In India, the concept of joint family has been prevalent since many decades. Once the families grows, such joint families seek for separation as newer generation grows further. In such scenario, division of joint family assets and transfer of same needs great consideration. In one such instance, in the case of Govind Kumar Khemka [1], where separation is envisaged through a family settlement deed, tax considerations have been discussed as tax authorities have questioned such arrangement. Details of the case are as under:
Facts of the Case:
In this case the Assessee entered into Family Settlement Deed (“FSD”) wherein the following was provided:
- Distribution of an immovable property to the Assessee due to relinquishment of rights in said property by other three brothers in favour of the Assessee.
- As a part of Family Settlement, Assessee to contribute certain sums from his own resources/capital or through the borrowed funds to balance the settlement between his brothers for which the Assessee disbursed a sum of INR 12 Cr (i.e. INR 4 Cr) to each brother.
Assessment Proceedings:
- Considering the above arrangement, the Assessing Officer (‘AO’) concluded that the Assessee had paid a “consideration” to his brothers against relinquishment of their rights in property distributed to him under the FSD and the distribution is not out of “natural love and affection”. Accordingly, the AO sought to tax the difference between the stamp duty value of the property (which was INR 28 Cr) and the “consideration” paid of INR 12 Cr as ‘income from other sources’ in the hands of the Assessee under section 56(2)(vii)(b) of the ITA.
- Upon Assessee making an appeal to CIT (A), order of AO was upheld.
- Aggrieved by the order of CIT(A), Assessee made further appeal to Income Tax Appellant Tribunal, Delhi Bench (‘Delhi ITAT’).
Order of Delhi ITAT:
Delhi ITAT set aside the order of CIT(A) and directed AO to delete the addition made. Observations made by Delhi ITAT are as under:
- The Delhi ITAT held that in this case, since there was a Family Settlement between the assessee and his brothers and that they have acted upon FSD to distribute various properties and rights therein amongst themselves, that would show that parties have entered into genuine transaction.
- It is well settled law that Partition or Family Settlement is not a transfer.
Therefore, no commercial transaction has been entered into between the assessee and his brothers and there is no colourable device. - Further, it held that since the distribution of the immovable property was between “relatives” as defined under section 56(2), the same would fall outside the purview of section 56(2)(vii)(b) of the ITA. The words “natural love and affection” have not been specified therein and therefore, this term has no consequence to the above provisions in which the AO has made the addition.
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[1] Govind Kumar Khemka Vs ACIT [2020] 113 taxmann.com 5 (Delhi – Tribunal)
