By TIOL News Service

MUMBAI, APRIL 03, 2018: THE ISSUE BEFORE THE BENCH is - Whether family settlements entered into bona fide in order to maintain peace and harmony in the family are valid and binding on the tax authorities. YES is the answer.

Facts of the case:

The Assessee, an individual had filed his return for the relevant AY. During the assessment proceeding, the AO noted that the Assessee had declared receipt of 30% of consideration received in respect of sale of property as LTCG. Further, the Assessee had claimed that the said property was devolved on him in view of memorandum of family arrangement cum compromised deed to the extent of 30%. The other 30% share to the other brother Shri Vishal Rajesh Gupta and other 40% went to father Shri Rajesh B Gupta. However, the AO believed that since no cost was incurred by the Assessee while acquiring the asset and the mode of acquisition was other than that mentioned u/s 49. The cost of the previous owner could not be allowed as cost in the hands of the Assessee and hence, the AO treated the entire share of Assessee Rs. 3.15 crore as LTCG and allowed deduction/exemption u/s 54 and assessed the balance LTCG as Assessee's income. On appeal, the CIT(A) treated the entire consideration of Assessee's share as income from other sources.

the Tribunal held that,

++ the property-Ram Kutir was acquired by Assessee's father Shri Rajesh Gupta through a will of Shri Balak Ram Kamal dated 15-09-1997, which was executed by probate order dated 25-11-2011. 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;

++ this Tribunal is 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 the Supreme Court in the case of Maturi Pullaiah v. Maturi Narasimham. From the said judgment, 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, the Supreme Court in the case of Kale vs. Deputy Director of Consolidation has laid down the principles which are essential for family arrangement;

++ the Madras High Court in the case of AL Ramanathan 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 this Tribunal, the Counsel for the Revenue 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. The only casting doubt is 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 the Supreme Court in the case of Maturi Pullaiah, 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;

++ hence, 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. A perusal of the record in the present case, 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, this Tribunal treat the family arrangement as genuine and distribution of sale consideration according to the same is to be assessed as capital gains. The consequential benefits and deductions are to be allowed as per law.

(See 2018-TIOL-490-ITAT-MUM)