Transaction under Family Settlement Agreement does not Amount to Transfer: ITAT deletes Addition u/s 69 of Income Tax Act [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the addition under Section 69 of the Income Tax Act, 1961 ruling that a transaction under a family settlement agreement does not amount to a transfer.

Brief facts pertaining to the issue is that Naresh Kotak together with his brother's son Krishna Kotak was running a group of businesses and companies under the umbrella of M/s J.M. Baxi & Co. As there were serious differences of opinion between Naresh Kotak and Krishna Kotak, it was decided to ultimately have a family separation and a Deed of Family Settlement dated 17.05.2012 was entered into. Pursuant to the family settlement, the assessee purchased the impugned property from M/s N. Jamnadas & Co. for a consideration of Rs. 9,00,000/-.

The market value of the said property was Rs. 2,50,39,000/- and the assessee paid various charges including stamp duty totaling to Rs. 14,92,100/-. The assessee in the books of accounts capitalized the impugned property for a value of Rs. 23, 92,100/- (Rs. 9, 00,000 + Rs. 14, 92,100) as addition to fixed assets. The AO treated the difference between the stamp duty value and the consideration accounted by the assessee as addition under section 69/69B of the Income Tax Act and the Commissioner of Income Tax (Appeals) [CIT (A)] confirmed the said addition. 

Mr. M M Golvala submitted that purchase of property as part of family settlement does not amount to "transfer" and in this regard drew our attention to Schedule 2C of the agreement in which the impugned property is part of the list of assets to substantiate that the impugned transaction is carried out as part of family settlement.

Further  relied on the decision of Madras High Court in the case of CIT Vs. Kay ARR Enterprises and Ors and CIT Vs. R. Ponnammal in this regard submitted the SLP against which were dismissed by the Supreme Court. Further submitted that the definition of "income" under section 2(24) of the Act does not cover the transaction where immovable property is purchased at a price lower than the market value fixed for stamp duty purposes.

Further submitted that there was no provision in law during the year under consideration to tax the difference between the market value for stamp duty purposes and the actual purchase price paid by the assessee as deemed income. It was contended that the provisions of section 56(2)(vii)(b) of the Income Tax Act which provides for taxation of such deemed income to submit that the said section is applicable only in the case of individual and HUF and that the assessee being a company the deemed income could have been added in the hands of the assessee. 

Mr. Manoj Kumar Sinha representing the revenue argued that the submission of the assessee that the purchase happened as part of the family settlement is not acceptable. Further relied on the decision of the Bombay High Court in the case of B.A. Mohota Textiles Traders (P) Ltd. vs. DCIT (2017) wherein it is held that an artificial judicial person cannot be part of family settlement.

Accordingly, the DR submitted that the assessee being a company cannot be held to be part of the family settlement which can happen only between individuals. It was submitted that the assessee's case was distinguishable for the reason that the decision was rendered in the context of addition made based on wealth tax valuation and not valuation for the purpose of stamp duty. Therefore, the AO has correctly applied section 69B for the purpose of making addition.

Considering these facts, the two member bench of the tribunal comprising Vikas Aswathy ( Judicial member) and Pathmavathy S ( Accountant member) observed that  there was merit in the submission the assessee company was  part of the settlement agreement though not specifically mentioned in the agreement and that the transaction took place consequent to the family agreement. It was also relevant to the notice of the Madras High Court in the case of Kay ARR Enterprises & Ors. (Supra) while considering a similar issue has held that the transaction under a family settlement agreement does not amount to transfer and that the SLP filed by the Department against the said case has been dismissed by the Supreme Court. Therefore, the addition made towards the impugned transaction was not tenable. Accordingly, the appeal of the assessee was allowed.

To Read the full text of the Order CLICK HERE

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