Tapuriah Jain & Associates

Al. Ramanathan vs Income-Tax Officer

Income Tax Appellate Tribunal - Madras

Al. Ramanathan vs Income-Tax Officer on 14 December, 1990

Equivalent citations: 1991 37 ITD 55 Mad

Bench: T Rangarajan, A Satyanarayana

ORDER T.N.C. Rangarajan, Judicial Member

1. This appeal is directed the assessment of capital gains.

2. The undisputed facts are as follows. The assessee is a Hindu Undivided Family. The Karta of this joint family is Sri AL. Ramanathan, who is the son of Sri L. Alagusundaram Chettiar. On 12-4-1952 there was a partition between Alagusundaram Chettiar and his brother L. Narayanan Chettiar. Thereafter, on 12-9-1955 there was a partition in the joint family of which Ahgusundaram Chettiarwas the Karta and his three sons, AL. Lakshmanan,  AL. Periannan and AL. Ramanathan were the other coparceners. Subsequently disputes arose between AL. Ramanathan and his son R. Lakshmanan on the one side and Alagusundaram Chettiar, AL. Lakshmanan and Periannan Shanmugam on the other side. The claim made by the assessee's side was that the division effected on 12-9-1955 was not fair and in addition there were also quarrels about the management of the company Mahalakshmi Textile Mills Ltd. in which all of them had shares. The disputes led to civil and criminal proceedings against each other. Since the disputes affected the family peace and honour, a rapprochement was made through two Panchayatdars, Sri R.M. Muthupalaniappa Chettiar and Sri S.P.S. Subramanian Chettiar. An interim agreement was entered into on 19-8-1980 under which the assessee's side was to receive Rs. 8 lakhs and certain lands in Kothagai village and in return they were required to transfer half of their share-holdings in Mahalakshmi Textile Mills Ltd., Lakshmi Lines Ltd. and Charlie Engg. Co. Ltd. to the other side subject to full settlement later. This arrangement was also conditional upon re-transfer of all these assets to each other in case final settlement fell through. However, on 20-6-1981 a final agreement was drawn up recording the oral agreement dated 6-5-1981 under which the assessee's side was to receive a further amount of Rs. 11 lakhs which was paid on 19-6-1981 in addition to Rs. 8 lakhs paid on 9-9-1980 and also keep the land transferred to them on 10-9-1980 as well as a brick chamber transferred by another registered transfer deed. In return, the other side was to retain the shares in Mahalakshmi Textile Mills Ltd., Lakshmi Lines Ltd. and Charlie Engg. Co. Ltd. etc. transferred by the assessee's side to them in accordance with the earlier agreement dated 19-8-1980. Two further clauses mentioned that a sum of Rs. 5,46,781 due from the assessee's side to the other side was to be waived and a sum of Rs. 3 lakhs was paid to Smt. Unnamalai Achi, wife of AL. Ramanathan as Stridhan by the other side. It was further agreed that AL. Ramanathan should resign from the post of Secretary to the company, Mahalakshmi Textile Mills Ltd. and also retire from the firms, Lakshmi Plantations and Jayalakshmi Credit Corporation. Similarly the other side was to give up the Directorship in Mahalakshmi Textile Mills Employees' Co-operative Credit Society Ltd. and R. Unnamalai Achi was to retire from the firm, Rajalakshmi Credit Corporation.

3. On these facts, the assessee claimed that the agreements dated 19-8-1980 and 20-6-1981 should be taken as supplement to the earlier partition dated 12-9-1955 thus not amounting to a transfer under Section 47 or in the alternative as a family arrangement not amounting to a transfer such that the capital gains from these transactions could not be assessed to tax. Another stand taken by the assessee was that the consideration paid was not merely for the transfer of assets but also to avoid continuous friction and to buy peace from the psychological tension and that an appropriate amount had to be excluded in case capital gains is to be computed.

4. The Income-tax Officer rejected these contentions of the assessee on the ground that capital gains was deemed to be income and unless exemption was made such deemed income was chargeable to tax. He was also of the view that since the parties had held and enjoyed the properties under the earlier partition deed, they cannot put the clock back by re-distributing the assets and, therefore, the transactions amounted to a transfer of their title in respect of which capital gains was exigible to tax. He computed the capital gains at Rs. 5,00,583.

5. The assessee appealed and pressed the contention that the transactions did not amount to a transfer as they formed a family arrangement. It was also contended that the transaction was effected for obtaining control of the companies and hence the entire consideration did not refer to the transfer of any particular capital asset in respect of which capital gains could be taxed. The CIT(Appeals) however rejected these contentions by noting that the partition had been completed on 12-9-1955 and had been recognised under Section 171 of the Income-tax Act, 1961 and could not be re-opened beyond the period of limitation of three years prescribed under the Article 113 of the Limitation Act, 1963. He felt that the claim of family arrangement should not be countenanced because such a theory will open the flood-gates of tax avoidance as every transfer will be described as a family arrangement for avoiding gift-tax and capital gains tax. He further held that the transfer of the shares took effect only when it was registered with the company and such registration of the shares took place in two accounting years ended 31-3-1981 and 31-3-1982. He further noted that the actual consideration received by the assessee included also the extinguishment of debts and payment of amount to Unnamalai Achi so that the total consideration should be worked out to Rs. 28,05,985. He was of the opinion that 50% of this amount had to be brought to tax in the assessment year under consideration and after giving notice to the assessee enhanced the capital gains assessable in this year to Rs. 10,03,725.

6. In the further appeal before us it was contended on behalf of the assessee that the transactions amounted to a family arrangement which courts have recognised in the case of CGT v. Pappathi Anni [1981] 127ITR 655 (Mad.), Ziauddin Ahmed v. CGT [1976] 102 ITR 253 (Gauhati), CIT v. R. Ponnammal [1987] 164 ITR 706 (Mad.), Kale v. Dy. Director of Consolidation [1976] 3 SCC 119 and by the Tribunal in the case of M.S. Mariappa v. GTO [1988] 25 ITD 53 (Mad.). It was submitted that since there was no transfer, there could be no capital gains eligible to tax. On the other hand, it was contended on behalf of the revenue that the claim that the transactions amounted to a family arrangement should not be accepted because it had not been proved to be so. According to the revenue, there were internal contradictions in the claim of the assessee particularly with reference to the conduct of the parties. It was submitted that in between the interim agreement dated 19-8-1980 and the final agreement dated 20-6-1981, the other side had transferred the land to the assessee on 10-9-1980 which the assessee had in turn sold on 6-2-1981 to strangers without waiting for the final agreement even though it was subject to re-transfer if the final agreement fell through. It was further pointed out that the document dated 10-9-1980 was registered as a gift settlement. According to the revenue, while the agreement dated 20-6-1981 stated that leave from 9-9-1980, an explanation had been called for on 5-5-1981, a day prior to the oral agreement dated 6-5-1981 calling for explanation for his recent actions as Secretary of the company thus belying the statement. It was also pointed out that Shri AL. Ramanathan had made a gift of diamonds to his sister out of the joint family funds which was inconsistent with the case that the parties were at loggerheads. It was argued that the family arrangement could be accepted only if it was bona fide and in view of the conduct of the assessee which showed trust in each other in their other transactions in spite of the alleged quarrels, the agreements could not be accepted as a genuine family arrangement and the claim should be rejected as being made only for the purpose of avoiding tax on capital gains particularly when they had transferred title to the properties which they had enjoyed for decades.

7. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed. The essentials of a family settlement and the principles governing the existence of the same have been succinctly summarised in llalsbury's Laws of England, Vol. 17, Third Edition, pp. 215-216 as follows :-

A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family 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.

The agreement may be implied from a long course of dealing, but it is more usual to embody or to effectuate the agreement in a deed to which the term 'family arrangement' is applied. Family arrangements are governed by principles which are not applicable to dealings between strangers. The Court, when deciding the rights of parties under family arrangements or claims to upset such arrangements, considers what in the broadest view of the matter is most for the interest of families, and has regard to considerations which, in dealing with transactions between persons not members of the same family, would not be taken into account. Matters which would be fatal to the validity of similar transactions between strangers are not objections to the binding effect of family arrangements.

This statement of the law has been affirmed by our Supreme Court in the case of Kale (supra). This position has been reiterated by the Madras High Court in the case of R. Ponnammal (supra). In the present case, the existence of disputes and the fact that the arrangement was made in consultation with Panchayatdars are not in dispute. Every such arrangement will necessarily result in realignment of interest in several properties. But yet, Courts have recognised that such realignment of interest would not amount to a transfer. For instance, in the case of Ziauddin Ahmed (supra), as in the present case, shares in a company were all transferred to one party to enable the proper management of the company and it was recognised as a family arrangement not amounting to a transfer. This arrangement appears to be bona fide inasmuch as it has been shown to have been made voluntarily and not induced by any fraud or collusion. 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. We find this family arrangement to be in conformity with the well-settled propositions regarding the binding effect and essentials of family arrangement set out in page 711 of 164 ITR in the case of Ponnammal by the Madras High Court. The fact that the document transferring the land in pursuance of the family arrangement was described as a gift settlement for stamp duty purposes, cannot conclude the issue whether the entire transaction amounted to a family arrangement.

8. The Appellate Tribunal has held in the case of Mohd. Haroon Japanwala v. ITO [1987] 22 ITD 61 (Delhi) that family arrangement not being transfer would not give rise to chargeable capital gains. We are not persuaded to differ from this view.

9. It was contended on behalf of the revenue that Section 47 specifically excluded distribution of assets on partition and if this transaction was treated as a supplementary partition and dated back to the original partition, then the assessee should be prepared for change in the incidence of taxation for all the intervening years. This contention proceeds on a mis-apprehension that the transaction is a supplementary partition or that it dates back to the original partition. The transaction of a family arrangement does not date back but only re-distributes the rights prospectively without effecting any transfer. The assumption underlining the family arrangement is that the parties had antecedent rights in all the assets and this proposition of law leads to the legal inference that the family arrangement does not amount to any transfer of title. The other contention of the revenue was that since a family arrangement was not listed in Section 47, it could not be excluded from the application of Section 45. This contention also cannot be accepted because Section 47 excludes certain transfers and since the family arrangement is not held to be a transfer by the courts it would not require to be listed in Section 47 unlike a partition which is a transfer and had to be specifically excluded from Section 45. Moreover, since Section 45 can apply only to capital gains arising from transfers, family arrangements fall outside the scope of Section 45 itself in view of the legal position that a family arrangement is not a transfer at all.

10. The Revenue relied upon the decision in the case of CIT v. Smt. Vimla Lal [1983] 143 ITR 16 (All.). But that decision is of no assistance to us as there was no claim in that case that the transaction amounted to a family arrangement and not a transfer. Similarly, there was no such claim in the case of Nanjiah Setty v. CGT [1964] 54 ITR 425 (Mys.) either, which is relied on by the revenue. The contention of the revenue that the acceptance of this claim will induce other assesses to make similar claims is of no significance, for, each case has to be decided on the merits of the claim as to whether there was a genuine family arrangement and such claims cannot be condemned without scrutiny merely because there will be no incidence of tax if the claims accepted. In the circumstances, we are of the considered opinion that the transaction of the assessee being a family arrangement did not amount to a transfer and, therefore, there was no chargeable capital gains arising from that transaction. The capital gains brought to tax by the authorities below are deleted from the total income of the assessee and the ITO is directed to re-compute the total income.

11. The appeal is allowed.