Section 2(47), read with section 45- Amount received by assessee pursuant to a Court decree in lieu of her share in self acquired property of father who died intestate, cannot be said to result in ‘transfer’ as the provisions of section 2(47)(i) or (ii) of the Income-tax Act are not attracted.
Facts:‘B’ died intestate leaving behind 4 sons and 6 daughters including the assessee, who filed a suit for partition of self acquired property of their father. The suit was ultimately compromised between the parties duly recognised by Court, according to which each daughter was to receive their 1/10th share in property coming to Rs. 87.5 lakh (for each daughter) from their brothers in cash.
The assessee’s brothers subsequently entered into a joint development agreement of the property, in terms of which, the developer directly paid Rs. 87.5 lakh each to the daughters of ‘B’ including assessee therein. On receiving the amount, the daughters of ‘B’ executed a release deed of disputed property in favour of their brothers.
During the relevant assessment year, the assessee did not offer this Rs. 87.5 lakh to tax under the head ‘Capital Gain’. The assessee took a stand that the amount was received as a result of a family arrangement, and therefore there was no transfer of asset to attract the provisions of section 45.
The assessing officer was of the view that the daughters of ‘B’, including the assessee, have sold the property to the developer and therefore, it was a case of transfer within the meaning of section 2(47), giving rise to long term capital gain, and hence he made certain additions to asseessee’s income under the head ‘capital gain’.
The Commissioner (Appeals) confirmed the order of Assessing Officer.
On second appeal.
Held:
The 4 daughters of late ‘B’ filed suit claiming 1/10th share each over the properties left behind by ‘B’. The claim was on the basis that as class-I legal heirs under the Hindu Succession Act, 1956, they are entitled to 1/10th share each over the properties of late ‘B’ who died intestate and in respect of the properties which were his self-acquired properties. The 4 sons claimed that the properties were joint family properties comprising of the 4 sons and late ‘B’. The trial court found the plea to be not acceptable and the plea of the daughters for 1/10th share each over the properties of the deceased was decreed.
The compromise recorded before the High Court recognises/ accepts the decree of the trial court and a decree in terms of the compromise was passed. The plaintiffs (4 daughters) and the 2 other daughters of the deceased gave up their right to mesne profits and took their share of the property in kind and not by way of division by metes and bounds. The compromise decree does not have any ingredients of a family arrangement and hence the money received by the assessee is not pursuant to a family arrangement.
Now, it is to be examined as to whether the money received pursuant to a court decree in lieu of a share in the properties, can be said to result in a transfer attracting the provisions of section 2 (47) (i) or (ii) of the Act, though the other clauses of 2(47) of the Act are admittedly not applicable to the present case.
One of the reasons given by the learned CIT(A) is that u/s. 47(i) of the Act, it is only distribution of capital assets on the total or partial partition of a Hindu undivided family is not regarded as transfer and therefore in the present case which was not a case of partition of an HUF, there is a transfer u/s. 2(47) of the Act.
However, the view expressed by the CIT(A) is not acceptable. The provisions are intended to clarify that when a partition is made, no gains are made by the HUF and therefore levy of tax on capital gain, which can only be on the transferor, does not arise at all. Even in the absence of such a provision the revenue cannot seek to levy tax on capital gain because tax on capital gain can be imposed only on transferor and the HUF on a partition receives nothing. Therefore it cannot be said that provisions of section 47(i) of the Act by implication can justify levy of tax on capital gain wherever there is a partition between co-owners of properties which does not involve a HUF.
Partition is any division of real property or Personal Property between co-owners, resulting in individual ownership of the interests of each. In the present case, on death of Mr. B and his wife, their 10 children, 4 sons and 6 daughters became entitled to 1/10th share each over the property by way of intestate succession. A partition of the share of each of the 1/10th co-owner was effected through Court. Since a physical division by metes and bounds of each of the 1/10th share was not possible, the 4 sons took the property and the 6 daughters took money equivalent of their 1/10th share each over the property.
The sum received by the assessee is thus traceable to the realisation of her rights as legal heir on intestate succession and not to any sale, relinquishment or extinguishment of right to property. This is clear from the terms of the memorandum of compromise dated 11.1.2008 entered into between all the legal heirs of late Mr. B, which ultimately was recognised by the Court and a decree in terms of the compromise recorded and passed.
As per clause-2 of the compromise the property was valued at Rs. 8.75 crore. The sons agreed to take the property and further agreed that they would deposit Rs. 5.25 crore being the value of 6/10th share of the property. As per clause 4 of the memorandum of compromise the 6 daughters agreed that they would receive Rs. 87.50 lakh each towards their 1/10th share each over the property. Under clause-5 of the memorandum of compromise the daughters agreed to execute a release deed after the receipt of Rs. 87.50 lakh each by them. It is thus clear that the release deed which was later executed by the 6 daughters in favour of the 4 sons on 23.7.2008 was only to confer better title over the property and that document did not create, extinguish or modify the rights over the property either of the sons or the daughters.
Ultimately, the sum of Rs. 87.50 lakh was paid only through the Court and not at the time of registration of the deed of release. It is also significant to note that the document of release is between the 6 daughters and the 4 sons and the developer is not a party to the document. The developer is also not a party to the suit for partition. Therefore the conclusions of the revenue authorities that there was a conveyance of the share of the daughters in favour of the developer based on statement of the sons and the developer is contrary to the written and registered document and cannot be sustained.
The issue can be looked at from another angle as well. Suppose the deceased had left behind him deposits in a Bank Account and the bank pays l/10th each of such deposits to the legal heirs, would the receipt be chargeable to tax as income in the hands of the legal heirs. The answer is obviously in the negative. Suppose money is received in lieu of a share over immovable property of the deceased, as in the present case, it cannot be brought to tax, as it is not in the nature of income. In such an event it is not possible to compute the capital gain as there would be no cost of acquisition. The provisions of section 55(2) (b) & section 55(3) of the Act which provides for determining cost of acquisition in different situations cannot also be applied because, those provisions are applicable only for the purpose of section 48 and 49 of the Act. Section 48 and 49 of the Act would apply only when section 45 of the Act applies i.e., there is a transfer of a capital asset giving raise to capital gain. The AO was therefore not right in computing the capital gain in the manner in which he did so.
For the aforesaid reasons, the money received
pursuant to a court decree in lieu
of a share in the properties, cannot be said to result in transfer as it does
not attract the provisions of section 2 (47) (i) or (ii) of the Income-tax Act and the revenue authorities were not justified in
bringing to tax amount in question as capital gain in the hands of the
assessee.
