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Tax Publishers Soni Sonu Mirchandani v. ACIT [ITA No. 1286/Del/2020, dt. 28-9-2020] : 2020 TaxPub(DT) 3874 (Del-Trib) Alleged Owelty in a Family Settlement vs. Capital gains *Facts:* Assessee was in possession of 59,998 shares of a listed entity called Guviso Holdings Ltd. and 4,978 shares of Iwai Electronics Ltd. which was received as a gift from her father and sons. The said shares were sold by the assessee to one Gulu Mirchandani for a consideration of Rs. 93.88 crores and thus capital gains was suo moto returned in the income as capital gains for Rs. 92.33. Arising out of the share sale deal it was also agreed that certain compounding fees paid for Excise duty liabilities of the entities would be settled by the purchaser which would exonerate the assessee from criminal proceedings. This compounding fee Excise duty payment was also considered as part of the sale consideration of the shares by the assessing officer. Assessee while offering the capital gains claimed indexation from the date of original holding of the shares by her father and sons, the assessing officer did not agree with this. On higher appeal the Commissioner (Appeals) allowed the indexation benefit but declined to admit that the Compounding fee Excise duty payment was not capital gains. Aggrieved the assessee went to ITAT wherein they raised a fresh issue before the ITAT that the receipt of Rs. 93.88 crores was not taxable capital gains in the first place and it was owelty which had risen in the course of a family settlement. The case was remanded to the assessing officer for fresh consideration where in the assessing officer once again did not agree with the claim that the capital gains had risen out of family settlement amount as owelty. This was upheld by the Commissioner (Appeals). On second round of appeal the assessee went to the ITAT. Held against the assessee that the claim was not owelty received in a family settlement. It was taxable capital gains for alienation of the shares. In this case there was no manifestation of any antecedent title on the property by the family members involved in the settlement besides no manifestation of any feud etc. or claim on any title holding as well which also worked against the assessee. Assessee relied on the following cases where in it was held that amount received on a family settlement is not transfer subject to capital gains -- Ram Charan Cas v. Girija Nandini Devi & Ors. AIR 1966 SC 323. Dewas Cine Corporation (1968) 68 ITR 240 (SC) : 1968 TaxPub(DT) 304 (SC). CIT v. Bankey Lal Vaidya (1971) 79 ITR 594 (SC) : 1971 TaxPub(DT) 316 (SC) CIT v. Kay ARR Enterprises (2008) 299 ITR 348 (Mad) : 2008 TaxPub(DT) 795 (Mad-HC) SLP dismissed by Hon'ble Supreme Court. Ravinder Kaur Grewal & Ors. v. Manjit Kaur & Ors. [CA. No. 7764 of 2014, dated 31-7-2020] CIT v. Sachin P. Ambulkar 42 taxmann dot com 22 (Bom) CIT v. R. Nagaraja Rao (2013) 352 ITR 565 (Karnataka) : 2012 TaxPub(DT) 2079 (Karn-HC) CGT v. K.N. Madhusudan [GTA Nos.1 & 2/2008 (Karnataka HC)] CIT v. Ashwani Chopra (2013) 352 ITR 620 (P&H-HC) : 2013 TaxPub(DT) 786 (P&H-HC) Shri Govind Kumar Khemka, Delhi v. ACIT, Circle-47(1), New Delhi, dated 16-9-2019 in ITA No. 2963/Del./2019 : 2019 TaxPub(DT) 6433 (Del-Trib) The compounding fee for Excise duty liability was not consideration which arose on relinquishment of the shares to the assessee and she did not receive the same was impressed upon by the assessee before the ITAT who refused to concur. *Editorial Note:* (A) Contents of a family settlement are explained in this verdict as quoted from Kale v. Dy. Director of Consolidation AIR 1976 SC 807 "In other words to put the binding effect and the essentials of a family settlement in a concretized form, the matter may be reduced into the form of the following propositions :-- (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; (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 section 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 bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable the family arrangement is final and binding on the parties to the settlement." (B) What is an Owelty is described in this decision "10.5. We may note that Owelty is an equalisation charges. 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. 10.5.1. 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. 10.5.2. 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 bona fide 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.

Tax Publishers

Soni Sonu Mirchandani v. ACIT [ITA No. 1286/Del/2020, dt. 28-9-2020] : 2020 TaxPub(DT) 3874 (Del-Trib)

Alleged Owelty in a Family Settlement vs. Capital gains

Facts:

Assessee was in possession of 59,998 shares of a listed entity called Guviso Holdings Ltd. and 4,978 shares of Iwai Electronics Ltd. which was received as a gift from her father and sons. The said shares were sold by the assessee to one Gulu Mirchandani for a consideration of Rs. 93.88 crores and thus capital gains was suo moto returned in the income as capital gains for Rs. 92.33. Arising out of the share sale deal it was also agreed that certain compounding fees paid for Excise duty liabilities of the entities would be settled by the purchaser which would exonerate the assessee from criminal proceedings. This compounding fee Excise duty payment was also considered as part of the sale consideration of the shares by the assessing officer. Assessee while offering the capital gains claimed indexation from the date of original holding of the shares by her father and sons, the assessing officer did not agree with this. On higher appeal the Commissioner (Appeals) allowed the indexation benefit but declined to admit that the Compounding fee Excise duty payment was not capital gains. Aggrieved the assessee went to ITAT wherein they raised a fresh issue before the ITAT that the receipt of Rs. 93.88 crores was not taxable capital gains in the first place and it was owelty which had risen in the course of a family settlement. The case was remanded to the assessing officer for fresh consideration where in the assessing officer once again did not agree with the claim that the capital gains had risen out of family settlement amount as owelty. This was upheld by the Commissioner (Appeals). On second round of appeal the assessee went to the ITAT.

Held against the assessee that the claim was not owelty received in a family settlement. It was taxable capital gains for alienation of the shares.

In this case there was no manifestation of any antecedent title on the property by the family members involved in the settlement besides no manifestation of any feud etc. or claim on any title holding as well which also worked against the assessee.

Assessee relied on the following cases where in it was held that amount received on a family settlement is not transfer subject to capital gains --

Ram Charan Cas v. Girija Nandini Devi & Ors. AIR 1966 SC 323.

Dewas Cine Corporation (1968) 68 ITR 240 (SC) : 1968 TaxPub(DT) 304 (SC).

CIT v. Bankey Lal Vaidya (1971) 79 ITR 594 (SC) : 1971 TaxPub(DT) 316 (SC)

CIT v. Kay ARR Enterprises (2008) 299 ITR 348 (Mad) : 2008 TaxPub(DT) 795 (Mad-HC) SLP dismissed by Hon'ble Supreme Court.

Ravinder Kaur Grewal & Ors. v. Manjit Kaur & Ors. [CA. No. 7764 of 2014, dated 31-7-2020]

CIT v. Sachin P. Ambulkar 42 taxmann dot com 22 (Bom)

CIT v. R. Nagaraja Rao (2013) 352 ITR 565 (Karnataka) : 2012 TaxPub(DT) 2079 (Karn-HC)

CGT v. K.N. Madhusudan [GTA Nos.1 & 2/2008 (Karnataka HC)]

CIT v. Ashwani Chopra (2013) 352 ITR 620 (P&H-HC) : 2013 TaxPub(DT) 786 (P&H-HC)

Shri Govind Kumar Khemka, Delhi v. ACIT, Circle-47(1), New Delhi, dated 16-9-2019 in ITA No. 2963/Del./2019 : 2019 TaxPub(DT) 6433 (Del-Trib)

The compounding fee for Excise duty liability was not consideration which arose on relinquishment of the shares to the assessee and she did not receive the same was impressed upon by the assessee before the ITAT who refused to concur.

Editorial Note:

(A) Contents of a family settlement are explained in this verdict as quoted from Kale v. Dy. Director of Consolidation AIR 1976 SC 807

"In other words to put the binding effect and the essentials of a family settlement in a concretized form, the matter may be reduced into the form of the following propositions :--

(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;

(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 section 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 bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable the family arrangement is final and binding on the parties to the settlement."

(B) What is an Owelty is described in this decision

"10.5. We may note that Owelty is an equalisation charges. 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.

10.5.1. 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.

10.5.2. 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 bona fide 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.