Transfer of shares or other interests pursuant to a family arrangement is not a transfer and hence not liable to capital gains tax.
Karnataka High Court
CIT vs. R. Nagaraja Rao
Case Number: ITA 3048/2005
Date of Judgment: 19-Mar-2012
The assessee, Shri R. Nagaraja Rao, was party to a family arrangement. Each of the parties to the arrangement held personal properties as well as family properties and shares in different business concerns. A dispute arose between the parties, which was referred to arbitration. As per the terms of the settlement suggested by the arbitrator, the assessee had to resign from a partnership firm and transfer his interest to another family member. Accordingly, the assessee transferred the share for a consideration of Rs. 35000, being capital balance of the firm. In turn, the other family member also transferred shares held by him in favour of the assessee.
The Assessing officer (AO) treated the above arrangement as a transfer, and held that the assessee was liable to pay capital gains tax. The CIT(A) confirmed the order of the AO. However, ITAT ruled in favour of assessee and held that the arrangement could not be treated as transfer for capital gain purposes because it was a family arrangement. For this purpose, IT AT relied on SC ruling in Ram Charan Das vs. Girija Nandini Devi (AIR 1966 SC 323) and Gauhati HC ruling in Ziauddin Ahmed vs. Commissioner of Gift Tax (1O2 ITR 253). Revenue appealed before Karnataka HC against IT AT’s order.
HC referred to its own decision in Commissioner of Gift Tax vs. K.N. Madhusudan, dated Sept 6, 2010. In that case, it was held that the word ‘transfer’ does not include partition or family settlement. HC observed that “it is well settled that a partition is not a transfer. What is recorded in a family settlement is nothing but a partition. Every member has an anterior title to the property which is the subject matter of a transaction, that is, partition or a family arrangement. So there is adjustment of shares, crystallization of the respective rights in family properties and therefore it cannot be construed as a transfer in the eyes of law.”
HC further observed that IT AT, on a proper consideration of the material on record, had categorically held that the transaction in question was a family arrangement. Thus, HC concluded that there was no ‘transfer’ in the present case and hence, no liability to pay capital gains tax arose.