The Commissioner of Income TaxCoimbatore v. M/s.KAY ARR Enterprises

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 06.07.2007CORAMTHE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJAT.C.(A) Nos.520 to 522 of 2007The Commissioner of Income TaxCoimbatore...Appellant in all T.Cs.Vs.M/s.KAY ARR Enterprises,694, Avanashi Road, Coimbatore...Respondent in TC.520/07R.Jayanthi..Respondent in TC.521/07K.Rajagopal (HUF)..Respondent in TC.522/07Appeals under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'D' Bench dated26.7.2005 in ITA Nos.930, 929 and 931/Mds/2000 for the assessment year1996-97.TC(A).520 of 2007 :Against the order of the Commissioner of Income Tax (Appeals)Coimbatore, dated 20.03.2000 in IT.Appeal No.154-C-99-2000 against theorder of the Joint Commissioner of Income Tax, Special Range I, Coimbatoredated 22.03.99 in PAN/GIR.No.47-036,FY-1817 the assessment year 1996-97.TC(A).No.521 of 2007 :Against the order of the Commissioner of Income Tax (Appeals)Coimbatore dated 28.03.2000 IT.Appeal No.408-C/99-2000 against the orderof the Income Tax Officer, Ward - I(3), Coimbatore in PAN.No.RT-4710 forthe assessment year 1996-97.TC(A).522 of 2007 :Against the order of the Commissioner of Income Tax (Appeals)Coimbatore dated 28.03.2000 in IT.Appeal No.155-C/99-2000 against theorder of the Joint Commissioner of Income-Tax, Special Range I, Coimbatorein PAN/GIR.No.Hr-9974/SR-I/CBE for the assessment year 1996-97. https://hcservices.ecourts.gov.in/hcservices/ For Appellant: Mr.J.Narayanasamy, Stg.Counsel for ITJ U D G M E N T(Delivered by P.D.DINAKARAN,J.)The Revenue has preferred the above tax case appeals against thecommon order of the Income Tax Appellate Tribunal dated 26.7.2005 made inITA Nos.930, 928 and 931/Mds/2000, raising the substantial questions oflaw, viz.,"(i) Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in law in holding that thefamily arrangement as arrived by the assessee to rearrange theshare holdings to avoid possible litigation themselves will notattract Capital Gains Tax under the Income-tax Act, 1961 ?(ii) Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in law in holding that, the re-arrangement of share holdings in the company to avoid possiblelitigation among family members to be a prudent arrangement, thesame cannot be held as a transfer of shares which is exigible toCapital Gains Tax ?"under the following facts and circumstances of the case, which are commonin all the three appeals.2. The assessment year involved in these appeals is 1996-97. Therewas a transfer of shares between the assessee-firm, which consists ofpartners, who are family members, in that, certain new shares wereacquired in exchange of old shares, as also some consideration in cash.According to the assessees, the transfer was consequent to a familyarrangement. But, the Assessing Officer, after analysing the facts of thecase and the legal aspects on the same, concluded that there was indeed atransfer involved and thus, subjected the Capital Gains Tax. Aggrievedby the same, the assessees filed appeals before the Commissioner ofIncome-tax (Appeals), who upheld the orders of the assessing officer.Exasperated by the same, the assessees preferred second appeals before theTribunal and the Tribunal, by the impugned common order dated 26.7.2005,allowed the appeals on the ground that the re-arrangement of shareholdings in the company to avoid possible litigation among family membersis a prudent arrangement, which is necessary to control the companyeffectively by the major share holders to produce better prospects andactive supervision and accordingly, held that such family arrangementcannot be held as transfer, which is exigible to Capital Gains Tax.Hence, the present appeals by the Revenue raising the substantialquestions of law referred to above. https://hcservices.ecourts.gov.in/hcservices/

3. The core issue that arises for consideration in these appeals iswhether the transfer of shares pursuant to the family arrangement to avoida possible litigation among the family members would attract the CapitalGains Tax.4. The law on the point is well settled by the decisions of the ApexCourt in Maturi Pullaiah and another v. Maturi Narasimham and others[A.I.R. 1966 (SC) 1836], and in Kale and Others v. Deputy Director ofConsolidation and others [A.I.R. 1976 (Supreme Court) 807] which arefollowed by this Court in Commissioner of Income-tax v. Ponnammal [(1987)164 I.T.R. 706], and in Commissioner of Income-tax v. AL.Ramanathan[(2000) 245 I.T.R. 494]. It is a settled law that when parties enterinto a family arrangement, the validity of the family arrangement is notto be judged with reference to whether the parties who raised disputes orrights or claimed rights in certain properties had in law any such rightor not.5.1. In Maturi Pullaiah and another v. Maturi Narasimham and others[A.I.R. 1966 (SC) 1836], cited supra, the Apex Court has held as follows:-"Briefly stated, though conflict of legal claims inpraesenti or de futuro is generally a condition for the validityof a family arrangement, it is not necessarily so. Even bonafide disputes, present or possible, which may not involve legalclaims will suffice. Members of a joint Hindu family may, tomaintain peace or to bring about harmony in the family, enterinto such a family arrangement. If such an arrangement isentered into bona fide and the terms thereof are fair in thecircumstances of a particular case, courts will more readilygive assent to such an arrangement than to avoid it."5.2. In Kale and Others v. Deputy Director of Consolidation andothers [A.I.R. 1976 (Supreme Court) 807], cited supra, the Apex Court haslaid down the propositions which are the essentials of a familyarrangement and the same read as follows:-"(1) The family settlement must be a bona fide one so as toresolve family disputes and rival claims by a fair and equitabledivision or allotment of properties between the various membersof the family;(2) The said settlement must be voluntary and should not beinduced by fraud, coercion or undue influence.5.3. This Court, in Commissioner of Income-tax v. Ponnammal [(1987)164 I.T.R. 706], referred supra, held that,"... the family arrangement had been brought about by theintervention of the panchayatdars and this clearly showed thatthe sons and daughters of the assessee were laying claims to theproperty which the assessee got under the will of her father andit was not relevant at the time when the family arrangement was https://hcservices.ecourts.gov.in/hcservices/ entered into to find out as to whether such claims if made in acourt of law would be sustained or not. If the assessee foundit worthwhile to settle the dispute between herself, her sonsand daughters by making the family arrangement, the saidarrangement could not be ignored by a tax authority. In view ofthe finding of the Tribunal, the family arrangement datedDecember 17, 1971, had to be held to be a valid piece ofdocument and, hence, the Tribunal was right in its view that notransfer of property was involved within the meaning of section2(xxiv) of the Gift-tax Act and, hence, there was no liabilityto gift-tax either under section 4(1)(a) or under section 4(2)and consequently no question of inclusion of the income of theminor in the hands of the assessee would also arise."Accordingly, in the said case, applying the principles laid down in thedecisions of the Apex Court and the decision of this Court referred supra,this Court held as follows:-" The Tribunal, on the facts, found that the family arrangementinvolved in this case appears to be a bona fide one inasmuch asit has been shown to have been made voluntarily and not inducedby any fraud or collusion and the conduct of the partiesreferred to by the Revenue is consistent with the bona fidefamily arrangement particularly when it was arrived at in thepresence of panchayatdars. So, the family arrangement is a bonafide one and it was effected to dissolve the family dispute.6.1. In the instant case also, the Tribunal found that the re-arrangement of shareholdings in the company to avoid possible litigationamong family members is a prudent arrangement which is necessary tocontrol the company effectively by the major share holders to producebetter prospects and active supervision or otherwise there would becontinuous friction and there would be no peace among the members of thefamily. Such a family arrangement intended either by compromisingdoubtful or disputed rights or by preserving the family property or thepeace and security of the family by avoiding litigation or by saving itshonour cannot be concluded as any other dealings between strangers, assuch a family arrangement is for the interest of the family and for theharmonious way of living. Therefore, such a re-alignment of interest byway of effecting a family arrangement among the family members would notamount to transfer. 6.2. Hence, the Tribunal has righly found that the impugned transferof shares by way of family arrangement would not attract Capital GainsTax, as the same is a prudent arrangement to avoid possible litigationamong the family members and is made voluntarily and not induced by anyfraud or coercion and therefore, cannot be doubted. https://hcservices.ecourts.gov.in/hcservices/ In view of the settled propositions of law, we hold that the Tribunalwas justified in arriving at the conclusion that the family arrangementamong the assessees does not amount to any transfer and hence, notexigible to capital gains tax. Accordingly, finding no substantialquestion of law arises for our consideration in these appeals, the sameare dismissed. Consequently, connected miscellaneous petitions are alsodismissed.Sd/Asst.Registrar/true copy/Sub Asst.RegistrarsraTo1.The Assistant Registrar,Income Tax Appellate Tribunal"D" Bench, Rajaji Bhavan,II floor, Besant Nagar, Chennai.2.The Commissioner of Income-Tax (Appeals), Coimbatore.3.The Joint Commissioner of Income-tax, Special Range-I, Coimbatore.4. The Income-Tax Officer, Ward I(3), Coimbatore.5. The Commissioner of Income Tax, Coimbatore.1 cc To Mr.N.Muralikumaran, Advocate, SR.41275.TC (A) Nos.520 to 522 of 2007 ASM(CO)RVL 01.08.2007