Kunal R. Gupta vs. ITO (ITAT Mumbai)

The Tribunal had to consider whether the property acquired by assessee through memorandum of family arrangement cum compromise deed dated 03-6-2004 is to be accepted as genuine, so as to adopt the cost of acquisition as on 01-04-1981 for the purpose of computation of long term capital gain and consequently the income is to be assessed under long term capital gain or to be taxed under the head of income from other sources.

The AO and CIT(A) rejected the claim inter alia on the basis that normally, a dispute is a prelude to a family arrangement. It was held as in the case of the present assessee no such pre-existing dispute has been shown to exist and no claim had been made by the assessee before any court of law or before any other authority in this context, there was no valid settlement.

It was also held that an agreement as to division of property where the heir gives up property to which he has undoubted right without consideration is not covered under the term of Family Settlement.

HELD by the Tribunal allowing the appeal of the assessee:

(i) This family arrangement cum compromise deed was documented by way of Memorandum in writing and this is registered in the presence of witnesses. The memorandum of family arrangement cum compromise clearly states about the dispute, which was never disputed by the Revenue.

(ii) I am of the view that it is settled law that when parties entered into family arrangement, validity of the family arrangement is not to be judged with reference to whether the parties should raised dispute or rights or claimed rights or a certain properties had in law any such right or not. This position is explained by Hon’ble Supreme Court in the case of Maturi Pullaiah v. Maturi Narasimham, AIR 1966 SC 1836 (SC), wherein Hon’ble Court as under:-

“17. Briefly stated, though conflict of legal claims in present or in future 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.” (p. 1841)

(iii) From the above judgment of Hon’ble Supreme Court, it is clear that even the conflict of legal claims in present or future is a condition for validity of family arrangement, it is not necessary so. Even future dispute if any possible that can be the reasons for family settling the property by way of family arrangement. Even, Hon’ble Supreme Court in the case of Kale vs. Deputy Director of Consolidation, AIR 1976 (SC) 807, as laid down the principles which are essential 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;” (p. 813)

(iv) I find from the authority referred by the learned for the assessee of Hon’ble Madras High Court in the case of CIT vs AL Ramanathan (2000) 245 ITR 494, wherein Hon’ble court has clearly held that family arrangement should be bonafide one so as to resolve the family dispute and rival claims by a fair and equitable division of properties between various members of the family. Before me, the learned Sr. Departmental Representative could not point out that the present memorandum of family arrangement cum compromise deed dated 03-06-2004 is not a bonafide or it is obtained under any fraud or coercion. There is no such challenged to this family arrangement.

(v) I have gone through the order of CIT(A) and noticed that the only casting doubt that there is no dispute over the title of the property and there is no right in third person over sale of property by law. This proposition has been settled by Hon’ble Supreme Court in the case of Maturi Pullaiah (Supra), wherein it is stated that even if there is no right of the property for any of the family members he can claim the same by way of family settlement. Similarly, Hon’ble Madras High Court in the case of CIT vs. R Poonammal (1987) 164 ITR 706 (Mad) held that:-

“. . . the family arrangement had been brought about by the intervention of the panchayatdars and this clearly shows 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 17th, 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.” (p. 707)

(vi) From the above facts of the present case and the proposition of law discussed above through various case laws, I am of the view that it is settled law that when parties entered into 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 to certain properties had in law any such right or not.

(vii) A perusal of the record in the present case before me, establishes that a dispute was there in the family as per memorandum of family arrangement cum compromised deed and family arrangement was arrived at was documented much prior to the sale of the property in 2011. The family arrangement was made in 2004. In view of these, I treat the family arrangement as genuine and distribution of sale consideration according to the same is to be assessed as capital gains.