Validity of Family Arrangement can’t be Suspected Merely because there is No Dispute over the Title of Property: ITAT [Read Order]

In Kunal R. Gupta vs. Income Tax Officer, a single judge bench of the Income Tax Appellate Tribunal ( ITAT ) at Mumbai held that the Assessing Officer cannot suspect the validity of Family Arrangement merely because there is no dispute over the title property.

Kunal R Gupta, the assessee/appellant is the son of one Rajesh Gupta. Rajesh Gupta is the adopted son of Shri Balakram Kamal. Shri Balakram Kamal had a self-acquired property which was transferred to his adopted son via a will. Rajesh Gupta was the bona fide owner of the property and no one else had any legal claim to the property.  In 2004, due to a dispute in the family among his sons, a family arrangement was made. Accordingly, at the time of the sale of the property, Rajesh Gopal agreed to give 30% of the total consideration (Rs. 3.15 Crore) to the assessee and 30% to his other son Vishal R. Gupta while keeping the rest of the 40% with himself.

The Assessing Officer at the time of assessment observed that no cost was incurred by the assessee to acquire the asset and the mode of acquisition was other than that mentioned in section 49 of the Act. He held that the cost of the previous owner cannot be allowed as cost in the hands of the assessee and hence, he treated the entire share of Rs.3.15 crore as long-term capital gain and allowed deduction/exemption under section 54 of the Act amounting to Rs 2, 76, 92,646/- and assessed the balance long-term capital gain of Rs.38, 07,354/- as income of the assessee.

On appeal before the CIT (A), the entire consideration of the assessee was treated as Income from other sources. The CIT (A) disagreed to recognize rights of the assessee over the property. According to the CIT (A), there wasn’t any pre-existing dispute as to frame a family arrangement.  It further held that a family arrangement did not create any right in the property itself in the hands of the assessee.

Aggrieved by the decision of the CIT (A), an appeal was filed before the Income Tax Appellate Tribunal (ITAT).  The Counsel for the assessee argued that the rights of the assessee were recognized by the family arrangement cum compromise deed and the same has been accepted by the Revenue while framing assessment under section 143(3) of the Act in the case of Shri Rajesh Gupta, the father, and Shri Vishal Gupta, the brother of the assessee. He also contended that the family arrangement cum compromise is equivalent to partition attracting the provisions of section 49(1) of the Act. He stated that the property acquired by way of family settlement for the purpose of computation of capital gains, indexation is always allowable. Consequently, the deduction under section 54 of the Act for the investment made in residential property should be allowed to the assessee.

The Departmental Representative (D.R) for the Revenue stated that there was nothing to show any pre-existing dispute and hence the family arrangement made was for circumventing tax liability. She further contended that a mere family arrangement cannot create any legal right in the property and therefore the amount received in cash from the assessee’s father after the sale of the property is only an ‘income from other sources’.

The Judicial Member Mahavir Singh relied on the case of Maturi Pullaiah v. Maturi Narasimham in which the Supreme Court held that a family arrangement is valid even if there isn’t a conflict of legal claims in present or in future. “ I find from the facts of the case that 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. I am of the view that it is settled law that when parties entered into the 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 certain properties had in law any such right or not…I 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...” the bench observed.

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