These appeals are filed by different assessees. Since common issue is involved in these appeals and the assessees are of the same group, they were heard together and are being disposed of by this consolidated order for the sake of convenience. In these three appeals of the assessees, the relevant assessment year involved is 1996-97 pertaining to the financial year 1995-96.
The only common issue in these appeals is that as to whether, in view of family arrangement as arrived at by the assessees to rearrange their shareholdings to avoid possible litigation among themselves will attract capital gain or not and whether it is a transfer or not.
The briefly stated facts are that the assessees, along with their family members in the previous year ended 31-3-1996, had transferred shares owned by the assessees and family members in M/s. Lakshmi Mills Ltd. and Lakshmi Card Clothing Co. Ltd. to the family members of Shri G.K. Sundaram. The assessees in regard to these transfers had submitted as under: "The assessee has transferred ICC and IMC shares and converted into Vijayeswari Textiles Ltd. share. In this connection we beg to submit the following: Shri K. Rajagopal and his family members are part of the Lakhsmi Group of families, certain companies were managed and controlled by the families of Sri G.K. Sundaram and Sri K. Rajagopal, jointly subsequent to certain family arrangement in which certain companies were allotted for the control and management of Sri G.K. Devarajulu. Subsequent to the first family arrangement Sri G.K. Sundaram and Sri K. Rajagopal and their family members were managing various companies. Due to various difficulties in managing various companies as a group and for the purpose of betterment of the respective companies and management by the elders of the family have formalized a family arrangement by which Shri K. Rajagopal and his family members were allotted the management.and control of Vijayeswari Textiles Ltd. and consequent to that Shri K.Rajagopal and his family members have relinquished and transferred their interest in other group companies in favour of Sri K. Sundaram and his family members and associates and have also received the shares held by Sri G.K. Sundaram, his family and associates in Vijayeswari Textiles Ltd. The transfer were effected consequent to the family arrangement agreed to between the members of the family. The family arrangement was accepted by all the members concerned in personal meeting and on oral agreement. As the transfers are as result of a family arrangement and to exercise the respective family group, it is submitted that the transfers are not liable to capital gains." This reply was submitted by the assessees in response to the letters issued by the assessing officer alleging that the assessees are liable for capital gains. The assessees objected for taxing the capital gains arising out of family arrangement and stated that rearrangement of share holdings in the companies were made to avoid possible litigation among family members. The assessing officer has not accepted the contentions of the assessees on the ground that there was no family arrangement in writing and consequently, there was no family arrangement as such. According to the assessing officer, the family was already divided long back and smaller families remained who, were doing independent business. The assessing officer from the details found that all the assessees have received consideration in terms of money for transfer of shares and there were transferors and transferees. The transferees in regard to the shares in the family of Shri K. Rajagopal, according to the assessing officer, were as under: Minor K. Arjun and Minor K. Nithin, represented by Smt. K. Vijayashree Karivaradhan And minor R. Adityakrishnan, represented by father and guardian Sri S.Pathy." The assessing officer further found that the other family of Shri G.K.Sundaram had offered capital gain tax arising out of sale of shares of M/s. Vijayeswari Textiles Ltd. to Shri K. Rajagopal. According to the assessing officer these assessees have accepted that there was no family arrangement involved in the transfer of shares and the transfer of shares, according to them, was liable to capital gain tax under the Income Tax Act. Further, the assessing officer found that there was extinguishment of title as a result of transfer of shares of M/s.
Lakshmi Mills Ltd., M/s. Lakshmi Card Clothing Co. Ltd. and M/s.
Vijayeswari Textiles Ltd. All the transferees have lost their rights and title over the shares held by them previous and had acquired new shares and rights consequent to the transaction. Accordingly, the assessing officer held that this was a transfer of shares as there was no family arrangement as such and taxed the capital gains arising out of this transaction. Aggrieved, the assessees preferred an appeal before the Commissioner (Appeals) who upheld the action of the assessing officer. Aggrieved, now the assessees are in appeals before the Tribunal.
Before the Tribunal these assessees have raised three common grounds which read as under: "1. The learned Commissioner (Appeals) has failed to appreciate that in a family arrangement, large business houses controlled by families would rearrange their shareholdings in the companies to avoid possible litigation among themselves in their holdings and such prudent arrangement is evidently necessary to control the companies effectively by the major shareholders to produce better profit and exert effective supervision both in the administrative and productive sides of the functions of the companies.
2. The Commissioner (Appeals) ought to have noted that for effecting a family arrangement, the arrangement need not be reduced in writing compulsorily and it need not be registered. An oral family agreement is sufficient to carry out a family arrangement claims and is equally enforceable like a registered document in the eye of law.
3. The Commissioner (Appeals) has failed to note that the real consideration in a family arrangement relating to propdrties is not the sacrifice of the right but the abandonment of future and avoidance of future disputes and that, in a family arrangement, it is based on the assumption that there is an antecedent title of some kind in the properties and a family arrangement merely acknowledges and defines what that title is." The assessee is a partnership firm and consists of all family members of Shri K. Rajagopal as one part of Lakshmi Group of Companies who controlled certain companies held by the families of G.K Sundaram. and in turn, Shri G.K Sundaram and family members also controlled by the same Lakshmi Group of Companies and both the families jointly subsequent to the family arrangement, certain companies were allotted for the control and management of G.K. Sundaram. These two families are branches of the same family. The family tree of Govindasamy Naidu which have already been incorporated in the assessment order and the family tree is being reproduced as it is: 3rd Son-in-law V. Narayanaswamy B/O: N. Thayarammal Wife is cousin of K. Sundaram Brother-in law of K. Sundaram A large business house has controlled by many companies but to avoid litigation among families, they have reached at a family arrangement to rearrange the shareholdings between the elders of the families as it was necessary to control the companies effectively by the major shareholders to produce better profit and exert effective supervision both in the administration and production for the functioning of the companies. Shri K. Rajagopal and his family members were one part of Lakshmi Group of Companies and other part was Shri G.K. Sundaram and his family members. A family arrangement was reached between Sri K.Rajagopal and Sri G.K. Sundaram to rearrange the shareholdings among these two families of Lakshmi Group of Companies. This was done due to various difficulties in managing the various companies as a group and for the purpose of betterment of respective companies and management by the elders of the family, Sri K. Rajagopal and family by way of this family arrangement transferred their interests in the Lakshmi Mills Ltd. and Lakshmi Card Clothing Mfg. Co. Ltd. to the family of Shri G.K.Sundaram. in lieu of this family arrangement Shri G.K. Sundaram.
transferred entire shareholdings in Vijayeswari Textile Mills to the assessee-firm and Sri K. Rajagopal and family. This family arrangement was effected verbally and it was not reduced in writing.
During the course of argument, the learned counsel for the assessee relied on the case laws which are discussed as under: He relied on the decision of the Hon'ble Supreme Court in the case of Maturi Pullaiah v.Maturi Narasimham AIR 1966 SC 1836 (V) 53 the learned counsel for the assessee 369) wherein the Hon'ble Apex Court has held as under: "Although conflict of legal claims in praesenti or in future in generally a condition for the validity of family arrangement, it is not necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims would be sufficient. 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 thereto are fair in the circumstances of a particular case, the Courts will more readily give asset to such an arrangement than to avoid it. In England also the Courts are averse to disturb family arrangements but try to sustain them on broadest considerations of the family peace and security.
The family arrangement will need the registration only if it creates any interest in immovable property in praesenti in favour of the parties mentioned therein. In case however no such interest is created, the document will be valid despite its non-registration and will not be hit by section 17 of the Registration Act." In this Apex Court judgment, the principles of family arrangement are depicted at paras 9 and 17 which reads as under: "(9) A brief summary of the nature of family arrangements and the conditions for their validity is found in Halsbury Laws of England, 3rd Edn., Vol. 17 at pp. 215-26: 'A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour.
The agreement may be implied from a long course of dealing, but it is more usual to embody or to effectuate the agreement in a deed to which the term "family arrangement" applied.' The principles the Courts should bear in mind in appreciating the scope of such family arrangement are stated thus: 'Family arrangements are governed by principles which are not applicable to dealings between strangers. The Court, when deciding the rights of parties under family arrangements or claims to upset such arrangements, considers what in the broadest view of the matter is most for the interest of families, and has regard to considerations which, in dealing with transactions between persons not members of the same family, would not be taken into account. Matters which would be fatal to the validity of similar transactions between strangers are not objections to the binding effect of family arrangements.' This passage indicates that even in England Courts are averse to disturb family arrangement but would try to sustain them on broadest considerations of the family peace and security. This concept of a "family arrangement' has been accepted by Indian Courts but has been adapted to suit the family set up of this country which is different in many respects from that obtaining in England. As in England so in India, Courts have made every attempt to sustain a family arrangement rather than to avoid it, having regard to the broadest considerations of family peace and security.
(17) Briefly stated, though conflict of legal claims in praesenti or in future 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 readily give assent to such an arrangement than to avoid it."Kale v. Dy. Director of Consolidation AIR "9. Before dealing with the respective contentions put forward by the parties, we would like to discuss in general the effect and value of family arrangements entered into between the parties with a view to resolving disputes once for all. By virtue of a family settlement or arrangement members of a family descending from a common ancestor or a near relation seek to sink their differences and disputes, settle and resolve their conflicting claims or disputed titles once for all in order to buy peace of mind and bring about complete harmony and goodwill in the family. The family arrangements are governed by a special equity peculiar to themselves and would be enforced if honestly made. In this connection, Kerr in his valuable treatise 'Kerr on Fraud' at p. 364 makes the following pertinent observations regarding the nature of the family which may be extracted thus: 'The principles which apply to the case of ordinary compromise between strangers, do not equally apply to the case of compromises in the nature of family arrangements. Family arrangements are governed by a special equity peculiar to themselves, and will be enforced if honestly made, although they have not been meant as a compromise, but have proceeded from an error of all parties, originating in mistake or ignorance of fact as to what their rights actually are, or of the points on which their rights actually depend.' The object of the arrangement is to protect the family from long drawn litigation or perpetual strifes which mar the unity and solidarity of the family and create hatred and bad blood between the various members of the family. To-day when we are striving to build up an egalitarian society and are trying for a complete reconstruction of the society, to maintain and uphold the unity and homogeneity of the family which ultimately results in the unification of the society and, therefore, of the entire country, is the prime need of the hour. A family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term 'family' has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successionis so that future disputes are scaled for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The Courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the Courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits. The law in England on this point is almost the same. In Halsbury Laws of England, Vol. 17, Third Edition, at pp. 215-216, the following apt observations regarding the essentials of the family settlement and the principles governing the existence of the same are made which is already reproduced in para 6.1 above: 10. In other words to put the binding effect and the essentials of a family settlement in a concretized form, the matter may be reduced into the form of the following propositions: (1) The family settlement must be a bona fide one so as to resolve family disputes and rival claims by a fair and equitable division or allotment of properties between the various members of the family; (2) The said settlement must be voluntary and should not be induced by fraud, coercion or undue influence; (3) The family arrangements may be even oral in which case no registration is necessary; (4) It is well-settled that registration would be necessary only if the terms of the family arrangement are reduced into writing. Here also, a distinction should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making necessary mutation. In such a case the memorandum itself does not create or extinguish any rights in immovable properties and, therefore, does not fall within the mischief of section 17(2) (sic) section 17(1)(b) of the Registration Act and is, therefore, not compulsorily registrable; (5) The members who may be parties to the family arrangement must have some antecedent title, claim or interest even a possible claim in the property which is acknowledged by the parties to the settlement. Even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him to be the sole owner, then the antecedent title must be assumed and the family arrangement will be upheld and the Courts will be upheld and the Courts will find no difficulty in giving assent to the same; (6) Even if bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable the family arrangement is final and binding on the parties to the settlement."K.Shanmugam Pillai v. K. Shanmugam Pillai AIR 1972 SC 2069 after an exhaustive consideration of the authorities on the subject, observed as under: "Equitable principles such as estoppel, election, family Settlement, etc., are not mere technical rules of evidence. They have an important purpose to serve in the administration of justice. The ultimate aim of the law is to secure justice. In the recent times in order to render justice between the parties, Courts have been liberally relying on those principles. We would hesitate to narrow down their scope."S.K. Sattar S.K.Mohd. Choudhari v. Gundappa Ambadas Bukate (1996) 6 SCC 373 has held in respect of family arrangement as under: "Section 5 contemplates transfer of property by a person who has a title in the said property to another person who has no title. A family arrangement, 'on the contrary, is a transaction between the members of the same family for the benefit of the family so as to preserve the family property, the peace and security of the family, avoidance of family dispute and litigation and also for saving the honour of the family. Such an arrangement is based on the assumption that there was an antecedent title in the parties and the agreement acknowledges and defines what that title is. It is for this reason that a family arrangement by which each party takes a share in the property has been held as not amounting to a 'conveyance of property' from a person who has title to it to a person who has not title." Further, the learned counsel for the assessee relied on the decision of the Hon'ble Madras High Court in the case of CIT v. AL. Ramanathan (2000) 245 ITR 494 wherein it has held under the head note as follows: "The assessee was a Hindu undivided, family. The karta of this joint family was one R, the son of A. There was a partition in the joint family of which A was the karta and his three sons, L, P and R, were the other coparceners. Disputes arose in the family and an interim agreement was entered into on 19-8-1980, under which the assessee's side was to receive a certain sum of money and certain lands and in return they were required to transfer half of their shareholding in certain companies. On 20-8-1981, a final agreement was drawn up and there was again a re-alignment of family properties. The assessee claimed that the agreements dated 19-8-1980, and 20-6-1981, were in pursuance of a family arrangement and, hence, the capital gains from these transactions could not be assessed to capital gains tax. The Income Tax Officer took the view that the transactions amounted to transfer of title in respect of which capital gains was exigible to tax. The Tribunal came to the conclusion that the transaction was a family arrangement and did not involve any transfer of title of properties. On a reference: 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 present of panchayatdars., The family arrangement involved in the above case did not amount to transfer. Therefore, no capital gains arose." On the other hand, the learned Departmental Representative argued that there is no family arrangement as such and no dispute at all which is to be resolved by way of family arrangement and moreover there is no written family agreement. Even otherwise, the family of Shri G.K.Sundaram admitted the capital gains on the same transaction arising out of the same transfer of shares of M/s. Vijayeswari Textile Mills and in turn purchased the shares of Lakshmi Mills Ltd. and Lakshmi Card Clothing Mfg. Co. Ltd. For this, he contended that there cannot be unilateral settlement and unilateral family settlement. For this, he relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of N. Durgaiah v. CGT (1975) 99 ITR 477.
We have considered the case law cited by the learned Departmental Representative wherein the Hon'ble Andhra Pradesh High Court under the head note held as follows: "Held, that in order to constitute a family arrangement, there must be an agreement or arrangement amongst the members of the joint family who wish to avoid any plausible or possible disputes and secure peace and harmony amongst the members as well as the properties belonging to them. Unless and until the existence of an arrangement or agreement is established, there can be no family arrangement. Where one of the parties executes a document styled as settlement deed whereunder some of the parties exclusively belonging to him as his self-acquired properties are settled in favour of the other members of the family, the terms of such document do not amount to a family arrangement. There is no agreement or arrangement amongst the members of the family which is the essence of a family arrangement in such a transaction as the same is only a unilateral one." We have considered the whole issue and gone through the case laws relied upon by both the sides. The condition laid down by the Hon'ble Apex Court in the case of Kale (supra) that where the family arrangement may be oral, no registration is necessary. In the present case, the family arrangement is not reduced into writing and after going through the facts of the case, it is not at all necessary. It seems that the assessee and the family of Shri K. Rajagopal transferred the shares of M/s. Lakshmi Mills Ltd. and M/s. Lakhsmi Card Clothing Mfg. Co. Ltd. and in turn, the other family of Shri G.K. Sundaram and Sri Narayanaswamy Naidu transferred the shareholdings of M/s.
Vijayeswari Textile Mills to the assessee and the family members of Shri K. Rajagopal. This is happened within March 1996. This arrangement was entered into between the family members who transacted the shares and in view of the nature of arrangement, this arrangement cannot be called as a transfer within the meaning of section 2(47) of the Income Tax Act. Here, we have to consider the reply submitted by the assessee which was submitted before the assessing officer dated 18-2-1999 which is being reproduced as it is: "The partners of the assessee-firm are all family members of Shri K.Rajagopal and family and the shares were exchanged pursuant to a family arrangement into with Shri G.K. Sundaram family and Shri Narayanaswamy Naidu family. The matters were settled by way of family arrangement and the shares held by each members were so reorganized that the family members of Shri K. Rajagopal and family will have the holding of Vijayeswari Textiles Ltd. and their holdings in Lakshmi Mills Co. Ltd. and Lakshmi Card Clothing Mfg. Co. Ltd. will be taken over by Sri G.K.Sundaram and family members. It is submitted that re-organisation was effected pursuant to family arrangement and all the partners are family members of Sri K. Rajagopal. The firm also had re-organised its holdings pursuant the family arrangement it is further submitted that in view of the decision of the Madras High Court in the case of CIT v.R. Ponnammal 164 ITR 706, no transfer of property could be deemed to have occurred when the matters are settled by way of family arrangement. It is further submitted that what has been effected is refinement and consolidation of the individual holdings out of common interest held by the family members pursuant to the family arrangement and in such cases it cannot be construed that a transfer has been effected. It is submitted that in the case of family arrangement there is no transfer warranting levy of capital gains tax." The expression 'family' had a very wide connotation and it is not as held by the learned Departmental Representative that there is no family as such but the word 'family' in the context of a family arrangement is not to be understood in a narrow sense of being a group of persons who are recognized in law as having a right of succession or having a claim to a share in the property in dispute. If it is settled in one between near relations then the settlement of such a dispute can be considered as a family arrangement. From the above case laws, it is clear that a compromise or family arrangement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges and defines what that title is, each party relinquishing all claims to property other than that falling to his share and recognizing the right of the others, as they had previously asserted it to the portions allotted to them respectively. These observations do not mean that some title must exist as a fact in the persons entering into a family arrangement. They simply mean that it is to be assumed that the parties to the arrangement had an antecedent. It is also to be noted that a family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term 'family' has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes succesion so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The Courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the Courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits.
As regard to another aspect of etoppel that the other family, i.e., G.K. Sundararn and family declared these transactions as transfers and paid capital gains tax then that estoppel will not apply in this case.
The Hon'ble Chief Justice C.J. Chagla, while dealing with the real nature of transaction in CIT v. Kolhia Hirdagarh Co. Ltd. (1949) 17 ITR 545 (Bom), has deliberated as under: "In taxation matters it is not necessary to construe documents from their purely legal aspect. It is open to us not merely to look at the documents themselves but also to consider the surrounding circumstances so as to arrive at a conclusion as to what was the real nature of the transaction from the point of view of two businessmen who were carrying out this transaction. In all taxation matters more emphasis must be placed upon the business aspect of the transaction rather then on the purely legal and technical aspect." As regard to the admission of this transaction as a transfer and, accordingly, paid capital gain, it is well-settled in law that admission is best evidence of a point in issue and though not conclusive, is decisive of the matter unless successfully withdrawn or proved erroneous. An admission is an extremely important piece of evidence but it cannot be said that it is conclusive and it is always open to, the person who made the admission to show that it is incorrect. In the present case, the admission is not made by the assessee rather the other party has accepted the transaction as a transfer and, accordingly, paid capital gains tax that will not debar the assessee from contesting the issue from the facts and circumstances of the case. It is clear that this is an admission of other party which will not bind the present assessees. Accordingly, we reject this argument of the revenue. In view of the above discussion and after considering the case laws of the Hon'ble Apex Court and Jurisdictional High Court, we are of the view that the rearrangement of shareholdings in the companies to avoid possible litigation among family members seems to be a prudent arrangement which is necessary to control the companies effectively by the major shareholders to produce better prospects and active supervision. Accordingly, the same cannot be held as a transfer of shares which is exigible to capital gain tax. No doubt this family arrangement is not reduced into writing and there is no need to reduce this family arrangement in writing compulsorily and it need not be registered in view of the ratio of the decision of the Hon'ble Supreme Court in Kales case (supra). From the above, it is clear that these two families are part of bigger families which is very clear from the family tree produced above. Accordingly, we hold that these transactions are not exigible to capital gain tax. Accordingly, the orders of the authorities below are reversed.