A family arrangement to avoid possible litigation among family members does not amount to a transfer eligible for Capital Gains Tax.

P.D. Dinakaran, J.

The Revenue has preferred the above tax case appeals against the common order of the Income Tax Appellate Tribunal dated 27. 2005 made in ITA Nos.930, 928 and 931/Mds/2000, raising the substantial questions of law, viz.,

"(i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the family arrangement as arrived by the assessee to rearrange the share holdings to avoid possible litigation themselves will not attract Capital Gains Tax under the Income-tax Act, 1961 ?

(ii) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that, the re-arrangement of share holdings in the company to avoid possible litigation among family members to be a prudent arrangement, the same cannot be held as a transfer of shares which is eligible to Capital Gains Tax ?"

Under the following facts and circumstances of the case, which are common in all the three appeals.

2. The assessment year involved in these appeals is 1996-97. There was a transfer of shares between the assessee-firm, which consists of partners, who are family members, in that, certain new shares were acquired in exchange of old shares, as also some consideration in cash. According to the assessees, the transfer was consequent to a family arrangement. But, the Assessing Officer, after analysing the facts of the case and the legal aspects on the same, concluded that there was indeed a transfer involved and thus, subjected the Capital Gains Tax. Aggrieved by the same, the assessees filed appeals before the Commissioner of Income-tax (Appeals), who upheld the orders of the assessing officer. Exasperated by the same, the assessees preferred second appeals before the Tribunal and the Tribunal, by the impugned common order dated 27. 2005, allowed the appeals on the ground that the re-arrangement of share holdings in the company to avoid possible litigation among family members is a prudent arrangement, which is necessary to control the company effectively by the major share holders to produce better prospects and active supervision and accordingly, held that such family arrangement cannot be held as transfer, which is eligible to Capital Gains Tax. Hence, the present appeals by the Revenue raising the substantial questions of law referred to above.

3. The core issue that arises for consideration in these appeals is whether the transfer of shares pursuant to the family arrangement to avoid a possible litigation among the family members would attract the Capital Gains Tax.

4. The law on the point is well settled by the decisions of the Apex Court in Maturi Pullaiah and another v. Maturi Narasimham and others [A.I.R. 1966 (SC) 1836], and in Kale and Others v. Deputy Director of Consolidation and others [A.I.R. 1976 (Supreme Court) 807] which are followed by this Court in Commissioner of Income-tax v. Ponnammal [(1987) 164 I.T.R. 706], and in Commissioner of Income-tax v. AL.Ramanathan [(2000) 245 I.T.R. 494]. It is a settled law that when parties enter into a family arrangement, the validity of the family arrangement is not to be judged with reference to whether the parties who raised disputes or rights or claimed rights in certain properties had in law any such right or not.

1. In Maturi Pullaiah and another v. Maturi Narasimham and others [A.I.R. 1966 (SC) 1836], cited supra, the Apex Court has held as follows:-

"Briefly stated, though conflict of legal claims in praesenti or de futuro is generally a condition for the validity of a family arrangement, it is not necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims will suffice. Members of a joint Hindu family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an arrangement is entered into bona fide and the terms thereof are fair in the circumstances of a particular case, courts will more read