The Punjab & Haryana High Court has held that family settlement is not required to be registered for computing capital gains.
The bench of Justice Sanjeev Prakash Sharma and Justice Sanjay Vashisth has observed that the family settlement arrived at between the parties, which was duly available on record, which recorded the earlier settlement already arrived at between the parties was, therefore, a valid family settlement to be noticed for the purpose of computation and computation of capital gains in terms of Section 49(1)(i) of the Income Tax Act, 1961.
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Background – Computing Capital Gains
The appellant-assessee was adopted by Permanand Mehra. The Appellant-Assessee’s father expired on 21.05.1997. In his Will, he gave life interest to his wife Vimal Kumari, but did not give her right of title, nor a right to sell, mortgage or alienate the house. The Appellant-Assessee’s mother, Vimal Kumari Mehra also bequeathed all her property, moveable or immovable in the name of her son, Rajiv Mehra, Appellant-Assessee and to his Hindu Undivided Family (HUF).
The settlement was also arrived at between Rajiv Mehra and Sudha Arora in which they stated that after the death of their parents, they have agreed upon the verbal agreement that as per the wish of our parents, Rajiv Mehra-Appellant-Assessee will be the sole owner of the immovable property.
The property was sold for a sum of Rs. 2 Crores. Return of income was filed on 31.03.2009 at an amount of Rs. 1,25,980 in which a claim was made for long term capital gain and indexed cost of Rs. 1,05,29,550 was mentioned on account of the inherited house.
It was stated that expenses on construction of a new house was Rs. 1,10,45,705 and therefore, the long term capital gain Rs. 1,05,29,550 was claimed as exempted in terms of Section 54 of the Income Tax Act, 1961 and the returned income was processed under Section 143(1) of the Act of 1961 on 18.02.2010.
A noticewas issued for scrutiny under the CASS Scheme which was served upon the Appellant-Assessee. The additions were made in the assessment, treating the acquisition of the house w.e.f. 02.09.2003 i.e. the date of memorandum of family settlement, working out the indexed cost from that date instead of the cost taken earlier as on 01.04.1981 and reducing the claim for exemption under Section 54 of the Income Tax 1961, since declined payments were to be treated as investment made in new residential house after determining the assessed income at an amount of Rs. 90,69,880.
The order was challenged in Appeal before the Commissioner of Income Tax (Appeals).
The Appeal of the Appellant-Assessee was partly allowed by the CIT(A). The order passed by the CIT(A) was challenged in Appeal by the Revenue before the ITAT.
During the pendency of the Appeal, the Appellant-Assessee filed a paper-book with material facts containing all his particulars.
The Appeal filed by the Revenue was allowed by the ITAT vide its order, but it did not take into consideration the documents filed by the Appellant- Assessee as there was no application moved by the Appellant-Assessee under Rule 46A of the Income Tax Act, 1961 for admitting additional evidence under the provisions of the Income Tax Rules, 1962.
The Assessing Officer (AO) has passed an assessment order on 30.12.2010. The AO has noticed that during verification, the residential house sold, has been the ancestral property of the family, and was acquired by the Appellant-Assessee as a result of memorandum of family settlement arrived at between the parties on 02.09.2003.
Therefore, the indexation cost acquisition of the residential house has been taken as per the provision of Section 48 and 49 of the Act of 1961 to be 551/463 while the Appellant-Assessee had claimed indexation cost by multiplier of 551/100 while it should be 551/463.
Relevant Provisions – Computing Capital Gains
Section 47 (iii) of the Income Tax Act, 1961, specifically lays down that any transfer of a capital asset under a gift or will or an irrevocable trust would not be covered by the provisions of Section 45(1) of the Act of 1961 and taking into consideration the transfer of capital asset cannot be computed in terms of Section 45 of the Act of 1961.
Thus, the present transfer of property has to be examined in terms of Section 47 of the Act of 1961 which specifically takes into consideration Section 47(i) of the Act of 1961 as any distribution of capital assets on the total or partial partition of a Hindu undivided family.
In the present case, there is a settlement arrived at between the members of the Hindu undivided family (HUF). Accordingly, the cost with reference to the acquisition of property would have to be assessed as per Section 49 (1)(i) of the Act of 1961.
A capital asset can be treated to be transferred where there is a consideration involved and would also include sale, exchange or relinquishment of an asset, or where a right of any person is extinguished.
However, if there is any transfer of a capital asset like property by way of a gift or a Will or an irrevocable trust, provisions of Section 45 of the Act of 1961 would have no application. Sections 48 and 49 of the Income Tax Act of 1961 provide the method and manner of computation of income chargeable under the head of capital gains.
For assessing the cost with reference to certain modes of acquisition has been now treated as per the Explanation (iii) to Section 48 of the Act of 1961, to be the First day of April, 1981 or the cost of acquisition for the year in which the asset is transferred to the same proportion as cost of first year in which the asset held by the assessee, whichever is later.
However, where the capital asset becomes the property of the assessee by way of any distribution of assets on the total or partial partition of HUF, then the cost of acquisition on the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
Conclusion – Computing Capital Gains
The court held that even though the documents relating to Will may not have been accepted by the ITAT, still the calculation has to be done treating the indexation as on 01.04.1981 and merely because the family settlement was arrived in the year 2003 would not make any difference, and the order passed by the CIT (A), is therefore, found to be correct although the CIT (A) has applied Section 49(i) (ii) of the Act of 1961.
The court held that even if the existence of the Will may be ignored, so far as the Appellant-Assessee is concerned, he has become the holder of the property on the basis of a family settlement and the cost of acquisition shall be with reference to 01.04.1981 alone. The calculation, therefore, has to be done accordingly and the order passed by the CIT (A) was not required to be interfered with.
Case Details
Case Title: Rajiv Mehra Versus The Commissioner Of Income Tax
Case No.: ITA-217-2013 (O&M)
Date: 23.10.2024
Counsel For Petitioner: Pankaj Jain
Counsel For Respondent: Urvashi Dhugga
