TMI Blog2014 (10) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that all the transactions intermingled were due to the family settlement arrived at either pursuant to Arbitration Award or oral agreements - various higher judiciaries have also validated the oral agreements in the case of Family/HUF partial or total partition. When there is any distribution of assets pursuant to family arrangement or HUF partial/total partition, such transactions will not amount to transfer of asset attracting tax liability in the hands of the recipient under the provisions of the Act - on piercing the corporate veil with respect to the two private limited companies viz. M/s.SKM Animals Feeds and Foods (India) Ltd., and M/s. SKM Siddha and Ayurvedic Medicines India Pvt Ltd., the entire intermingled transactions can be seen only as the family settlement arrived at through Arbitration Award amongst Hindu family members - Further there are no transfers of assets with respect to the public limited company M/s.SKM Egg Products Exports (India) Ltd. - Therefore, considering the facts and circumstances of the case the provisions of section 2(22)(e), 2(24)(iv) or Sec.56(2)(vi) cannot be invoked - the addition made by the AO which is further sustained by the Ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of the Second award superceding the first award, the payment is made to comply with the provisions of the arbitral agreement entered prior to the awards. 4. The learned Commissioner of Income Tax (appeals) had completely erred by ignoring the law of novation under the Indian Contract Act and hence ought to have appreciated the fact that though the earlier arbitration award has been said to supersede the earlier award, the preamble of the second Award which has the clause stating that all the other clauses are equally applicable to the present award other than the clauses which had a minor alterations and the new additions has not been considered by him and all the parties to the arbitration acceded to novation. 5. The learned Commissioner of Income Tax (appeals) has erred by not appreciating the fact that the Arbitration Award per se is a not a family settlement/arrangement but a part of the family settlement/arrangement and also ignored the fact that the Arbitrator himself while making the award for the smooth settlement based on the principle of equality and practical approach to the issue, resorted to the piercing of Corporate veil and since the entire gamut of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessment year 2008-09 by way of cheque dated 26.12.2007 ₹ 1,15,00,000/- and ₹ 76,00,000/- dated 14.03.2008. The balance amount of ₹ 3,50,00,000/- was received by the assessee during the Financial Year 2008-09 vide cheque dated 04.03.2009. The assessee had also received the following assets from M/s.SKM Animal Feeds and Foods (India) Limited: 1. Property situated at Chennimalai Road(Car shed),Erode town in TS No.95,96,97B to the extent of 13,825.75 Sq.ft valued at ₹ 1,38,25,750/-. 2. 1,06,20,000 (One Crore Six Lakhs and Twenty thousands) equity shares of ₹ 10/- fully paid in M/s. SKM Egg Products Export (India) Ltd. valued at ₹ 20,46,90,000/-. The contention of the assessee was that he had not offered the aforesaid amount/assets received for taxation because he had received the same under family settlement pursuant to arbitration award. 4. The details of the other assets transferred to the members of the family resulting from the arbitration award are stated herein below for reference: A. Assets transferred to Dr. M. Chandrasekhar as per Schedule-II of the Arbitration award. 1212 (One Thousand Two Hundred and Twelve) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, Ld. Assessing Officer made an addition for the amount of ₹ 2,26,00,000/-. In doing so, the Ld. Assessing Officer made the following observations: (i) The assessee's claim that the cash and other assets received by the assessee was due to the family partition resulting from Arbitration was in his personal capacity and the same will not be altered or overrule the provisions of the Income Tax Act. (ii) From the assessee's contention it was clear that the assessee had received cash payments directly from the Company which is neither a loan or advanced and the same has been received without any consideration thereby attracting the provisions of Sec.56 (vi) of the Act. (iii) The assessee's explanation that the payment is made on account of family partition as per the arbitration award and hence the payment received is capital nature is not acceptable. (iv) The claim of family partition is a mere conduit for transfer of company's fund to the assessee and as such the family partition cannot overwrite the provisions of the I.T Act. Therefore, the sum of ₹ 5,76,00,000/- received by the assessee without any consideration can only be treated as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for adjudicating the taxability of the sum received by the appellant. The admitted facts are that the (i) Appellant is an individual (ii) Appellant received a sum in excess of ₹ 50,000 after 01/04/2006 Now the issue is whether the amount is received by the appellant is with or without consideration? 5.16. For the purposes of adjudicating the issue of receipt of ₹ 2,26,00,000/- as income under the head other sources U/s.56(2)(vi), I hold that the family arrangement, arrived at based on the Arbitration award dated June, 2008, is not taken as a transaction for consideration, thus not falling under the proviso to Sec.56(2)(vi) and the assessing authority is correct in law and in the facts and circumstances of the case to hold that the sum of ₹ 2,26,00,000 is taxable in the hands of the appellant U/s. 56(2)(vi) of I.T. Act. Accordingly, this ground of appeal is dismissed. 8.1 Before us Ld. A.R. submitted that the entire transactions was consequent to the family arrangement and settlement between the family members consisting of Shri SKM Maielanandhan, his wife Smt. M. Kuttilakshmi and two sons Shri SKM Shree Shivkumar and Dr. M Chandrasekar and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitrator under the Arbitration and Conciliation Act 1996 and no other assets were received during the relevant year by the assessee. This is only for the information. Submission Number 3: Inapplicability of Sec 2(24)(iv) of the Income Tax Act 1961: It seems that the department has invoked the provisions of section 2(24)(iv) of the Income Tax Act by ignoring the very fact of the family settlement, details of which were already furnished and also on the records of the company M/s.SKM Animal Feeds and Foods (India) Limited on the basis of which we presume that the assessment of the assessee had been reopened and hence there is no proper appreciation of the facts of the transaction arising out of the family settlement which is a unique and solitary transaction as far the members of the family settlement are concerned, before invoking the above section. The assessee and his family members entered into a family settlement to resolve the disputes amongst the family members over the assets of the company and referred the matter to an Arbitrator as per the provisions of the Arbitration and Conciliation Act 1996. Since the company whose assets are jointly developed by all the family me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mad.) 2. KM.PR.KM Firm v. CIT [1966] 62 ITR 159 (Mad.) 3. M.S.M.M.Firm v.CIT [1969] 72 ITR 14 (Mad.) The Ld. A.R. further relied on the decision of the case Pannalal Silk Mills (P.) Ltd. v. Commissioner of Gift Tax reported in [2011] 338 ITR 1(Bom.) 9. Ld. D.R vehemently argued before us reiterating the stand of the Revenue that the family arrangements arrived at based on the arbitration award dated June 2008 cannot be taken as a transaction because of the following reasons: (i) From the records, it is evident that there exists two arbitration awards, one dated October, 2007 and the other dated June 2008. As per the arbitration award dated October, 2007, the effective date for transfer/demerger of shares in respect of all companies, units, assets and properties shall be the date on which the transfers are legally made. (ii) As per the arbitration award dated June, 2008, the effective date shall be 08/06/2008, which falls beyond the assessment year under consideration. (iii) The perusal of the arbitration award dated June, 2008 clearly envisages that this award made in June 2008, supercedes the earlier one. The Dictionary meaning of 'supersede' is ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion proceedings in so far as the settlement of the dispute and division of the properties were concerned which would require his concurrence. (5) The dispute in essence relates to the division and distribution of the various assets and properties of the family consisting of SKM, Shri SKM Shree Shivkumar and Dr. M. Chandrasekar. (6) The point for determination is, whether the distribution of the assets and properties standing in the names of the family members and their wholly owned private Limited companies represent their jointly acquired assets and properties, or whether each of the individual family members can claim absolute and separate ownership in regard to the assets and properties standing in their individual names. (7) Though the assts and properties were acquired in individual names of the family members and the companies the fact remains that the properties have been acquired by the joint efforts of all the three members of the family. (8) Shri SKM Shree Shivkumar and Dr. M. Chandrasekar, while accepting in principle the position that the various assets and properties have been jointly acquired, have not been able to reach an agreement as to the manner in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ram (Near Siddha Unit) in S.F.No.210/5 to the extent of 5.435 Acres. 2. Windmills ( 5 Nos. having a total capacity of 2250 KW) including the land related to them and its liabilities. 11.2 The Ld. D.R has submitted a written submission dated 25.06.2014 countering the submissions and written submissions of the Ld. A.R. The main argument of the Ld. D.R was that the Arbitration Award was passed on 24.10.2007 and 08.06.2008; however certain transactions like amount received of ₹ 2.26 crores by the appellant from M/s.SKM Animals Feeds And Foods (India) Ltd., was prior to the dates of the Arbitration Award and therefore, they cannot be considered as part of family settlement. It was further stated that the company was a legal entity distinct from its promoters and therefore, the transactions between the companies and family members cannot be considered as a family settlement. We do not find any merit in these submissions of the Ld. D.R. It is an undisputed fact that various higher judicial forums have recognized the oral partial/total partition of HUF or family arrangement to be legally valid. In the present case before us, the chronological events make it abundantly clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid assets between the family members/HUF will give arise to taxable income U/s. 2(22)(e) and 56(2)(vi) or any other provisions of the Act. For understanding the true nature of the transactions, the corporate veil of the intermingled companies in the transactions needs to be pierced. It is pertinent to note that in the relevant case, this issue needs to be considered only in the case of the company M/s.SKM Animal Feeds and Foods (India) Limited M/s.SKM Siddha and Ayurvedic Medicines India Private Limited because only their assets are transferred between both these companies or to the family members. In the case of the Public Limited company M/s. SKM Egg Products Export (India) Ltd., only the equity shares of M/s. SKM Egg Products Export (India) Ltd., held by M/s.SKM Animal Feeds and Foods (India) Limited were transferred to Shri SKM Shree Shivkumar and not any assets held by the company were transferred, therefore the issue of piercing the corporate veil of this company will not arise and also being a public limited company, that may not be permitted. In the case of both the other companies, the entire shares are held by the family members only. Therefore, on piercing the corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious higher judiciary, let us examine the issue that whether any distribution of assets resulting from Family Partition/HUF partial or total partition will give arise to taxability by invoking any of the provisions of the Act ? 13.1 The Hon'ble Madras High Court in the case of CIT v. R. Ponnammal reported in [1986] 164 IT R 706 held as follows: Held: that, in the instant case, it was found as a fact that the family arrangement had been brought about by the intervention of the panchayatdars and this clearly showed that the son and daughters of the assessee were laying claims to the property which the assessee got under the will of her father and it was not relevant at the time when the family arrangement was entered into to find out as to whether such claims if made in a court of law would be sustained or not. If the assessee found it worthwhile to settle the dispute between herself, her sons and daughters by making the family arrangement, the said arrangement could not be ignored by a tax authority. In view of the finding of the Tribunal, the family arrangement dated December 17,1971, had to be held to be a valid piece of document and, hence the Tribunal was right in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in [1998] 2 45 ITR 494 held as follows: Held, that the dispute arose in the family and the family arrangement was arrived at in consultation with the panchayatdars and accordingly re-alignment of interest in several properties resulted. The family arrangement was arrived at in order to avoid continuous friction and to maintain peace among the family members. The family arrangement was governed by the principles which were not applicable to dealings between strangers. So such re-alignment of interest by way of effecting family arrangements among the family members would not amount to transfer. The Tribunal found that the family arrangement was a bona fide one inasmuch as it was made voluntarily and not induced by any fraud or collusion and the conduct of the parties was consistent with the bona fide family arrangement particularly when it was arrived at in the presence of panchayatdars. The family arrangement involved in the above case did not amount to transfer. Therefore, no capital gains arose. 13.4. The Hon ble Delhi High Court in the case of Commissioner of Wealth Tax V. Santhosh Singh reported in [2001] 252 ITR 7 07 held as follows:- Held, dismissing the applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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