Legal Ownership vs Beneficial Ownership: ITAT Ruling on Capital Gains Tax

ITAT Distinguishes Between Legal and Beneficial Owners

The Income Tax Appellate Tribunal (ITAT) in Mumbai made a significant ruling, distinguishing between a property’s legal owner and its beneficial owner. The ITAT clarified that being a legal owner does not necessarily mean being a beneficial owner, particularly when there is strong evidence to the contrary. This means that the legal owner is not required to pay capital gains tax if they do not receive any sale proceeds.

Implications for Taxpayers

It is common for family members to add another person’s name to a property title out of love and affection, such as providing security to a spouse. However, when such property is sold, the legal owner may face tax demands for their share of capital gains tax. This ITAT order in the case of V N Jain will benefit taxpayers in similar situations.

Case of V N Jain

V N Jain jointly owned a property with his brother, which they sold for Rs 54 lakh during the financial year 2014-15. The Income-Tax (I-T) officer observed that there was no family arrangement under which Jain had relinquished his right to the property before the sale. As a result, the officer held that Jain’s share of the sale proceeds, amounting to Rs 27 lakh, would be taxable in his hands as capital gains.

ITAT’s Observation

Before the ITAT, Jain submitted that the property sold originally belonged to his brother, who had full possession and rights over it. Jain’s name was added as a joint owner out of natural love and affection. The ITAT bench reviewed the evidence, such as purchase deeds and the brother’s bank statement, and observed that the brother had declared the entire sale consideration in his own I-T returns. The ITAT concluded that Jain had neither paid for the property nor received any proceeds from the sale. Thus, no capital gains tax liability could be imposed on him.

Expert Opinions

Tax experts have welcomed the ITAT’s order, stating that it upholds the principles of natural justice and prevents unjust taxation on individuals who are not the real beneficiaries of an asset.