LIVE GST Certification Course by CA Arun Chhajer begins 21st April. Register Now!!

Payment made at time of family settlement

Mitesh Shah (MS) (24 Points)

16 September 2015

Hi,

I have entered into a family settlement with my relatives.

As part of settlement I have got a residential flat valuing approximately 90 Lakhs.

This flat was purchased by my father in 1976 at a cost of Rs. 20000/-

The other members of the family (legal heirs of my deceased brother and my sister) were paid a sum of INR 10 Lakhs.

I intend to sell this flat now.

My question is whether the payment of 10 Lakhs towards family settlement be considered as cost of acquisition of the residential flat or only the payment made by father to purchase the flat will be considered as a cost of acquisition for capital gains purpose.

Also will the sale be treated as short term (since it was transferred to me in April 2015) or long term since it was purchased in 1976.

Reply
Follow
Share

3 Replies

Z ( ) (2960 Points)
Replied 17 September 2015

Mere family settlement is not liable to capital gain, so says the Karnataka High Court

https://www.kpmg.com/IN/en/services/Tax/FlashNews/Nagaraja-Rao.pdf

As per S. 47
Nothing contained in section 45 shall apply to the following transfers :—

(i) any distribution of capital assets on the total or partial partition of a Hindu undivided family;
[Practically partial is not allowed]

There shall be a long term capital gain and period of holding will include period of holding of previous owner, the date for the purpose of indexation (be it acquisition or improvement) shall also be taken when the asset was so acquired by previous owner

[DO NOTE THAT Since property was acquired in 1976, you will need to detemine the Fair market Value as on 1.4.1981]

As per Explanation b to S.2(42A)

In the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49 there shall be included the period for which the asset was held by the previous owner referred to in the said section ;

As per S. 49. (1) Where the capital asset became the property of the assessee—

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;

(ii) under a gift or will;

(iii) (a) by succession, inheritance or devolution, or

How to detemine the FMV as on 1.4.1981 ?

You may make an application to the registrar/sub registrar of the property and ask them to give the details of the transfers which occurred ,in the area where the property to be valued is situated , on or around 1.4.1981 .
You will get a list of transactions , we need to compute the WEIGHTED AVERAGE cost per sq yard and then apply that rate to the area of the property to be valued.

Alternatively one may go to certified valuer for this purpose or request AO to refer the case to departmental valuation officer.

FMV as on 01.04.1981 shall be deemed to be FMV to you and it shall be indexed accordingly, if there is any cost of improvement post 01.04.1981 then it also has to be considered.

Cost of improvement pre 01.04.1981 shall be ignored.

There shall be no tax effect of INR 10Lacs.

Further you may claim exemption u/s 54 on this Long term cap gain from sale of flat. Refer to the provision for more details.

If theres any more info you need, let us know.

Miss Rinkal (Student) (1304 Points)
Replied 17 September 2015

1. The asset will be treated as a LTCG as the asset is recd on account of inheritance and hence purchase year of the previous owner will be considered as the holding period. Accordingly the cost of the previous owner is to be considered. However since the asset was purchased prior to 01.04.1981, the assessee has an option to either take the cost of the property as on 01.04.1981 or at actual coat of the previous owner. Needless to say, higher of 1976 or 1981 to consider, to reduce the tax liability.

2. The COA will be the COA of the previous owner. However if the previous owner purchased the property prior to 01.04.1981 then FMV as on 01.04.1981 could be opted by you. For knowing the FMV of the property as on 01.04.1981, you can make an application in writing to the Registrar. Accordingly, calculate the indexed cost of acquisition of the property. I.e COA × CII in the year of sale ÷ 100 (100 because CII of FY 1981-82 is the base year having 100 as its value)

3. Now the amt of Rs 10 lacs is paid to the relatives on account of family settlement and hence such sum is not regarded as transfer in legal terms. Therefore it does not attract CG tax. On the other side, it cannot be considered as COA of the property.