Facts of the Case

The assessee, Smt. Neera Bhandari, received an amount of ₹1,05,00,000 from her brother, Pramod Kumar Bajaj. The amount was received in installments consisting of ₹72 lakhs during Assessment Year 2005-06 and ₹33 lakhs during Assessment Year 2006-07.

The payment was made in accordance with directions given by the assessee's late father, Shri A.P. Bajaj, in his Will. Under the terms of the Will, if agricultural land situated at Village Badshahpur, District Gurgaon, Haryana was sold under any circumstances by Pramod Kumar Bajaj, then 30% of the sale consideration was required to be paid to the assessee.

Following the father's death, the brother transferred to the assessee an amount equivalent to 30% of the sale consideration of the property. The Assessing Officer treated the amount as Short-Term Capital Gain and added ₹1,07,25,000 to the total income of the assessee. The claim of exemption under Section 54EC amounting to ₹35,25,000 was also denied.

 

Issues Involved

  1. Whether the amount received by the assessee pursuant to the directions contained in the father's Will could be treated as taxable Short-Term Capital Gain.
  2. Whether the receipt constituted inheritance under a Will and therefore fell outside the ambit of taxable income.
  3. Whether the amount could alternatively be covered under exemption available under Section 56(2)(v) of the Income Tax Act.
  4. Whether the deletion of addition relating to income from house property was justified.

 

Petitioner's Arguments (Revenue)

The Revenue argued that:

  • The Tribunal committed an error in law in deleting the addition of ₹1,07,25,000 made on account of Short-Term Capital Gain.
  • Part of the sale consideration had already been received by the assessee's brother during the lifetime of the father in November 2004.
  • Since a portion of the transaction had occurred before the father's death, the receipt by the assessee should not be regarded as inheritance arising solely from the Will.
  • The assessee's receipt was claimed to be taxable income and not exempt inheritance.

 

Respondent's Arguments (Assessee)

The assessee contended that:

  • The payment was received entirely pursuant to the directions expressly contained in the father's Will.
  • The Will clearly provided that on sale of the agricultural property, 30% of the sale consideration would belong to the assessee.
  • The receipt was therefore in the nature of inheritance and succession rights and could not be treated as taxable income.
  • Even if the amount was considered income, the receipt was protected under Section 56(2)(v) of the Income Tax Act.

 

Court Findings / Order

The Delhi High Court dismissed the Revenue's appeal and held as follows:

  • The Court observed that the Will clearly provided that the assessee would receive 30% of the sale proceeds upon sale of the property.
  • Even if the agreement for sale had been entered into during the father's lifetime and some consideration had already been received, the condition specified in the Will had already stood satisfied.
  • Consequently, the assessee became entitled to receive her share directly under the Will after the death of her father.
  • The receipt in the hands of the assessee could not be regarded as taxable income.
  • The Court further observed that even if the amount were considered income, the assessee would still be entitled to the benefit under Section 56(2)(v) of the Income Tax Act.
  • The Tribunal's order therefore required no interference.
  • No substantial question of law arose for consideration and the appeal was dismissed.

 

Important Clarification

The Court clarified an important principle that where an amount is received by an individual by virtue of rights flowing directly from a Will, such receipt assumes the character of inheritance and cannot ordinarily be taxed as income merely because the underlying property transaction had commenced during the lifetime of the deceased.

The judgment further clarifies that fulfillment of a condition during the lifetime of the testator does not alter the nature of the beneficiary's entitlement under the Will.

 

Sections Involved

  • Section 56(2)(v) of the Income Tax Act, 1961
  • Section 54EC of the Income Tax Act, 1961
  • Provisions relating to Capital Gains under the Income Tax Act, 1961
  • Principles governing inheritance and testamentary succession


Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:1566-DB/RVE22032013ITA1622013.pdf

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