Commissioner Of Income Tax – Ii, Jalandhar v. Ashwani Chopra

IN THE PUNJAB & HARYANA HIGH COURT AT CHANDIGARH Date of Decision: 10.01.2013 ITA No.353 of 2011 Commissioner of Income Tax – II, Jalandhar …Appellant Versus Ashwani Chopra …Respondent ITA No.354 of 2011 Commissioner of Income Tax – II, Jalandhar …Appellant Versus Ashwani Chopra …Respondent ITA No.355 of 2011 Commissioner of Income Tax – II, JalandharVersusArvind Chopra …Appellant …Respondent ITA No.356 of 2011 Commissioner of Income Tax – II, JalandharVersus …Appellant Arvind Chopra…Respondent CORAM: HON’BLE MR. JUSTICE HEMANT GUPTAHON’BLE MS. JUSTICE RITU BAHRI Present:Mr. Vivek Sethi, Advocate, for the appellant. HEMANT GUPTA, J. This order shall dispose of afore-mentioned four appealsfiled under Section 260-A of the Income Tax Act, 1961 (for short ‘theAct’) arising out of an order passed by the Learned Income TaxAppellate Tribunal, Amritsar Bench, Amritsar in respect ofAssessment Year 2007-08. However, for facility of reference the factsare taken from ITA No.354 of 2011. The Revenue has raised the following substantialquestions of law: i.Whether the Hon’ble ITAT was right in law inconfirming the relief allowed by the learned CIT(A) in respect of the addition of Rs.2,09,47,604/-being capital gain on the compensation received?ii.Whether the Hon’ble ITAT was right in law inholding that the assessee has only inchoate right toreceive the compensation till the final outcome ofthe decision of the Hon’ble Apex Court? However, we find that the following question of lawarises for consideration: “Whether the amount of compensation paid to theassessee to settle inequalities in partition, thus, aprovision of owelty, represents immovable property andis not an income exigible to tax?” The said question of law arises out of the fact that duringthe course of assessment proceedings, the Assessing Officer found thatthe assessee (Group A) has received compensation from Group B atthe time of partition of properties of group of M/s Hind Samachar Ltd.and that the said amount has been kept in Fixed Deposit Receipts asper the orders passed by the High Court as well as by the Hon’bleSupreme Court. The learned Assessing Officer considered the familysettlement and found that 8.56% of Rs.24 crores of compensation isthe share of the assessee (Ashwani Chopra) and consequently, leviedlong term capital gain on the said amount. There were two groups i.e. Group ‘A’, based at NewDelhi and Group ‘B’, based at Jalandhar of share-holders of M/s HindSamachar Ltd., a company founded by the veteran journalist late LalaJagat Narian. Group ‘A’ is headed by Smt. Sudarshan Chopra,whereas Group ‘B’ is headed by Shri Vijay Kumar Chopra. Afterprolonged litigation, during the pendency of an appeal before thisCourt against an order of the Company Law Board, parties agreed tosettle their disputes. Earlier, Group ‘B’ has given a proposal fordividing the assets and businesses of the family including thecompany into two lots i.e. lot-1 containing the Jalandhar and Ambalaunits, whereas lot-2 containing Delhi and Jaipur units. Group ‘B’offered Group ‘A’ to choose one of the lots. Instead of choosing oneof the lots, Group ‘A’ filed an application under Section 8 of theArbitration & Conciliation Act, 1996 which was dismissed by theCompany Law Board on 17.05.2004 laying down the modalities forthe division of the company. The said order was challenged before this Court. The parties agreed to settle the disputes amicably asrecorded by this Court in the order dated 19.10.2005. The relevantextract of the order dated 19.10.2005 reads as under: this Court. The parties agreed to settle the disputes amicably asrecorded by this Court in the order dated 19.10.2005. The relevantextract of the order dated 19.10.2005 reads as under: “The appellants as well as Group A have decided to settlethe matter amicably. It has been agreed that the appellants will beentitled to lot-2, in terms of the enclosures accompanying the letterdated 07.03.2000 constituting proposals formulated by Group A(herein) and available on the record of the Company Law Board. Itgoes without saying that lot-1 as determined by the enclosures tothe aforesaid letter dated 07.03.2000, shall be retained by Group A.The afore stated arrangement shall be entail that the assets and theliabilities of the company and the firms under lot-2 located in theterritories of Delhi and Jaipur shall fall to the share of the appellantsand the assets and the liabilities of the company and the firms underlot-1 in the territories of Jalandhar and Ambala shall fall to the shareof Group A. Additionally, the appellants have exercised their optionto accept Rs.24 crores under paragraph (xx)(i) of the modifiedproposal. This amount has been agreed to be deposited by Group Awith the Company Law Board, by way of Bank draft, for onwardtransmission to the appellants within six weeks from today.” In terms of such settlement, lot-1 in the territories ofJalandhar and Ambala fell to the share of Group ‘A’ and lot-2 in theterritories of Delhi and Jaipur fell to the share of Group ‘B’ with thecondition of payment of Rs.24 crores. Such amount of Rs.24 croreswas deposited with the Company Law Board. Now the disputeregarding date of split is pending before different forums includingbefore the Hon’ble Supreme Court. It is so apparent from the order ofthe Assessing Officer, which reads as under: “12. As stated by the assesse’s counsel in letter dated 13.11.2009,the order dated 04.11.2008 of Hon’ble Punjab & Haryana HighCourt has been challenged by Group B shareholders by way of SLPin Supreme Court of India. It is, thus, apparent that Group A, ofwhich the assessee is a member, is not aggrieved with the amount of compensation of Rs.24 crores paid to it by Group B and the GroupA has exercised the option of accepting Rs.24 crores before HighCourt. Further, a perusal of the Hon’ble Supreme Court’s ordershows that the Group B, vs. Shri Vijay Kumar Chopra & othershave filed appeal against the order dated 04.11.2008 of the Punjab& Haryana High Court and the Hon’ble Supreme Court has orderedto list the case on the notified date and that till that date the orderpassed by the High Court shall not operate.” The assessee filed an appeal against the said order. Thelearned Commissioner of Income Tax (Appeals) held that distributionof assets including sum of Rs.24 crores was not complete during therelevant year as the matter was sub-judice and the assessee was notallowed to use the money by the order of this Court, therefore, the sumof Rs.24 crores transferred to the assessee and other members ofGroup A did not accrue to the income of this group including theappellant. Such order has been affirmed in appeal as well by theTribunal. Learned counsel for the appellant has vehemently arguedthat the amount of Rs.24 crores was deposited by the other Group, ascompensation to the assessee in the present set of appeals. Though theassessee cannot use money in terms of the order passed by this Court,but the fact remains that the interest on such deposit is an income andis liable to tax. It is argued that the order of Commissioner of IncomeTax and that of the Tribunal are based upon misapprehension of factsand law, therefore, the capital gain is payable on the amount ofcompensation received. On the other hand, learned counsel for the respondentrelying upon the ‘principle of owelty’, argued that the amount of Learned counsel for the appellant has vehemently arguedthat the amount of Rs.24 crores was deposited by the other Group, ascompensation to the assessee in the present set of appeals. Though theassessee cannot use money in terms of the order passed by this Court,but the fact remains that the interest on such deposit is an income andis liable to tax. It is argued that the order of Commissioner of IncomeTax and that of the Tribunal are based upon misapprehension of factsand law, therefore, the capital gain is payable on the amount ofcompensation received. On the other hand, learned counsel for the respondentrelying upon the ‘principle of owelty’, argued that the amount of compensation received by the assessee, is to equalize the inequalitiesin the partition and, thus, such amount is nothing but an immovableproperty. It is contended that such amount received by the assessee isnot an income, but a share in the immovable property though paid incash, as it is the cash value to settle inequalities in partition.Therefore, such amount cannot be treated as income liable to capitalgain. Reliance has been made to the judgment of Hon’ble SupremeCourt reported asT.S.Swaminatha Odayar Vs. Official Receiver ofWest TanjoreAIR 1957 SC 577 and the Division Bench judgments ofMadras High Court in Commissioner of Income Tax Vs. AL.Ramanathan(2000) 245 ITR 494 andCommissioner of Income TaxVs. Kay Arr Enterprises & others(2008) 299 ITR 348 apart fromthe Division Bench judgments of Karnataka and Gauhati High CourtinCommissioner of Income Tax Vs. R. Nagaraja Rao(2012) 207TAXMAN 74 andZiauddin Ahmed Vs. Commissioner of Gift-Tax,Assam, Nagaland, Meghalaya, Manipur & Tripura(1976) 102 ITR253 respectively In T.S.Swaminatha Odayar‘scase (supra), the SupremeCourt was examining the nature of provision in a partition decree for apayment by one co-sharer to another of a sum of money forequalization of shares. It was held that such payment in the partitionsettlement was an owelty for adjustment or equalization of shares andno more. The Court observed as under: “14. It must be remembered that the decree was one for partition ofthe properties belonging to the joint family of which the defendantNo.3 and the appellant were coparceners. While effecting such apartition it would not be possible to divide the properties by metesand bounds there being of necessity an allocation of properties ofthe properties belonging to the joint family of which the defendantNo.3 and the appellant were coparceners. While effecting such apartition it would not be possible to divide the properties by metesand bounds there being of necessity an allocation of properties of unequal values amongst the members of the joint family. Propertiesof a larger value might go to one member and properties of asmaller value to another and therefore there would have to be anadjustment of the values by providing for the payment by the formerto the latter by way of equalization of their shares. …..” It has been held that when an owelty is awarded to amember of a joint family on partition for equalization of the shares onan excessive allotment of immovable properties to another member ofthe joint family, such a provision of owelty ordinarily creates a lien ora charge on the land taken under the partition. The member to whomexcessive allotment of property has been made on such partitioncannot claim to acquire properties falling to his share irrespective ofor discharge from the obligation to pay owelty to the other members.What he gets for his share is, the properties subject to the obligation topay such owelty and that by necessary implication, an obligation onhis part to pay owelty out of the properties allotted to his share. It wasobserved as under: It has been held that when an owelty is awarded to amember of a joint family on partition for equalization of the shares onan excessive allotment of immovable properties to another member ofthe joint family, such a provision of owelty ordinarily creates a lien ora charge on the land taken under the partition. The member to whomexcessive allotment of property has been made on such partitioncannot claim to acquire properties falling to his share irrespective ofor discharge from the obligation to pay owelty to the other members.What he gets for his share is, the properties subject to the obligation topay such owelty and that by necessary implication, an obligation onhis part to pay owelty out of the properties allotted to his share. It wasobserved as under: “18. It therefore follows that when an owelty is awarded to amember on partition for equalization of the shares on an excessiveallotment of immovable properties to another member of the jointfamily, such a provision of owelty ordinarily creates a lien or acharge on the land taken under the partition. A lien or a charge maybe created in express terms by the provisions of the partition decreeitself. There would thus be the creation of a legal charge in favourof the member to whom such owelty is awarded. If, however, nosuch charge is created in express terms, even so the lien may existbecause it is implied by the very terms of the partition in theabsence of an express provision in that behalf. The member towhom excessive allotment of property has been made on suchpartition cannot claim to acquire properties falling to his shareirrespective of or discharged from the obligation to pay owelty tothe other members. What he gets for his share is therefore theproperties allotted to him subject to the obligation to pay such owelty and there is imported by necessary implication an obligationon his part to pay owelty out of the properties allotted to his shareand a corresponding lien in favour of the members to whom suchowelty is awarded on the properties which have fallen to his share.” A Full Bench of Kerala High Court in a judgment reported asParvathi Amma Vs. Makki AmmaAIR 1962 Kerala 85explained the concept of owelty and held that such amount is not adebt 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 Court observed as under: “4. …The case of owelty is, in our view, very similar to theconsideration for a release of the kind mentioned above. The co-sharer who accepts the lesser properties gives a part of his share tothe other co-sharer in consideration of a sum of money which iscalled ‘owelty’. In other words, owelty represents the unpaid priceof the excess land taken from one co-sharer and given to another onpartition; it is as if a portion of the property that really belonged toB has been assigned to A and A is made to pay the price therefore toB. B is therefore entitled to a vendor’s share for the price remainingunpaid. xxxxxxxxx 7. ….As we have found owelty to be the price of land taken fromone co-sharer & allotted to another on a partition, and that thecharge for owelty is in substance, a vendor’s charge for unpaidprice, it is within the exception (vii) in the above definition and is,therefore, outside the purview of the Kerala Agriculturists DebtRelief Act, 1958.” In the concurring, but separate judgment by Hon’ble Mr. Justice Baghavan, J. it was mentioned that owelty is only part of the properties partitioned though it may not be part of the originalproperties. It was held to the following effect: “16. …Putting the idea again differently, the share of the memberwith the excessive allotment is that excessive allotment less theowelty carved out of it and the share of the other member is the xxxxxxxxx 7. ….As we have found owelty to be the price of land taken fromone co-sharer & allotted to another on a partition, and that thecharge for owelty is in substance, a vendor’s charge for unpaidprice, it is within the exception (vii) in the above definition and is,therefore, outside the purview of the Kerala Agriculturists DebtRelief Act, 1958.” In the concurring, but separate judgment by Hon’ble Mr. Justice Baghavan, J. it was mentioned that owelty is only part of the properties partitioned though it may not be part of the originalproperties. It was held to the following effect: “16. …Putting the idea again differently, the share of the memberwith the excessive allotment is that excessive allotment less theowelty carved out of it and the share of the other member is the lesser allotment added with the owelty carved out of the excessiveallotment. This again means that owelty is only part of theproperties partitioned; it may not be part of the original properties;but, if I may borrow the expression of Maclean, C.J. in the Calcuttacase which I shall hereinafter refer to, it is the substituted propertywhich the sharer gets in the partition.” In Sivaswami Chettiar Vs. Muthuswami Chettiar & others(1965) 78 LW 695, the Madras High Court held that oweltyrepresents the difference arising out of unequal partition and is anature of property and not a debt. The Court observed as under: “2. Owelty of course represents the difference arising out ofunequal partition and is in the nature of property and not a debt.When equal partition for some reason or other is not possible, inorder to adjust rights and equities, the sharer who has been allottedproperty in excess of his due is directed to make good to the othersharer who has been allotted less, to the extent of such excess. Inmy view, such owelty is clearly not a liability in the nature of a debt,but is property….” The Madras High Court in a judgment reported as Palanikumar Pillai Vs. Palanikumar Pillai & others(1988) 1 LW 448 explained the scope of ‘provision of owelty’. While referring tothe Supreme Court judgment in Badri Narain Prasad Choudary &others Vs. Nil Rattan Sarkar(1978) 3 SCR 467, held to the followingeffect: “23..........A Court may also be confronted with a situation, namely,that the item of property is not capable of physical partition or issuch that, if divided, it will lose its intrinsic worth, in such a case,that item is allotted to one and compensation in money value isgiven to the other and if such a course is not possible it is soldoutright and the sale proceeds divided between the joint owners.All the aforesaid and similar other methods are adopted by Courtsin making an equitable partition of the joint properties either with the consent of the parties or where such consent is not forthcomingin exercise of its own discretion. Whatever method is adopted, it is only to implement theprocess of equitable partition. It would well-night be impossible fora Court to effectuate a partition on an equitable basis, if it should beheld that it is under a legal obligation to divide every item of thejoint property in specis. Where properties are susceptible of suchdivision, the Court adopts it. Where it is not, it adopts one or otherof the alternative methods narrated above. .............” The Madras High Court in AL. Ramanathan’scase(supra) returned a finding that an amount of Rs.8 lacs received in afamily settlement to settle the disputes between the family is notsubject to capital gain. It was observed as under: the consent of the parties or where such consent is not forthcomingin exercise of its own discretion. Whatever method is adopted, it is only to implement theprocess of equitable partition. It would well-night be impossible fora Court to effectuate a partition on an equitable basis, if it should beheld that it is under a legal obligation to divide every item of thejoint property in specis. Where properties are susceptible of suchdivision, the Court adopts it. Where it is not, it adopts one or otherof the alternative methods narrated above. .............” The Madras High Court in AL. Ramanathan’scase(supra) returned a finding that an amount of Rs.8 lacs received in afamily settlement to settle the disputes between the family is notsubject to capital gain. It was observed as under: “2. A perusal of the records goes to establish that dispute arose inthat family and the family arrangement was arrived at inconsultation with the panchayatdars and accordingly realignment ofinterest in several properties had resulted. The family arrangementwas arrived at in order to avoid continuous friction and to maintainpeace among the family members. The family arrangement is anagreement between the members of the same family intended begenerally and reasonably for the benefit off the family either bycompromising doubtful or disputed rights or by preserving thefamily property or the peace and security off the family by avoidinglitigation or by saving its honour. So, the family arrangements aregoverned by principles which are not applicable to dealingsbetween strangers and the family arrangement among them is forthe interest of the family, for the harmonious way of living. So,such realignment of interest by way of effecting family arrangementamong the family members would not amount to transfer.” In Kay Arr Enterprises case (supra), there was transfer of shares as also consideration in cash. The Court held that suchrearrangement of shareholding in the Company is to avoid possiblelitigation among the family members and is prudent arrangement and such transfer of shares is not alienation. The Court held to thefollowing effect: “9. In the instant case also, the Tribunal found that therearrangement of shareholdings in the company to avoid possiblelitigation among family members is a prudent arrangement which isnecessary to control the company effectively by the majorshareholders to produce better prospects and active supervision orotherwise there would be continuous friction and there would be nopeace among the members of the family. Such a familyarrangement intended either by compromising doubtful or disputedrights or by preserving the family property or the peace and securityof the family by avoiding litigation or by saving its honour cannotbe concluded as any other dealings between strangers, as such afamily arrangement is for the interest of the family and for theharmonious way of living. Therefore, such a realignment of interestby way of effecting a family arrangement among the familymembers would not amount to transfer.” The Division Bench of Karnataka High Court in R.’Nagaraja Raoscase (supra) has held that partition is not a transfer andadjustment of shares, crystallization of the respective rights in thefamily properties cannot be construed as a transfer in the eye of law.When there is no transfer of asset, there is no capital gain andconsequently there is no liability to pay tax on capital gains. In view of the aforesaid principles of law, we find that thepayment of Rs.24 crores to Group A is to equalize the inequalities inpartition of the assets of M/s Hind Samachar Ltd. The amount so paidis immovable property. If such amount is to be treated as incomeliable to tax, the inequalities would set in as the share of the recipientwill diminish to the extent of tax. Since the amount paid during thecourse of partition is to settle the inequalities in partition, therefore In view of the aforesaid principles of law, we find that thepayment of Rs.24 crores to Group A is to equalize the inequalities inpartition of the assets of M/s Hind Samachar Ltd. The amount so paidis immovable property. If such amount is to be treated as incomeliable to tax, the inequalities would set in as the share of the recipientwill diminish to the extent of tax. Since the amount paid during thecourse of partition is to settle the inequalities in partition, therefore deemed to be immovable property. Such amount is not an incomeliable to tax. Thus, the amount of owelty i.e. compensation depositedby Group B is to equalize the partition represents immovable propertyand will not attract capital gain. The argument that the assessee is liable to tax beinginterest on cash, suffice it to say, that such question or fact does notarise from the orders of the Tribunal. Consequently, the question oflaw is answered against the Revenue and in favour of the assesseeleading to the dismissal of appeal though on different grounds. (HEMANT GUPTA)JUDGE 10.01.2013Vimal (RITU BAHRI)JUDGE