The issue before the appellate tribunal was “ That on the facts and circumstances of the case and in Law, the A.O./CIT(A) erred in not holding that the amount received on re-alignment of shareholding pursuant to family settlement arrangement was not liable to capital gains tax under section 45 of the Income Tax Act, 1961.”
The assessee contended that the impugned amount of Rs.93,88,81,656/- received by the assessee through Family Settlement is an Owelty in nature and is, therefore, not taxable and is liable to be excluded from the total income so offered for taxation. Considering the various submissions the Tribunal held that ;
1) The family settlement must be a bonafide 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 arrangement 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. Here also, a distinction should be made between a document containing the terms and recitals 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 fall within the mischief of s. 17(2) of the Registration Act and is, therefore, not compulsorily registerable.
(5) The members who may be parties to the family arrangement must have some antecedent title, claim or interest even a possible claim in the property. It 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 9 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 bonafide disputes, present or possible, which may not involve legal claims are settled by a bonafide family arrangement which is fair and equitable the family arrangement is final and binding on the parties to the settlement.”
Owelty is an equalisation charge. It is the amount that one co-owner must pay to another after a Lawsuit to Partition real estate, so that each co-owner receives equal value from the property.
The Webster Law Dictionary defines Owelty “A Lien created or a peculiar sum paid by Order of the Court to effect an equitable partition of property when such partition in kind would be impossible, impracticable or prejudicial to one of the parties of an Owelty Award.” The legal definition of the Owelty defines the difference which is paid or secured by one coparcener to another, for the purpose of equalising the partition.
Family Arrangements involve settlement of disputes, relating to family property in which Members must have an antecedent title or claim. Family Settlement Memorandum, once acted upon, is binding on the parties despite being unregistered. The literal interpretation of Family Settlement would imply an existence or anticipation of a dispute between the Members of Family.
From the taxation perspective, the Family Settlement is in the nature of ‘Partition’ which is not regarded as Transfer’ under section 2(47). When there is no transfer, there is no capital and, therefore, no tax on capital gain is liable to be paid. Using Family Settlement for the purpose of tax planning is not outside the purview of Law. However, Family Settlement should always be undertaken with a bonafide intention of Resolution of Disputes in a family and that it results in tax planning should be an extra benefit and not a primary concern. She has not received this amount as owelty as there were no division of assets. She had to forego her assets for a consideration and she did not receive any asset/right in reciprocation nor was the money paid for equalisation of the interest. Thus, the money received by her though indirectly were the sale consideration of transfer of her rights and not owelty. Thus, it is clear that assessee received the impugned amount on sale of the shares. Therefore, it would be transfer of capital asset within the meaning of Section 2(47 of the Act .Accordingly the order of lower authorities affirmed .( ITANo.1286/Del./2020 dt.28-9 -2020 ) (AY. 2009-10)