A family arrangement cannot be construed as 'transfer' for capital gain purposes

A family arrangement cannot be construed as 'transfer' for capital gain purposes


The Karnataka High Court held that the family arrangement / partition cannot be construed as 'transfer' for capital gain purposes. Therefore, there is no liability to pay capital gain tax under Section 45 of the Income-tax Act, 1961 (the Act).
• The High Court had considered similar issue in the case of CGT v. K N Madhusudan, wherein it was held that :
 The word ‘transfer’ does not include partition or family settlement as defined in the Act.
 What is recorded in the family settlement is nothing but a partition.
 Every member has an anterior title to the property which is subject matter of partition or a family arrangement.
 Under family arrangement there is adjustment of shares, crystallisation of respective rights in the family properties and therefore it cannot be construed as a transfer in the eye of law.
 When there is no transfer there is no capital gain and consequently no capital gain tax.
• In this case, the Tribunal had, after considering entire material, categorically held that the transaction is a family arrangement. Since there was no transfer, there was no question of capital gains and hence, capital gains tax.
• The High Court held that the order of the Tribunal was in accordance with the law.
CIT v. R Nagaraja Rao [2012] 207 Taxman 236 (Kar)