In an arrangement made between the family members being Directors of the company the difference in rate cannot be considered for the levy of capital gains tax

The Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad has recently held that in an arrangement made between the family members being Directors of the company the difference in rate should not be taken into account for the levy of capital gains tax.
The Bench comprising of Shri P.M. Jagtap, Accountant Member and Smt. Asha Vijayaraghavan, Judicial Member have passed the said judgment on 25.02.2015 in the case of Deputy Commissioner of Income vs. Ms. Maheshwari Plaza Resorts Ltd having PAN: AABCM 6346D, being ITA No.892/Hyd./2013 relating to the Assessment Year 2006-07.
The Hearing was concluded on 24.12.2014. The Department was represented by Shri Rajat Mitra and the assessee was represented by Shri C.P. Ramaswami, Advocate.

Facts and circumstances of the case:

This was an appeal preferred by the Revenue against the order of the CIT (A)-V, Hyderabad, dated 14.02.2013 in connection with the Assessment Year 2006 – 07.
The assessee was a company engaged in building and running of hotels. For the Assessment Year 2006-07, the assessee filed a return of income on 20.04.2007 declaring a net income of Rs.2, 61, 18,812/-. Assessment was completed under the provisions of section 143(3) and the total income determined was Rs.6, 10, 49,592/- after making some additions.
The assessee being aggrieved by the assessment order filed an appeal before the CIT (A). The CIT (A) allowed the appeal. In the said order, the addition amounting to Rs.2.00 lakhs was decided in favour of the assessee. However other additions were decided in favour of the Revenue. Regarding the addition of Rs.2, 10, 60,000/- on account of difference in profit on sale of shop, the CIT (A) remanded the issue to the Assessing Officer with the findings that in view of the facts of the case and based on evidence, there cannot be any doubt that the area in question was sold to the brother of the Director Mr. Ashok Kumar Malpani at the rate of minimum Rs.2000/- per sq. feet as per sale rate of nearby areas. It was quite easy for the appellant to get the in cash as the purchaser was a brother of a Director as well as a business associate in the project. Therefore, the Assessing Officer was correct in holding that the actual sale rate was higher than that stated by the appellant. However, instead of sale rate of Rs.2, 250/- sq. feet the Assessing Officer applied a sale rate Rs.2, 000/-. The Assessing Officer also directed to verify whether there was any fake addition.
Against the decision of the Learned CIT (A), the Department as well as the assessee preferred an appeal before the Income Tax Appellate Tribunal. During the proceedings before the Tribunal, the assessee filed another ground that the transactions made by the company in the Assessment Year were part of family agreement and there cannot be any question of capital gains out of such sales. The Tribunal after going through the ground by an order passed in ITA No.571/Hyd./2010 remanded the issue to the Assessing Officer with the observations that after considering the submissions of both the sides and also after perusing the materials placed it appears that the transfer was as per family arrangement to settle the family disputes. The learned counsel appearing on behalf of the assessee also placed various judgments of the Hon’ble Supreme Court. As submitted by the learned counsel for the assessee and that of the Department, the lower authorities did not consider the issue. Both the counsels had no objection to remand back the issue to the file of the Assessing Officer to be further considered. The other issues of the appeal were also to be reconsidered by the Assessing Officer.
Accordingly the order of the lower authorities was set aside and the issue was remitted back to the file of the Assessing Officer to consider them on the basis of the materials filed by the assessee and to decide the issue as per law after giving an opportunity to the assessee.
It was made clear that no opinion was expressed on the merit of the appeal. The Assessing Officer should reconsider the total issue as per law without being influenced by the observations of the Tribunal.
According to the directions of the Tribunal, the Assessing Officer initiated assessment proceedings and passed an order on 30.12.2011 by making Disallowance under section 40(a)(ia) of Rs.2,71,729 and that of interest amounting to Rs.45,01,777/-. Business profit from sale of shops at Rs.1, 22,54,000/- was also added.
Being aggrieved by the assessment order dated 30.12.2011 the assessee filed an appeal before the CIT (A) raising a ground that the Assessing Officer has erred in disallowing interest paid towards borrowed capital for a sum of Rs.45, 01,777/- as expenses incurred for exempted income as per section 14A and it should have allowed the interest claimed as per section 36(I) (iii).

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The judgment:

After hearing both the parties and upon perusal of the copy of the deed of family arrangement executed by the family members of Malpani family filed by the assessee, following the decision of the Hon’ble Supreme Court in the case of Maturi Pullaiah & Another vs. Maturi Narasimham & Others, it was held that as there was no transfer of assets in a family arrangement and the amount was received by the assessee according to the family arrangement and not as consideration for transfer of any capital asset, there cannot be imposition of capital gain tax.
The family settlement was only a readjustment of the existing interest and there was no physical transfer resulting in capital gains. In such circumstances the order of the lower authorities assessing the amount received under a family arrangement as capital gains was bad in law and was deleted. Accordingly the Revenue’s appeal was dismissed and that of the assessee was allowed.