfer of property was involved within the meaning of section 2(xxiv)
of the Gift-tax Act and, hence, there was no liability to gift-tax either under
section 4(1)(a) or under section 4(2) and consequently no question of inclusion
of the income of the minor in the hands of the assessee would also arise."
Accordingly, in the said case, applying the
principles laid down in the decisions of the Apex Court and the decision of
this Court referred supra, this Court held as follows:
" The Tribunal, on the facts, found that the
family arrangement involved in this case appears to be a bona fide one inasmuch
as it has been shown to have been made voluntarily and not induced by any fraud
or collusion and the conduct of the parties referred to by the Revenue is
consistent with the bona fide family arrangement particularly when it was
arrived at in the presence of panchayatdars. So, the family arrangement is a
bona fide one and it was effected to dissolve the family dispute.
6.1. 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.
6.2. 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.
To
1. The Assistant Registrar Income Tax Appellate
Tribunal "D" Bench Madras.
2. The Secretary Central Board of Direct Taxes New
Delhi.
3. The Commissioner of Income Tax (Appeals)
Coimbatore.
4. The Joint Commissioner of Income tax Special
Range I Coimbatore.
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ABHISHEK 04012020
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