THE issues before the Bench are - Whether a sum paid as owelty during the course of partition to settle inequilities is deemed to be immovable property, and will not attract capital gains; Whether a compensation paid by one party to another in a partition proceedings attracts invocation of principle of owelty and thus is not liable to tax and Whether any transfer of assets takes place in case group partition proceedings. And the verdict goes in favour of assessee.
Facts of the case
There were two groups i.e. Group ‘A’, based at New Delhi and Group ‘B’, based at Jalandhar of share-holders of M/s Hind Samachar Ltd. After prolonged dispute, a settlement was arrived in which they agreed to partition the properties between the two groups. The assessee (Group A) has received compensation from Group B at the time of partition. However, a dispute regarding date of split was still pending before different forums including before the Supreme Court. The compensation amount had been kept in Fixed Deposit Receipts as per the orders passed by theHigh Court as well as by the Supreme Court. The AO considered the family settlement and found that 8.56% of Rs 24 crores of compensation was the share of the assessee and consequently, levied long term capital gain on the said amount. The AO was of the opinion that that Group A, of which the assessee is a member, was not aggrieved with the amount of compensation of Rs.24 crores paid to it by Group B and the Group A had exercised the option of accepting Rs 24 crores before High Court.
On appeal, the CIT(A) held that that distribution of assets including the sum of Rs 24 crores was not complete during the relevant year as the matter was sub-judice and the assessee was not allowed to use the money by the order of this Court, therefore, the sum did not accrue to the income of this group, including the assessee. The order was further affirmed by the Tribunal.
Aggrieved, the Revenue filed an appeal before the High Court.
The Departmental Representative argued that though the assessee cannot use money in terms of the order passed by this Court, but the fact remained that the interest on such deposit was an income and was liable to tax.
On the other hand, the AR relying upon the ‘principle of owelty’, argued that the amount of compensation received by the assessee, was to equalize the inequalities in the partition and, thus, such amount was nothing but an immovable property. It was contended that such amount received by the assessee was not an income, but a share in the immovable property though paid in cash, as it was the cash value to settle inequalities in partition.
Having heard the parties, the High Court held that,
++ in T.S.Swaminatha Odayar‘s case, the Supreme Court was examining the nature of provision in a partition decree for a payment by one co-sharer to another of a sum of money for equalization of shares. It was held that such payment in the partition settlement was an owelty for adjustment or equalization of shares and no more;
++ it has been held that when an owelty is awarded to a member of a joint family on partition for equalization of the shares on an excessive allotment of immovable properties to another member of the joint family, such a provision of owelty ordinarily creates a lien or a charge on the land taken under the partition. The member to whom excessive allotment of property has been made on such partition cannot claim to acquire properties falling to his share irrespective of or discharge from the obligation to pay owelty to the other members. What he gets for his share is, the properties subject to the obligation to pay such owelty and that by necessary implication, an obligation on his part to pay owelty out of the properties allotted to his share;
++ a Full Bench of Kerala High Court in a judgment reported as Parvathi Amma Vs. Makki Amma explained the concept of owelty and held that such amount is not a debt being a liability for which charge is provide under sub clause (b) of Clause (4) of Section 55 of the Transfer of Property Act, 1882;
++ the Madras High Court in AL. Ramanathan’s case returned a finding that an amount of Rs.8 lacs received in a family settlement to settle the disputes between the family is not subject to capital gain;
++ the Division Bench of Karnataka High Court in R. Nagaraja Rao’s case has held that partition is not a transfer and adjustment of shares, crystallization of the respective rights in the family properties cannot be construed as a transfer in the eye of law. When there is no transfer of asset, there is no capital gain and consequently there is no liability to pay tax on capital gains;
++ in view of the aforesaid principles of law, we find that the payment of Rs.24 crores to Group A is to equalize the inequalities in partition of the assets of M/s Hind Samachar Ltd. The amount so paid is immovable property. If such amount is to be treated as income liable to tax, the inequalities would set in as the share of the recipient will diminish to the extent of tax. Since the amount paid during the course of partition is to settle the inequalities in partition, therefore deemed to be immovable property. Such amount is not an income liable to tax. Thus, the amount of owelty i.e. compensation deposited by Group B is to equalize the partition represents immovable property and will not attract capital gain.