Multi-billion-dollar Godrej family settlement won't attract tax: Sources

Multi-billion-dollar Godrej family settlement won’t attract tax: Sources

The multi-billion-dollar settlement entered by the third-generation members of the Godrej Family will not attract any capital gains tax, even though shares of over half a dozen companies owned by the family are changing hands, people with direct knowledge of the matter said.

The family has chosen to use the ‘family arrangement’ route under the tax law, which is outside the purview of the Income Tax Act that specifies the applicability of capital gains tax.

The Godrej restructuring fulfils the conditions prescribed under the family arrangement route required to avail of the tax benefits, the people said.

The 127-year-old family conglomerate announced last week that it will split into two groups, with each of the family factions overseeing specific businesses.

According to the pact, Adi and Nadir Godrej and their descendants will be in charge of listed companies of the group, including Godrej Industries, Godrej Properties, Godrej Agrovet, Godrej Consumer and Astec Lifescience. On the other hand, the other faction comprising Jamshyd Godrej and Smita Crishna will inherit the unlisted company Godrej & Boyce.

A 1976 Supreme Court verdict, Kale vs Deputy Director of India, among others, serves as the precedent for such settlements.  There are four broad principles laid out by the Supreme Court in various cases for family arrangements which need to be fulfilled for such a settlement to be valid, and the Godrej settlement fulfils all the conditions, the people cited above said.

Emails sent to spokespeople for Godrej Industries and Godrej & Boyce remained unanswered.

The first condition is that the parties to the family arrangement should be direct relatives. The second condition is that the settlement should have been entered to resolve any current or future family disputes pertaining to assets and ensure an equitable division of wealth within the family.

“Even if there are no current family disputes, the parties can show the courts/tribunals that there is a likelihood of disagreements in the future. Given the number of succession battles we are seeing among cousins these days, it is not difficult for large conglomerates to justify such amicable settlement,” the person cited above said.

Third, each party has to relinquish some claims in favour of others. For example, Adi and Nadir are exiting their stakes in the unlisted Godrej & Boyce, while Jamshyd and Smita will give up the bulk of their holding in the listed entities. The fourth condition is each party in the family settlement must recognise the rights of other parties in the agreement. All Godrej family members have already accepted the terms of the settlement.

“Family arrangements are not taxable under the Indian tax laws. Basis the existing jurisprudence, any transfer of capital assets or business assets pursuant to a bonafide family arrangements between natural persons are regarded as exempt transfers not attracting income tax. This proposition of law has been expounded by the Supreme Court in numerous judgements,” said Amit Singhania, founder of Areete Law Offices.

Generally, in such transactions, the transfer of physical assets may sometimes attract taxes but in the Godrej case this may not arise, the people said. In such partitions, sometimes the parties want to divide assets like real estate properties that are on the balance sheet of the company.

“Such restructuring generally attracts tax since assets housed within the company are not covered under the family arrangement. But in the current case, there is no such transfer of assets from within one company to another,” said a person cited above.

This assumes significance as the conglomerate owns large parcels of land in Mumbai’s suburban area, Vikhroli. Within the group, these land parcels are owned by Godrej & Boyce, while the real estate projects are developed and marketed by Godrej Properties. After the deal, the land will continue to remain under the unlisted Godrej & Boyce leaving no scope for any tax incidence. According to sources, the unlisted firm owns about 3,000 acres of land, the bulk of which is in Vikhroli.