Tribunal: Capital Gains Not Applicable on Family Settlements under Section 47(iii)

Introduction

The decision in the case of Y. Shanmuga Durai v. ACIT[i] by the Income Tax Appellate Tribunal, Chennai Bench, is a significant reiteration of settled principles governing the taxability of capital gains under s.45 read with s.2(47) of the Income-tax Act, 1961 (‘Act’), in the context of family settlements and property transfers among relatives. The Tribunal was called upon to examine whether the mutual relinquishment of jointly held immovable properties between brothers, executed through separate but simultaneous registered settlement deeds, could be treated as a ‘transfer’, attracting capital gains tax. The Tribunal ruled in favour of the assessee, holding that such transactions, being genuine family settlements executed in accordance with the law and aimed at avoiding future disputes, are squarely covered under the exception carved out in s.47(iii) and thus could not be taxed under the head ‘capital gains’.

Facts

• Y. Shanmuga Durai (‘assessee’) was a Partner in the Saravana Store Group. The assessee and his brother, S. Rajarathinam, jointly purchased various properties in the past, which were not inherited HUF properties.

• To avoid potential family disputes, they executed settlement deeds dated 05.03.2010 whereby:

• The assessee relinquished his 50% share in approximately 30 jointly held properties in favour of his brother.

• Similarly, his brother relinquished his 50% share in approximately 55 other jointly held properties in favour of the assessee.

• A search and seizure action under s.132 of the IT Act was conducted on the assessee’s business premises and residence on 18.08.2011.

• The Assessing Officer (‘AO’) issued notice under s. 153C to which the assessee responded that his original return should be treated as the return filed in response to the notice.

• The AO completed the assessment under ss. 153C, 153A and 143(3) determining a total income of Rs.12,70,75,080 including several additions, including Rs.4,74,82,926 as short term capital gains and Rs.6,48,31,420 as long term capital gains.

• The AO treated these transactions as mutual exchange of properties, considering them ‘transfers’ as per s. 2(47), concluding that these do not fall under the exemptions of s. 47.

• The CIT(A) confirmed the original assessment, which led to the current appeal before the Tribunal.

Issues

1.  Whether the settlement deeds between brothers constituted a ‘transfer’ under s. 2(47) of the Act?

2. Whether these transactions were exempted under s. 47(iii) as gifts or settlements?

3. Whether the transactions should be viewed as independent settlements or as a mutual exchange?

Held

The Tribunal held in favour of the assessee, observing the following:

• The transaction of settlement between the assessee and his brother, as well as the reciprocal settlement, should be considered independent transactions, as recognised by the Indian Stamp Act,1899 ('Stamp Act'), rendering it legally erroneous to treat these settlement deeds as an exchange transaction.

• The Tribunal observed that gift transactions between relatives (brothers in this case) should be considered settlements for tax purposes and not transfers under s. 2(47).

• The settlement deeds executed fall within the exception provided under s. 47(iii) of the Act, which exempts ‘any transfer of capital assets under a gift or will or irrevocable trust’ from capital gains taxation.

• The Tribunal noted that under the erstwhile Gift Tax Act, 1958 (‘Gift Tax Act’), ‘gift’ included settlement, with s. 2(xii) defining gift as movable or immovable property transferred, while ‘transfer’ is defined in s. 2(xxiv) to include settlement. Therefore, the settlement deed should be viewed as a gift falling within the scope of s. 47(iii).

• The Tribunal also noted that settlement deeds attract a concessional rate of stamp duty compared to the gift deeds, yet both serve similar purposes in the context of family arrangements.

Analysis & Conclusion

The Tribunal provided a detailed analysis of why these settlement deeds should not be considered transfers:

• Legal Framework Analysis: The Tribunal analysed s. 47(iii), which exempts transfers under gifts or settlements from capital gains tax. It connected this with the provisions of the Gift Tax Act, where such settlements are included within the broader concept of gifts among relatives.

• Distinction Between Independent Transactions v. Exchange: The Tribunal found that the CIT(A) erred fundamentally in clubbing both the settlement deeds together and treated them as a single exchange transaction. The settlements were executed separately and registered independently under the Stamp Act, not as a single exchange deed.

• Purpose and Intent of Family Settlements: The Tribunal emphasised that family settlements serve the specific purposes of preventing future disputes, maintaining family harmony, and crystallise adequate rights among family members.

• The Tribunal relied on the established precedents to analyse such family settlements:

• The Karnataka High Court, in CIT v. Nagaraja Rao[ii], established that partition is not transfer, and what is recorded in family settlements is essentially partition or adjustment of rights.

• The Madras High Court in CIT v. R. Ponnammal[iii] went further to state that family arrangements should be upheld even if the parties might not have clear titles, as long as the arrangements were entered into in good faith. The Tribunal held that these settlement deeds were not executed for monetary consideration in a commercial sense that would trigger s. 2(47) definition of transfer through relinquishment. The Tribunal specifically noted they were following established jurisdictional High Court decisions that family arrangements among members are not to be treated as transfers under s. 2(47).

• The Tribunal allowed the appeal, setting aside the order of the CIT(A) directing the AO to delete the additions of long-term and short-term capital gains from the assessment for the assessment year 2010-11. The crucial takeaway from this judgement is that the family settlement deeds executed among brothers to avoid any future disputes cannot be termed as ‘transfers’ as per the IT Act and therefore are not subject to capital gains taxation under s. 45.

End Notes

[i] [2025] 173 taxmann.com 187.

[ii] ITA No. 3038 of 2005 dated 19.02.2012.

[iii] [1986] 28 Taxman 26/ [1987] 164 ITR 706 (Madras).

Authored by Vanshika, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.