A family settlement is an agreement where
family members mutually work out how a property should get distributed among
themselves. All the parties should be related to each other and have a claim to
a share of the disputed property. The latter need not be limited to real
estate, but can also cover movable assets like jewellery or money in bank
accounts. A family settlement is usually used to settle common property or
joint property that the family owns as opposed to individual or self-acquired property.
Family settlement is not
addressed exactly by the legal provisions contained in the Income-tax Act,
1961. It is more so governed by the general law. The courts have interpreted at
regular intervals. The concept of family settlement evolved because
of such court decisions. In a nutshell, family settlement is court
made law and is tax-free because of such decisions and the absence of legal
provisions to tax those settlements.
A family arrangement is not treated as a conveyance. It is
only in the nature of allocation, distribution, re-distribution or recognition
of pre-existing rights. This is like re-alignment of rights. In the process,
some of the pre-existing rights of one of more members may even be extinguished
by their consent. So long as it meets the other requirements of a valid family
arrangement, this is also recognised.
Family
arrangement or settlement should not be entered into with an object of escaping
tax. It then becomes a fraud. It should not be made with a view to circumvent
provisions of law relating to stamp duty or provide an advantageous position
with regard to stamp duty and registration costs. It must not be in the nature
of extinguishing or limiting the rights of a family member who is not a
consenting party to the arrangement.
Family Settlement
The term ‘family settlement’ has
wider meaning than "partition" which is applicable for HUFs.
A family settlement or arrangement would mean an arrangement between
the members of the same family to amicably settle present disputes
and avoid any possible future disputes. The title to the asset or property is
not the bed rock for making a family settlement.
Halsbury’s Laws of England,
Volume 18, 4th Edition deal with family arrangement in paras 301 to
312. It defines family arrangement as under:
“A family arrangement is an agreement between the 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.”
Memorandum of Family Settlements.
Irrespective of the fact that, ‘Family
Settlements’ have not been defined under any Indian statute, the courts
nonetheless recognises and upholds its validity. In simple terms, family
settlements can be described as transaction between members of the same family
for their mutual benefit, so as to maintain and preserve the property, peace
and security, thus avoiding any future discourses and court cases and
ultimately saving the honour of the family. Similarly, a Memorandum of Family
Settlements refers to a written document which states the arrangement between
family members and acts as a record of the mutual agreement regarding the terms
of the division of property.
Ingredients of family arrangement
The courts have held that under a family arrangement, there
is no transfer of property by one member to another and it is just an
arrangement by which each member takes the share of family property by virtue
of his/her antecedent title. As to whether a transfer falls within the ambit of
a family arrangement (and, therefore, out of the tax net), the courts have
consistently evaluated three ingredients: family, property and dispute.
(1) Family
A family arrangement necessarily needs to be among family
members, and not with outsiders. The term “family” has not been defined under
any law. However, the courts have generally held that the term has to be
understood in a wider connotation. A common tie of relation is enough to bring
a person within the fold of a family. Also, the existence of legal/succession
right to the family property is not a prerequisite to determine whether a
person is a family member.
Family has been defined under Income Tax Act, 1961 in Explanation
1 to Section 10(5)
Family in relation to individual means:
(i) The spouse and children of the
individual
(ii) The parents, brothers, sisters
of the individual or any of them wholly or mainly dependent on the individual.
However the term ‘family’ has not been defined under any
law. But according to the courts it has to be understood in a wider sense. A
common tie or relation is enough to consider that person as the member of a
particular family. To determine whether a person belongs to the family or not
it is not required that there should be an existence of legal/succession right
to the family property.
Cousin
of members of the same family can be party to the Family Arrangement
Common tie of relationship is
enough to bring a person within the fold of ‘family’. Whenever there is legal
claim by any person against near relations, then all such persons shall stand
included within fold of a family. It is not necessary that the parties to the
arrangement should all belong to one family. The Apex Court further held that
the word “family” in the context of 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 share in the property in
dispute. – [Krishna Bihari Lal v. Gulabchand and others 1971
AIR 1041, SCR 27 (SC)]
(2)
Property
The family arrangement should be for working out the rights
in the family property. Typically, common property or joint property in the
family is considered for the purpose of family arrangement. Individual or
self-acquired properties are generally not considered unless antecedent title,
claim or interest in the property is shown to be in existence. In essence, an
antecedent title of the participants in the subject property is the guiding
factor for evaluating a bona fide family arrangement.
Thus, there must be an ancestral title in the property for Family Arrangement.
In case of Bansari Lal Aggarwal v. CGT, the
Punjab and Haryana High Court disregarded the family arrangement arrived at
between the husband on the one side and wife & four son on the other as
collusive one effected with a view to avoid payment of tax. In the said case,
property owned by the assessee was an individual property. Wife and four sons
had only lent money to husband to buy the said property. Mere creating an antecedent
title, claim or interest of the five persons in the individual property of
husband and consequently, the family arrangement decree obtained by the parties
concerned was set aside on the ground of being collusive, obtained with a view
to avoid payment of tax. – [Bansari
Lal Aggarwal v. CGT (1998) 230 ITR 114 (P&H)]
(3)
Disputes
Normally a dispute in a family leads to a family arrangement.
The word ‘arrangement’ means to come to an agreement about, to settle the
dispute. The very nature of the word ‘arrangement’ suggest the existence of
either the actual dispute or the prosperity of the persons concerned to raise
the dispute in future.
However, family dispute is not necessarily a prelude to the
family arrangement. Though conflict of the legal claims in presenti or in
future of generally a condition for the validity of the family arrangement, it
is not necessarily so. Even the possibility and/or plausibility of bona fide
disputes, which may not involve legal claim, will suffice to arrive at a valid
family arrangement.
In the case of Shambhu Prasad v. Phool Kumar, the Court observed by holding that there must exist a
dispute, actual or possible in future, in respect of each and every item of
property and amongst all members arrayed by one against the other. It would
suffice if it is shown that there were actual or possible claims by parties in
settlements whereof the arrangement as a whole has been arrived at, thereby
acknowledging title in one to whom a particular property falls on the
assumption (not actual existence in law) that he had an interior title therein.
In the present case, the property was purchased by father out of his own money.
The adopted son could not have claimed any share in such property. In spite of
this position, the Apex Court held that – “But, as stated earlier, a dispute or
contention, the settlement of which can constitute family arrangement, need not
be one which is actually sustainable in law.” – [Shambhu Prasad v. Phool Kumar AIR 1971 SC 1337 (SC)]
Arrangements
The word ‘arrangement’ means to come
to an agreement regarding a dispute. Under the process of arrangement,
the parties are not warned by any court of law. The arrangement is not arrived
strictly by following law of inheritance. The person with no right to inherit
particular property can also get a share in an arrangement.
Under
this case ‘family arrangement’ was described as transaction between the members
of a family for the future benefit of family members. It is done to
preserve peace and harmony in the family and to avoid any legal dispute
In the case of S. K. Sattar S.K. Mohd. Vs. Gundappa Ambadas,
the Court
described ‘family arrangement’ as a transaction between members of the same
family for the benefit of the family so as to preserve the property, peace, and
security of the family, avoidance of family dispute and litigation and for
saving the honour of 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 title is. – [S.K. Sattar S.K. Mohd. Vs. Gundappa Ambadas (1996)
6-SCC-373 (SC)]
In the case of Roshan Singh v. Zile Singh, the
Supreme Court held that parties to a Family arrangement set up competing claims
to the properties and there was an adjustment of the rights of the parties. By
family arrangement it was intended to set at rest competing claims amongst
various members of the family to secure peace and amity. The compromise was on
the footing that there was antecedent title of the parties to the properties
and the settlement acknowledged and defined title of each of the parties. – [Roshan Singh v. Zile Singh AIR 1988 SC 881 (SC)]
Parties
in General
Any members of a family may be
parties to a family arrangement. Thus, agreements between husband and wife,
parent and child, legitimate or illegitimate, uncle and nephews or nieces,
coheiresses and brothers have all been supported as family arrangements (see
para 309 of Halsbury’s Laws of England).
To
constitute a valid family arrangement:
(i)
The transaction should be one which
is for the benefit of the family generally.
(ii)
The consideration for arrangement may
be the preservation of family, property, preservation of peace and honour of
the family or the avoidance of litigation.
(iii)
It is not essential that there should
be a doubtful claim, or disputed right to be compromised. If there is one, the
settlement may be upheld if it is founded on a reciprocal give and take and
there is a mutuality between the parties, in the one surrendering his right and
in the other forbearing to sue. In such cases, the Court will not too nicely
scrutinize the adequacy of the consideration moving from one party to the
other.
(iv)
In any case, if such an arrangement
has been acted upon, the courts will give effect to it on the ground of
estoppel or limitation and the like.
(v)
A family arrangement may also be
upheld if the consideration moves form a third party.
(vi)
If it appears to the Court that if one
party has taken undue advantage of the helpness of the other and there is no
sacrifice of any right or interest, the agreement is unilateral and devoid of
consideration.
(vii)
The consent of the parties should be
freely given to the arrangement end gross inadequacy of consideration may be
determining factor in judging whether the consent was freely given.
(viii)
If the agreement involves or implies
injury to the person or property of one of the parties, the courts retain
inherent power to prevent injustice being done.
Binding effect and the essentials of
a Family Settlement
The concept of Family Settlement was considered by the Supreme Court in
detail in the case of Kale v. Dy. Director of Consolidation AIR 1976 SC 807 and
the Supreme Court explained the binding effect and the essentials of a family
settlement in a concretised form and reduced the concept of Family Settlement
into 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 arrangement 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 in formation 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) 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 find no difficulty in giving assent to the same;
(6) Even if bonafide disputes, present or
possible, which may not involve legal claims are settled by a bona fidefamily
arrangement which is fair and equitable the family arrangement is final and
binding on the parties to the settlement.
Essential
Conditions
An
imperative pre-requisite in a family arrangement is that :
- There should be a family
dispute or rival claims which require to be settled by an equitable
division or allotment of property between the claimants who are
necessarily family members belonging to the same family.
a. The
dispute could relate to any aspect, but is usually relates to the rights or
claims in respect of property, assets, enjoyment of rights in respect of
properties, claims, shares, possible claims, family feuds, refusal to recognise
rights of family members, etc.
b. It
could relate to any aspect which may threaten the rights of any member or the
family as a whole, if the disputes are prolonged or escalated or in the nature
of creating situations or circumstances that the members are not able to meet
eye to eye.
c.
It could be a genuine dispute or a
controversy, rival claims, assertions and denials. It is unfortunate that many
disputes revolve around the sheer ego of the persons involved. The law says
that these disputes are not in the best interest of the members of the family.
- The family arrangement should
be for the benefit of the family in general.
- The family arrangement must be
bonafide, honest, voluntary and it should not be induced by fraud,
coercion or undue influence.
- The family members must have
interest, claim or an antecedent title.
- The parties to the family
arrangement must have antecedent title, claim or interest. Even if a
possible claim in the property which is acknowledged by the parties to the
settlement will be sufficient for the same.
- The consideration for entering
into family arrangement should be preservation of family property,
preservation of peace and honour of the family and avoidance of litigation
The Supreme Court in Ramcharandas v. Girjanandinidevi AIR
1966 SC 323 provided the following insights into family settlement:
(a) Family
settlement between the members of the family to put an end to
the dispute among themselves is not a transfer. It is also not a creation of
interest.
(b) In
a family settlement, each party takes a share in the property by virtue of
independent title which is admitted to that extent by the other parties.
(c) Every
party who takes benefit under it need not necessarily have a legal claim to a
share in the property.
(d) All
that is necessary is to show that the parties are related to each other in some
way and have a possible claim to the property or even a semblance of claim on
some other ground, say affection.
(e) The
word ‘family’ is not to be understood in a narrow sense of being a claimant to
have share in the property in dispute.
Even without registration a written
document of family settlement can be used as corroborative evidence
Even without registration a written document of family settlement /
family arrangement can be used as corroborative evidence as explaining the
arrangement made thereunder and conduct of the parties
It was held that a family
arrangement, in the form of a document that mentioned the list of properties
which were partitioned, though not registered, would operate as a complete
estoppel against the parties to such a family settlement. It was held that even
without registration a written document of family settlement/family arrangement
can be used as corroborative evidence as explaining the arrangement made
thereunder and conduct of the parties. – [Thulasidhara v.
Narayanappa 2019 SCC
OnLine SC 645 (SC)]
It was held that once family settlements are reduced in
writing, they require registration. However, if the same are not registered,
the contents thereof can be used to corroborate the existence of an arrangement
between the families, as also to explain the conduct of the parties. – [Satish Kumar Batra v. Harish Kumar Batra and Ors. (RFA 776/2016) on 09.02.2018 (Del.)]
Family arrangement /settlement in respect of immovable property
worth more than Rs. 100, when orally made, no registration is required and is
admissible in evidence but when reduced in writing same has to be registered-
but even if unregistered, same can be used as corroborative evidence. [Sections
17 & 49 of the Registration Act, 1908]
In respect of joint family immovable
property worth more than Rs 100, when family arrangement/settlement has been
orally made, no registration is required and would be admissible in evidence
but when reduced in writing, registration is essential, without which it is not
admissible in evidence. But even without registration, written document of
family settlement can be used as corroborative evidence as explaining the
arrangement made thereunder and conduct of the parties. – [Subraya M.N. v. Vittala M.N. And Others (2016) 8 SCC 705 (SC)]
Family
settlement could also be made orally which could be reduced later on in
writing as memorandum of understanding - It is only to prove what was agreed
upon and the document written as memorandum of understanding could be registered
for declaring what rights and in which of those properties, the parties possess
rights
In Tek Bahadur Bhujil v. Debi Singh
Bhujil and others, a Bench consisting of 4 Hon’ble Judges, it was pointed
out by this Court that a family arrangement could be arrived at even
orally and registration would be required only if it was reduced into writing.
It was also held that a document which was no more than a memorandum of what
had been agreed to did not require registration. This Court had observed thus :
“Family arrangement as such can be arrived at orally.
Its terms may be recorded in writing as a memorandum of what had been agreed
upon between the parties. The memorandum need not be prepared for the purpose
of being used as a document on which future title of the parties be founded. It
is usually prepared as a record of what had been agreed upon so that there be
no hazy notions about it in future. It is only when the parties reduce
the family arrangement in writing with the purpose of using that
writing as proof of what they had arranged and, where the arrangement is
brought about by the document as such, that the document would require
registration as it is then that it would be a document of title declaring for
future what rights in what properties the parties possess.” – [Tek Bahadur
Bhujil v. Debi Singh
Bhujil and others (1966) AIR 1966 SC 292]
Examples
of a valid family settlement
(a) A father has started a
business in which he is later on joined by his two sons. All the assets and
business interests are jointly owned by the family. After several years,
disputes arise between the two sons as to who is in command and who owns which
property. This leads to a lot of bad blood and ill-will within the family. In
order to buy peace and avoid unnecessary litigation, the father, the two sons
and their families effectuate a family settlement under which all the
businesses and properties are equally divided between the two brothers’
families. This is a valid family settlement and would be recognised in a court
of law.
(b) A father and son are joint in
business. The son has played an active role in the business and in creating the
wealth. After many years, the two develop a bitter dispute over various issues
with the result that the son wants to opt out of the business. The son gives up
all his rights and interest in the family properties and in return for the same
the father pays him some money. This is a valid family settlement.
(c) There are two brothers and
two operating companies, which are located in separate offices. The shares of
these operating companies are held through investment companies. The offices,
in turn, are owned by a property company, the shares of which are held by the
two brothers. As a part of the family settlement, it has been decided to give
one operating company to each brother and also to give the respective office to
the respective brother. This is a valid family arrangement.
(d) A family settlement is
purported to have been executed by all the family members of a particular
family. However, the married daughter has not signed the family settlement MOU.
In such a case, it cannot be said that the family settlement would bind the
daughter – Sneh Gupta vs. Devi Sawarup (2009) 6 SCC 194.
It may so happen that
a family of four brothers may carry on the business jointly and the
business may be registered in the name of one such brother. The other brothers
may not have a legal title or right to claim the net worth of the business yet
by means of family settlement the assets standing in the name of one
such brother could be divided and allocated among the brothers.
[A] Cases wherein genuineness
of family settlement vis-Ã -vis genuineness of
transactions was accepted
It was held that where the assessee
had received property from his brothers on account of Family Settlement and
Release Deed was also executed in which it was nowhere recorded that the
assessee paid any consideration to his other three brothers, there being no
commercial transaction, provisions of section 56(2)(vii)(b) of the
Act were not attracted. – [Govind Kumar Khemka v. ACIT (2020) 118 ITD 586 : 113 taxmann.com 5 (ITAT Delhi)]
Assessing Officer on noticing that
there was a credit of Rs. 5 crores asked the assessee to explain the source of
credit to which the assessee explained that it was received on family settlement.
After going through the document submitted by the assessee titled “Recording
of Family Settlement” that the assessee had relinquished his share
in family business and in lieu thereof he received Rs. 5 lcrores, the
Assessing Officer held that provisions of section 2(47)(v) of the Act
stood attracted and accordingly framed the assessment. The Commissioner of
Income-tax (Appeals) after apprising the facts of the case noted that
genuine Family Settlement was done with a view to settling the issue(s)
between the assessee, his brother and mother and therefore through family settlement deed,
the family business was settled and all disputes were settled in the
presence of their family Guru. The Commissioner of Income-tax
(Appeals) thus, on appreciation of evidences and material, held
that family settlement was genuine and was done under circumstances
to settle all disputes between family members. The Tribunal held that
the Commissioner of Income-tax (Appeals) was justified in holding that no
capital gain tax was attracted in this case and so the addition by the
Assessing Officer was unjustified. The Tribunal followed number of precedents
in this case. (Related Assessment Year : 2008-09 – [DCIT v. Arvind
Kapoor - Date of Judgement : 10.02.2016 (ITAT Agra)]
It was held that where the assessee
received a property with clause in his mother’s Will providing overriding title
in favour of his three sisters, payment made by assessee to his sisters for
acquiring absolute title in property would be reduced as expenditure while
computing capital gain on sale of said property. – [ACIT v. Kamlakar
Moghe (2015) 378 ITR 561 : 64
taxmann.com 413 (2016) 236 Taxman 439 (Bom.)]
The ITAT Mumbai Bench in the case
of DCIT v. Paras D. Gundecha noted that
the assessee, in this case, received certain sum from his brother’s wife, ‘N’
and claimed the said sum to be exempt under section 56(2)(v) of the Act.
In her statement, ‘N’ stated that she gave the amount to the assessee because
of family settlement deed arrived at among family members.
The Assessing Officer added the amount to the income of the assessee. The
Tribunal Court held that since the assessee received the sum out of family
settlement, the same was not taxable, as by way of settlement only
respective shares were determined. – [DCIT v. Paras
D. Gundecha (2015) 155 ITD 880 : 62 taxmann.com 170 (ITAT Mumbai)]
The Andhra Pradesh and Telangana
High Court in the case of P. Shankaraiah Yadav (HUF) v. ITO explained
the concept of family settlement by observing as under at para.10 of
its judgment-
“The family arrangement
is a typical legal phenomenon that does not fit into those which are
specifically recognised under law. The transfer of immovable or movable
property, as the case may be, does take place under the arrangement but it is
substantially different from the one that is contemplated under the Transfer of
Property Act or the Sale of Goods Act. No formal registered document is
executed and the nature of consideration is not amenable to any legal analysis.
The purport of the family arrangements was explained by the Supreme
Court in Kale v. Dy. Director of Consolidation AIR 1976 SC 807, in
such a way that is difficult to put it in any different words. The relevant
portion reads:
“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 page 364 makes the following pertinent
observations regarding the nature of the family arrangement 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 issue was decided in favour of the assessee. – [P.
Shankaraiah Yadav (HUF) v. ITO (2015) 371 ITR 386 : 232 Taxman 757 : 59 taxmann.com 263 (AP&T)]
Where pursuant to family settlement, assessee received
certain amount and assets from a company in which he had substantial interest,
provisions of section 2(22)(e) could not be applied to amount so received
When there is any distribution of assets pursuant to family
arrangement or HUF partial/total partition, such transactions will not amount
to transfer of asset attracting tax liability in the hands of the recipient
under the provisions of the Act. In the given case, on piercing the corporate
veil with respect to the two private limited companies, viz., SKM Animals
Feeds & Foods (India) Ltd. and SKM Siddha
& Ayurvedic Medicines (India) (P) Ltd., the entire intermingled
transactions can be seen only as the family settlement arrived at through
arbitration award amongst Hindu family members. Further there are no transfers
of assets with respect to the public limited company SKM Egg
Products Exports (India) Ltd. Therefore, considering the facts and
circumstances of the case the provisions of section 2(22)(e), 2(24)(iv) or
section 56(2)(vi) cannot be invoked. Accordingly, the addition made by the
Assessing Officer in the case of the assessee which is further sustained by the
Commissioner (Appeals) on account of deemed dividend under section 2(22)(e) and
income from other sources under section 56(2)(vi) is hereby deleted. – [SKM
Shree Shivkumar (2014) 65 SOT 232 : 48 taxmann.com 346 (ITAT Chennai)]
It was held that
where family members of assessee were holding shares in different
business concerns and assessee under a family arrangement had
transferred his share held in a firm in favour of a family member,
there was no transfer involved attracting the provisions of section 2 (47)(v)
of the Act in the instant case. – [CIT v. R. Nagaraja Rao (2013) 352 ITR
565 : (2012) 207 Taxman 236 : 21 taxmann.com 101 (Karn.)]
Family settlement - Amount of owelty i.e. compensation
deposited to settle inequalities in partition, represents immovable property
and would not attract capital gain tax
During the course of assessment
proceedings, the Assessing Officer found that the assessee (Group A) had
received compensation from Group B at the time of partition of properties of
group of 'H' Ltd and that the said amount had been kept in fixed deposits as
per the orders passed by the High Court as well as by the Supreme Court. The
Assessing Officer considered the familysettlement and found that 8.56
per cent of Rs. 24 crores of compensation was the share of the assessee and,
consequently, levied long term capital gain tax on the said amount. On appeal,
the Commissioner of Income-tax (Appeals) set aside the order
of the Assessing Officer and the order of the Commissioner of Income-tax
(Appeals) was confirmed by the Tribunal. The matter reached the Punjab and
Haryana High Court. The High Court held as under—
"The
payment of Rs. 24 crores to Group A is to equalize the inequalities in
partition of the assets of 'H' Ltd. The amount so paid is immovable property.
If such amount is to be treated as income liable to tax, the inequalities would
set in as the share of the recipient will diminish to the extent of tax. Since
the amount paid during the course of partition is to settle the inequalities in
partition, it is deemed to be immovable property. Such amount is not an income
liable to tax. Thus, the amount of owelty i.e., compensation
deposited by Group B, is to equalize the partition represents immovable
property and will not attract capital gain
With regard to the argument that the
assessee is liable to tax being interest on cash, suffice it to say, that such
question or fact does not arise from the orders of the Tribunal. Consequently,
it is held that the amount of compensation paid to the assessee to settle
inequalities in partition, thus, a provision of owelty, represents immovable
property and is not an income exigible to tax.” [In
favour of assessee] (Related Assessment year : 2007-08) - [CIT v. Ashwani Chopra (2013) 352 ITR
620 : 213 Taxman 490 : 30 taxmann.com 299 (P&H)]
KEY NOTE
“Owelty” means the difference which
is paid or secured by one coparcener to another, for the purpose of equalizing
a partition: a lien created or a pecuniary sum paid by order of the Court to
effect an equitable partition of property (as in divorce) when such a partition
in kind would be impossible, impracticable, or prejudicial to one of the
parties. In other words, it is a payment to balance (both) sides involved in a
dispute.
Whether amount received by assessee on transfer of various
shares in course of family arrangement would not result in any capital gains
within meaning of Act as it did not amount to transfer - Therefore, assessee
would not be liable to pay any capital gains tax on amount-in-question
One Pal group consisted of two
families, namely, ‘R’ Pal and ‘M’ Pal. As there were disputes between
two families of group matter was referred to an arbitrator as per which an
arrangement was made. Consequent
to differences between the two-family groups, a situation had developed
requiring the two-family groups to identify their interests with clear
understanding that they would not dabble in the affairs of the
other family group. The assessee, daughter of R had to handover
shares and other securities etc., in companies to M Group. From that point of
view, the assessee being a member of R Group, had to be roped in and she had to
abide by the award of the arbitrator for the sole purpose of ensuring peace
between the two-family groups. Notwithstanding the fact that the assessee
was a married woman, and became a member of husband’s family by
virtue of marriage, the antecedence with R’s family remained intact
and family ties were not severed. She being part of R’s family and
carrying that name still as a daughter of the family, with a view to
ensure peace and amity for her parents, had to necessarily surrender her
interest in A Ltd., by giving away the shares at the price determined by the
arbitrator. The Tribunal based on these facts held that “the amount received by
the assessee on transfer of various shares in the course of
the family arrangement would not result in any capital gains within
the meaning of the (Income-tax) Act as it did not amount to transfer”. (Related
Assessment year : 1996-97) –
[Mrs.
P. Sheela v. ITO (2009)
120 ITD 159 (ITAT Bangalore)]
Re-arrangement of shareholdings in company to avoid possible
litigation among family members is a prudent arrangement necessary to control
company effectively by major shareholders to produce better prospects and
active supervision and in case of such rearrangement of share holding it cannot
be held that there is transfer of shares liable to capital gains tax
There was a transfer of shares in
the assessee-firm which consisted of partners, who were family members. in
that, certain new shares were acquired in exchange of old shares, as also some
consideration was paid in cash. According to the assessees, the transfer was
consequent to a family arrangement. But the Assessing Officer, after analyzing
the facts of the case and the legal aspects on the same, concluded that there
was indeed a transfer involved and, thus, subjected the transaction to capital
gains tax. The Tribunal held that the re-arrangement of shareholdings in the
company to avoid possible litigation among family members was a prudent
arrangement necessary to control the company effectively by the major
shareholders to produce better prospects and active supervision as otherwise
there would be continuous friction and there would be no peace among the
members of the family and held that such family arrangement could not be held
as transfer which was exigible to capital gains tax.
Held that the law on the point
involved is well settled by the decisions of the Apex Court in Maturi Pullaiah
v. Maturi Narasimham AIR 1966 SC 1836, and in Kale v. Dy. Director of
Consolidation AIR 1976 SC 807 which are followed by this Court in CIT v. R.
Ponnammal (1987) 164 ITR 706 : (1986) 54
CTR 319 (Mad.) and in CIT v. AL. Ramanathan (2000) 245 ITR 494 : 159 CTR
255 (Mad.). In view of the settled
proposition of law, the Tribunal was justified in arriving at the conclusion
that the family arrangement among the assessees did not amount to any transfer
and, hence, was not exigible to capital gains tax. Accordingly, no substantial
question of law arose. (Related Assessment year : 1996-97) -
[CIT v. Kay Arr
Enterprises (2008) 299 ITR 348 : 215 CTR 244 (Mad.)]
Reconstitution
of partnership firm pursuant to family settlement – Word ‘otherwise’ used in section 45(4) takes
into its sweep not only cases of dissolution but also cases of subsisting
partners of a partnership, transferring assets in favour of a retiring partner
- By memorandum of family settlement, dated 30-1-1997, it was agreed between
parties thereto that business of six firms as set out therein would be
distributed in terms of family settlement as parties desired that various
matters concerning business and assets thereto be divided separately and
partitioned - Pursuant to said family settlement, there was a deed of
reconstitution of various partnerships as set out in family settlement -
Assessing authority assessed partnerships for capital gains under section 45(4)
- Tribunal held that business continued to be run and there was no dissolution
of firm and, consequently, section 45(4) was not attracted - Assessing Officer
was justified in assessing partnerships for capital gains under section 45(4)
It was held that, after amendment of Finance act in 1988, subsection (ii)
of section 47 was removed. Hence the exemption given earlier for transfer of
assets at the time of dissolution or otherwise was no more applicable. Hence
the asset given by the firm to its partner at the time of dissolution or
otherwise will be chargeable to tax in the hands of the firm.
Word ‘otherwise’ used in section 45(4) takes into its sweep not only
cases of dissolution but also cases of subsisting partners of a partnership,
transferring assets in favour of a retiring partner. By memorandum of family
settlement, dated 30.01.1997, it was agreed between parties thereto that
business of six firms as set out therein would be distributed in terms of
family settlement as parties desired that various matters concerning business
and assets thereto be divided separately and partitioned. Pursuant to said
family settlement, there was a deed of reconstitution of various partnerships
as set out in family settlement. Assessing authority assessed partnerships for
capital gains under section 45(4). Tribunal held that business continued to be
run and there was no dissolution of firm and, consequently, section 45(4) was
not attracted. Assessing Officer was justified in assessing partnerships for
capital gains under section 45(4). In this case, the taxpayer was a partnership
firm constituted by family members and during reconstitution, various assets
belonging to the firm were given to the retiring partners through a family
arrangement. The High Court held that the gains arising out of the said
arrangement is taxable. (Related Assessment year : 1997-98) - [CIT v. A.N. Naik Associates (2004) 265
ITR 346 : 136 Taxman 107 (Bom.)]
Assessee-lady settled her self- acquired immovable property
on her minor children by registered settlement deed, which did not refer to
family dispute and was also witnessed by her husband - During assessment
proceedings she filed affidavit stating that this was done by her because of
her husband having extra-marital relations with other ladies and his second
marriage - It was assessee’s moral and legal obligation to support minor
children and in view of her husband having deserted her, alienation of property
by her was to be construed as family settlement and not a transfer so as to
attract section 64(1)(v)
Section 64(1)(v) - Transfer of
assets - For benefit of spouse or minor child - Through a
family, settlement deed dated 26.06.1971, the assessee-lady settled her-self
acquired immovable property in favour of her three minor children. She filed an
affidavit before the tax authorities on 28.03.1988 stating that she had done so
in view of her husband having extra-marital relations with other ladies and who
had subsequently married a second time. The AAC accepted her affidavit and
excluded the income from said properties from her total income and also from
her wealth.
Aggrieved, the revenue in its appeal to the Tribunal
contended that the income was includible in the assessee’s total income under
section 64(1)(v), inasmuch as (a) the said section provided for
both direct and indirect transfers;(b) the conditions precedent for
making of family settlement were not fulfilled as the deed of settlement did
not provide or suggest any dispute for which the family settlement was made; (c)
the husband was a witness to the deed which showed that the dispute was
fictitious; and (d) the AAC had erred in accepting the affidavit filed
after along time. The transfer, according to the revenue, was a simple gift and
could not be considered as a family settlement.
Held : The existence of a family dispute is sine qua non
for the purpose of family settlement. The record and documents revealed that
the assessee was deserted by her husband. She was apprehending breach of family
peace. Therefore, she was concerned with the well-being of her three minor
daughters. She was also not in a position to repose faith in her husband. In
the light of her husband’s alleged adulterous relations, it was quite natural
on the part of the assessee to take care of her minor children. She had not
only a moral obligation but also a legal obligation to support the minor
children. In those circumstances, alienation of property through a deed of
settlement could only be construed as a family settlement. Section 64(1)(v) was not applicable in the facts and
circumstances of the case, since it was not a transfer within the ratio of the
decision of the Andhra Pradesh High Court in CGT v. Gandhi Subba Rao (1987) 63 ITR 305 (sic). The order of the AAC excluding the income
of the property in question from the total income of the assessee did not,
therefore, call for interference and was to be sustained. [In favour of
assessee] (Related Assessment
year : 1981-82) - [ITO v. Smt. Jagrani Bai (1990)
34 ITD 54 (ITAT Hyderabad)]
Surrender of a portion of the
properties bequeathed to the assessee by her father in favour of her minor son amounted
to only a family arrangement and there was no transfer as under section 64(iii)
Section 64(iii) [as it stood prior
to 01.01.1971] of the Income-tax Act, 1961 - Transfer of assets - For benefit
of spouse or minor child - On facts mentioned under heading ‘Transfer of
property’ surrender of portion of properties bequeathed to assessee by her
father in favour of her minor son did not amount to a transfer of assets within
meaning of section 64(iii) and, therefore, inclusion of income from surrendered
properties was improper and should be deleted. - [CIT v. R.
Ponnammal (1987) 164 ITR 706 : (1986) 28 Taxman 26 (Mad.)]
Assessee had
received certain properties by way of a family settlement which was arrived at
to save peace and honour of family and to avoid unnecessary litigation by
various claimants to such property - Settlement was arrived at following
assessee’s claim in a suit that she had succeeded by inheritance to the
impugned property by virtue of the relevant law - Later assessee sold some of
the jewellery received by way of family settlement - It could not be said that
assessee had received properties sold by way of succession/inheritance so as to
attract provisions of section 49(1)(iii) for purposes of computation of capital
gains
The
assessee was the wife of S, who had a brother P. The assessee and S had no
issue during P's lifetime. His wife A, out of love and affection, made a will
on 09.12.1965 in favour of two of her sister's sons, of all her immovable and
movable properties in equal shares. P died on 27.11.1966, A died on 11.07.1975
and S expired on 10.11.1977. On the death of A, the assessee filed a suit
against the two sons of A's sister claiming that the properties left behind by
A would devolve upon her in accordance with law as she was sister-in-law of A
whose husband had already died. However, on 20-9-1978, the assessee and the two
brothers, the beneficiaries of the will, moved an application for compromise
decree in order to save peace and honour of the families and to prevent
unnecessary litigation which was ruinous to all concerned and in order to
arrive at a settlement which was beneficial to all. The Court approved the
compromise settlement. The assessee received some assets, including jewellery
later on sold, on the basis of the settlement arrived at through the Court.
According to the ITO the assets acquired by the assessee, including the
jewellery sold, were by succession/inheritance or devaluation and attracted the
provisions of section 49(1)(iii)
for purpose of determination of capital gains. In appeal, the AAC held (i) that the properties left behind by
A were not received by the assessee under the Hindu Succession Act, 1956, but
were, in fact, received by way of family settlement which was recognised as one
of the modes which gave proper title to a person and, therefore, the cost of
jewellery to the assessee had to be taken at the market value pertaining on the
date of the acquisition of the assets, and (ii) that since the jewellery was sold immediately after
acquisition there was no material change in their cost and no capital gain
could arise from the sale thereof. On second appeal the revenue contended that
(i) the assessee's rights
flowed from her vested interest under the provisions of the Hindu Succession
Act and as such those rights could not be compromised in a family settlement,
and (ii) that the members who
arrived at the settlement cannot be called members of a family in view of the
provisions of section 2(41).
HELD : The two brothers with whom the settlement was
arrived at were the sons of A’s sister. They together constituted a family and
apparently had antecedent rights to the properties of the deceased as the
assessee was claiming right, title and interest over the properties because of
her close relationship and the two brothers were staking their claims on the
basis of the will of the deceased dated 09.07.1965. The settlement was,
therefore, nothing but a family settlement and the rights of the parties
accrued and were finally settled on account of that settlement. To such facts,
the provisions of section 2(41) are not
applicable in view of the judgment of the Supreme Court in Ram
Charan Das v. Girja
Nandini Devi AIR 1966 SC 323. In
that decision it was also laid down that in a family settlement each party
takes a share in the property by virtue of the independent title which is
admitted to that extent by the other parties. Every party who takes benefit
under it need not necessarily be shown to have, under the law, a claim to a
share in the property.
The rights of the parties prior to approval of
family settlement by the Court were inchoate. None of the parties could claim
an asbolute right, title and interest in the properties left by A due to
disputes and counter claim. Apparently, none of the parties was able to
exercise the right, title and interest over the properties left by A and,
therefore, the dispute was taken up before the Court where there was no
adjudication upon rights of the parties on the merits because before that
contingency happened the parties arrived at a family settlement, 'to save the
peace and honour of the families and in order to prevent unnecessary litigation'.
It was under the family settlement that the rights of the parties to the
ownership of the properties left by A became final. Thus, the date of
acquisition by the assessee had to be taken with reference to the family
settlement and not with reference to any other right which was in an unsettled
state earlier. Since the properties were received in view of and by way of
family settlement, the date of acquisition for the purpose of computation of
capital gains on sale of jewellery would be with reference to the family
settlement.
The will of A was made as far back as 09.07.1965.
Thereafter, there were natural events upon which no one could claim to have
control whatsoever - the events were deaths of S, P and finally the death of
the testator ‘A’ on 11.07.1975. All these natural events culminated into a
position from where the assessee claimed her rights to the properties testated
in the will dated 09.07.1965 by A. On such facts, a settlement followed in the
way and to the extent described above. To such a settlement, allegation that it
was an artificial device to defraud the revenue could not but be described as
flights of fanciful imagination. Even if the ITO had a right to look behind the
family settlement, there was nothing for him but to recognise family settlement
which has approved by the Court and could not be impeached by the revenue.
Since the family settlement was binding on the
parties and the assessee received the properties including the jewellery sold
under the settlement, the conclusion drawn by the AAC that the assessee did not
acquire the property by way of the means mentioned in section 49 was fully
justified. [In favour of assessee] – [ITO v. Smt.
Sharda Seshadri (1986) 16 ITD
615 (ITAT Delhi)]
Where
as per civil court’s decree assessee was entitled only one-third of house
property in question, ITO could not tax two-thirds of income from that property
in hands of assessee merely on basis that assessee had invested two-thirds of
cost of such property, in absence of challenge to decree and finding that
decree was collusive
Section 23 of the Income-tax Act, 1961 - Income from house
property - Annual value - The assessee and his wife jointly purchased a plot
and constructed a house property thereon. The assessee’s case was that he had
thrown his share in the common hotchpot of his HUF consisting of himself, his
wife and son and later by family settlement as decreed by a civil court he
became entitled to 1/3 of the property in question and as such 1/3 of income
alone could be included in his hand. The ITO, however included 2/3 share of the
income in his hand on the basis of investment made by the assessee and his wife
for the construction of the property which worked out to be 78 : 22. It was
undisputed that the civil court decreed that assessee was entitled to only 1/3
share of the property. The ITO however held that the decree was collusive and
brought to tax 2/3 share of income on the hands of assessee. The Tribunal held
that the decree of the Civil Court was binding on the Revenue unless the same
was challenged and found to be collusive and that no challenge having been
brought about by the revenue, though it had suspected the genuineness of the
decree, it could tax only 1/3rd of the income in the hands of the assessee. (Related Assessment years : 1972-73, 1974-75 and 1976-77)
– [T. S. Madan v. ITO (1982) 13 TTJ 575 (ITAT Chandigarh)]
[B] Cases wherein genuineness
of family settlement vis-Ã -vis genuineness of
transactions was not accepted
It was held that where huge volume
of shares in a public limited company was transferred by assessee to another
company without any consideration, without any proper documentation being
executed as per law and giving it a nomenclature of ‘gift’, as assessee had not
demonstrated by way of documentary evidence genuineness and validity of
transaction, the matter had to be remanded to the Assessing Officer. The
Tribunal noticed that “There was no proof of any family settlement arrived
at when the transferee was a party. Neither there was
any family arrangement that had been brought to the notice of the
authorities nor had the assessee declared that what had been received by it in
lieu of that transfer of shares. The assessee had failed to establish its
relation with G (the donee) as well as not executed any gift deed
or family settlement, in order to establish the genuineness of the
transfer. Merely stating that the transfer was effectuated in lieu of
a family realignment was not acceptable without supportive documents
in the eyes of law. The assessee had not demonstrated by way of documentary
evidence or in any of the manner to prove the genuineness and validity of
transaction.” – [Gagan Infraenergy Ltd. v. DCIT (2018) 94 taxmann.com 301 (ITAT Delhi)]
Transfer of shares by a family
managed limited company, even if through a family arrangement, is liable to
capital gain tax
Transfer (Family arrangement) -
Assessee-company was under control and management of members of a family. Family
settlement through Court required assessee-company to transfer shares held by
it in another company in favour of certain family members. Assessee claimed
that since transfer of shares was done in pursuance of family
arrangement/settlement, no capital gains would be attracted. Since assessee was
separate legal entity being incorporated as limited company, transfer of shares
by assessee-company would amount to transfer and would be covered within
meaning of section 2(47) so as to be assessable to capital gain tax. [In favour
of revenue] (Related Assessment year : 1995-96) – [B.A. Mohota TextilesTraders
(P) Ltd. v. DCIT(Special Range) (2017) 248 Taxman 490 : 82
taxmann.com 397 (Bom.)]
Relinquishment of right over property in case of a family
settlement falls under definition of ‘transfer’ and exigible to capital gains
tax
The assessee submitted before the
Tribunal that "she got 40 per cent of the said property from her father
through gift deed dated 02.12.2006. She referred to the gift deed and pointed
out what was given by her father was in a particular share of the
property i.e., 40 per cent share in the overall property.
Thus, this property could not have been divided to receive share because her
younger brother had received 60 per cent of the share of the said property,
through the same gift deed. Therefore, the assessee had released her share in
favour of her brother through deed dated 14.02.2007 which should be construed
as family settlement and cannot be called a transfer and therefore,
money received in the family settlement has to be treated as
exempt." The Departmental Representative for the Revenue submitted that
the Assessing Officer had clearly given a finding that the assessee’s brother
had given an affidavit through which it has been stated that he had paid a sum
of Rs. 30 lakhs as full and final settlement for the said property
and it was argued that it was a clear case of transfer of right to property and
not case of family settlement and in the case of family settlement,
the assessee would have got alternative property or some other right and not
simple case.
It was held that
release/relinquishment of right over family property against receipt of a sum
would be covered by definition of ‘transfer’ in section 2(47)(i) and where
share in property is released against receipt of cash, instrument of release
cannot be called a family settlement and would be covered by term ‘transfe’ and
exigible to capital gains tax. [In favour of revenue]
(Related Assessment year : 2007-08) –
[Mrs. Lalitha Rathnam v. ITO (2013) 35 taxmann.com 371 :
59 SOT (URO) (ITAT Chandigarh)]
Payment
to brothers for vacating house, who were allowed to stay in assessee’s house
out of natural love and affection, cannot be deducted while computing capital
gain. Further such payment also did not come
within family arrangement - Assessee owned a flat wherein he
allowed his brothers to stay with him - Assessee sold said flat for Rs. 22
lakhs and while computing capital gains, claimed deduction of Rs. 12 lakhs
allegedly paid to his brothers to get flat vacated - In absence of any legal
right of assessee’s brothers in said flat, alleged payment of Rs. 12 lakhs to
them was inadmissible as deduction in computing capital gains - In absence of
any bona fide dispute present or possible among members of family, it would be
incorrect to construe aforesaid payment as family arrangement so as to be an
allowable deduction
The
assessee sold a flat which was his personal property for Rs. 22 lakhs. In the
relevant assessment year 1987-88, he claimed a deduction of Rs. 12 lakhs out of
the said amount while calculating capital gains on the ground that he had paid
that amount to get the flat vacated from his three brothers who had been living
with him in the flat for a long time. The amount of Rs. 12 lakhs was also
alleged to have been paid in terms of a family settlement. The Assessing
Officer rejected the claim of the assessee, but the Commissioner (Appeals)
allowed the claim. On the revenue’s appeal:
Held : There is
no provision in the law by which it could be said that the brothers of the
assessee had acquired a legal right in the premises on the strength of
uninterrupted stay in the flat. If a person allows his relation to stay in his
house, he only provides him a licence to use the house. This licence does not
confer any right in the property.
A right is a legally protected interest, infraction
of which can be challenged in a Court of law. Law prescribes remedy against the
violation of any legal right. This idea is inculcated in the well-known legal
maxim -’UBIJUS IBI REMEDIUM’(wherever there is right, there is remedy).
In a situation like the instant case, no Court of
law could allow any claim to the brothers of the assessee. They were not the
owners of the house. They were not the tenants. The assessee had allowed them
to stay out of natural love and affection. There was absolutely no evidence
that the assessee had taken any money for allowing them to stay. In these
circumstances, it could not be said that a ‘right’ was generated in favour of
the assessee brothers.
In the instant case, the payment made to the
brothers was at best a personal obligation. The amount, therefore, could not be
deducted while computing the capital gains. Further, the payment could not be
construed as a family arrangement. The conflict of legal claim in
praesenti or in futuro is generally a condition for the
validity of a family arrangement. There should be at least a bona
fide dispute present or possible.
Members of a joint Hindu family may, to maintain peace and to bring about
harmony in the family, enter into such a family arrangement. In the instant
case, the core of the dispute was not explained. The flat was not family
property. It was the personal property of the assessee. It was only an
arrangement to reduce the tax burden. When the factum of dispute itself was dubious,
there was no sanctity of the award. In this view of the matter, the order of
the Commissioner (Appeals) was set aside. [In favour of revenue] (Related Assessment year : 1987-88) – [ITO v. Narendra
Kapadia (1996) 58 ITD 329 (ITAT
Mumbai)]
A company, PSM, had two groups of shareholders managing
affairs as directors also - Pursuant to sale agreement in respect of certain
property between said company and purchaser, each group claimed a share in part
of price receivable under said agreement - Eventually, by virtue of an
arbitration award, first group to which assessee belonged, transferred its
shares at a rate less than face value to shareholders of second group and got
one of properties belonging to said company - Two groups of shareholders though
related to each other, there being nothing common among them in matter of
enjoyment of properties belonging to company as members of family, transaction
in question could not be said to be family arrangement so as to say there was
no transfer within meaning of section 2(47) so as to exclude applicability of
section 45 - Assessee having thus transferred her shares on cash payment and
received a share in property transferred by company, was liable to capital
gains in respect of consideration received including share of value in property
after deducting therefrom original cost of those shares
The existence of a family dispute is a sine
qua non for the purpose of family
settlement. Further a family arrangement is made by the parties belonging to
the same family in a bona fide manner so as to put an end to various disputes amongst themselves
in respect of the properties in which their interest is common. But such
interest can not be determined in species and severality. There should be an
antecedent title in the properties belonging to the family before a family
arrangement could be made amongst the various claimants to the title. In the
instant case, so far as the assessee was concerned, her family consisted of
herself, her husband and her daughter. Admittedly she had no dispute with her
husband and her daughter. She was the absolute owner of 321 shares and the
second group to whom the shares were transferred had no antecedent title in
these shares. The two groups of shareholders, though related somehow, belonged
to altogether different families and there was nothing common amongst them in
the matter of enjoyment of properties as members of the family. There was a
third party too, i.e., a
company which was a distinct legal entity and, as per laws governing companies,
distinct shares were held by different members of the group in their own rights
and such shares were their individual properties, which were capable of being
transferred without any pre-condition or hindrance, legal or otherwise.
Further, the company being a corporate entity, was in no way concerned with the
disputes amongst the shareholders. One group of shareholders imputed certain
charges as regards mismanagement of the company; beyond that there was nothing
to show the existence of family dispute or the possibility of a family dispute
The smooth functioning of the company was dictated by its memorandum of
association and articles of association and not by the conduct of its
shareholders. In the absence of a dispute, it could not be concluded, even if
the corporate veil was penetrated, that the arrangement was made to secure
peace and harmony amongst the members. There was no supporting evidence. Thus,
the transfer of shares by the assessee was not covered by the alleged family
arrangement and was squarely covered by ‘transfer’ as contemplated under
section 2(47).
The fact that the ITO assessing the other two
shareholders of the first group had not taxed in their hands the capital gains
on the said transfer on the basis of a family arrangement, had no relevance. If
another ITO assessing the other two members of the family did not correctly
appreciate the facts of the case, that should not help the assessee whose case
had been discussed threadbare by the authorities below. The issue raised here
had to be adjudicated de hors any other proceedings to which recourse might have been taken by
the revenue. The proceedings under the Income-tax Act and the Gift-tax Act were
distinct proceedings and it was the company in whose hand gift tax had been
levied and that was not tantamount to double taxation so far as the assessee
was concerned. Hence, the findings of the Commissioner (Appeals) were upheld.
(Related Assessment year : 1982-83) -
[Kusumben
Kantilal Shah v. ITO (1996)
56 ITD 476 (ITAT Ahmedabad)]
SLP dismissed against impugned order of High Court holding
that consideration received on settlement of case of property usurped by
relatives was taxable as capital gain
Family settlement - Assessee was a
Power of Attorney holder to an NRI, namely, LMP. An immovable property owned by
LMP along with other co-owners was usurped by her relatives. Pursuant to
settlement in a civil suit filed by LMP and other co-owner for same, LMP
received certain amount as consideration towards her share in property. A
reopening notice under section 148 was issued to assessee on ground that
aforesaid amount received by LMP was taxable as capital gains. Assessee
contended that impugned reopening was barred by limitation; and, secondly,
there was a family settlement in which impugned amount in question was received
and same was ineligible to capital gain tax. High court by impugned order held
that reassessment notice issued against assessee within 6 years from end of
relevant assessment year 1999-2000, was well within period of limitation and
merely because dispute regarding immovable property involved some family
members and such dispute was ultimately settled by filing consent terms, same
could not be styled as a family settlement and on such basis, it could not be
held that consideration received as a result of such settlement did not
constitute capital gain. SLP against said impugned order was to be dismissed. [In
favour of revenue] (Related Assessment year 1999-2000 – [P. P. Mahatme
v. ACIT (2021) 279 Taxman 325 : 126 taxmann.com 176 (SC)]
No tax if assessee received property on account of family
settlement - Where assessee had received property from his brothers on
account of Family Settlement and Release Deed was also executed in which it was
nowhere recorded that assessee paid any consideration to his other three
brothers, there being no commercial transaction, provisions of section
56(2)(vii)(b) were not attracted
Assessee during year filed its return of income
declaring total income of Rs. 1.28 crore. Assessing Officer on perusal of
Memorandum of Family Settlement (MFS) noted that assessee had acquired Bungalow
at New Delhi, due to relinquishment of rights in said property by three
brothers of assessee for Rs. NIL. Assessing Officer noted that assessee had got
sanctioned a bank loan of Rs. 15 crore and disbursement was made by bank of Rs.
12 crore, Rs. 4 crore to each of three brothers and this meant that brothers
were paid a sum against relinquishment of their rights in property. Thus,
taking into consideration that property had been purchased by assessee from
brothers for Rs. 12 crore and there being difference of Rs. 28 crore, in stamp
value determined by Registrar for this property, Assessing Officer made
addition of difference under section 56(2)(vii)(b). Commissioner (Appeals)
confirmed addition under section 56(2)(vii)(b). On appeal, it was found that in
pursuance of Family Settlement, assessee and his three brothers had distributed
various properties among themselves and necessary rights and title were
transferred in favour of each brother which would show that parties had entered
into genuine transaction. Further, Release Deed was also executed, in which it
was nowhere recorded that assessee paid any consideration to his other three
brothers. Moreover, loan as considered by authorities below of Rs. 12 crore
received by assessee had been received after execution of aforesaid Release
Deed and thus, there was no question of parting with any consideration for
execution of Release Deed. Thus, there being no commercial transaction in
distribution of property, provisions of section 56(2)(vii)(b) were not
attracted. [In favour of assessee] (Related Assessment year :
2015-16) – [Govind Kumar, Khemka
v. ACIT (2020) 113 taxmann.com 5 (ITAT Delhi)]
Family members intended to maintain peace in the family and
therefore, the family arrangement was arrived at which was bona fide one.
Hence, the transaction did not constitute gift within the meaning of Section
2(xii) and 4(1)(a) of the Gift-tax act, 1958
Assessee along with her son carried on business and acquired certain
properties jointly with her son. She executed a partition deed with a view to
settle dispute with her son. She along with her son also executed lease deed in
respect of properties in favour of her husband and two daughters for a sum of
Rs. 16,000 per annum. GTO held that by partition deed property absolutely belonging
to assessee was allotted to her son which involved a ‘gift’ and lease amount
fixed was much lower than annual income of property and brought transaction to
gift-tax. Assessee pleaded that that was a family arrangement. Tribunal held in
favour of assessee. Tribunal was right in holding that transaction by which a
self-acquired property of assessee was alienated in favour of her son by way of
partition was only a family arrangement and was, therefore, outside purview of
Gift-tax Act. Tribunal rightly held that transaction by which assessee leased
out properties to her husband and two daughters at a lease rent which was far
below annual income of property was only a family arrangement and was outside
purview of Act. (Related Assessment year : 1988-89) – [Commissioner of Gift Tax v. D. Nagrirathinam (2004) 266 ITR 342 (2003)
129 Taxman 822 (Mad.)]
Income-tax implications
Transfer
between individual family members
cannot be treated as a “transfer” under section 2(47) of the Income Tax Act
Transfer of
property between the individual family members pursuant to a bona fide family
arrangement entered into between the individual family members cannot be
treated as a “transfer” under section 2(47) of the Income Tax Act and
therefore, any capital gains which may arise in the hands of the transferor
shall not be taxed as capital gains tax under section 45 of the Act.
When it
cannot be treated as a “transfer” which is liable to capital gains tax u/s 45
of the Act, other deeming fictions such as section 50C or 50CA of the Act (to
compute the fair market value of unlisted shares and land or building as deemed
consideration) should not be triggered despite the fact such transfer is at a
lower valuation than the fair market value.
Word ‘transfer’ does not include
partition or family settlement - Where
family members of assessee were holding shares in different business concerns
and assessee under a family arrangement had transferred his share held in a
firm in favour of a family member, there was no transfer in instant case
Family members of assessee were holding apart from personal
properties, family properties and shares in different business concerns.
Disputes arose between assessee and other family members . Thereupon a family
arrangement was made between assessee and other family members, whereby
assessee had resigned from a partnership firm and transferred his share of
profit and loss in said firm to a family member for a consideration
of ₹ 35,000 being capital balance of firm.
The Karnataka High Court held that the word ‘transfer’ does
not include partition or family settlement as defined under the Act. It is well
settled that a partition is not a transfer. What is recorded in a family
settlement is nothing but a partition. Every member has an anterior title to
the property which is the subject matter of a transaction, that is, partition
or a family arrangement. So there is adjustment of shares, crystallization of
the respective rights in the family properties and, therefore it cannot be
construed as a transfer in the eye of law. Consequently, the Tribunal on a
proper consideration of the entire material on record has categorically held
that the transaction in question is a family arrangement. When there is no
transfer, there is no capital gain and, therefore, there is no liability of the
assessee to pay capital gain tax. Therefore, the appeal filed by the revenue
was dismissed. (Related Assessment
year : 1993-94) – [CIT v. R. Nagaraja Rao (2012) 207 Taxman 236 : 21 taxmann.com 101 (Karn.)]
Section 56(2) does not apply to “Family
Arrangement”
It will not attract any income-tax as the arrangement is
among the members of the family.
Section 56(2) of Income-tax is applicable for transfer of
assets between persons with inadequate consideration or without consideration.
However, the said section 56(2) does not apply to “Family Arrangement”.
Hon’ble Supreme Court in Ramcharandas v. Girjanan
Devi AIR 1966 323 held as under:
(i) To put an end to dispute amongst the members of the
family is not a transfer. It is also not a creation of interest.
(ii) In family settlement each party takes a share in the
property by virtue of an independent title which is in fact admitted by other
parties.
(iii) Each Party need not have a legal claim to be share in
the property.
(iv) It is necessary to show that the parties are related to
each other in some way and a possible claim on property or possible claim on
some other ground.
(v) Apex Court in Kale v. Dy. Director of
Consolidation AIR 1976 SC 807
It laid down two important aspects of family arrangement,
they are:
It must be bona fide one to resolve the
family dispute and rival claims by fair and equitable division or allotment of
properties amongst various members of the family. Settlement must be fair and
voluntary free of coercion or fraud.
No tax on transfer of property under
family settlement - Where assessee had received property from his brothers on
account of Family Settlement and Release Deed was also executed in which it was
nowhere recorded that assessee paid any consideration to his other three
brothers, there being no commercial transaction, provisions of section
56(2)(vii)(b) were not attracted
Family settlement of property - Assessee during year
filed its return of income declaring total income of Rs. 1.28 crore. Assessing
Officer on perusal of Memorandum of Family Settlement (MFS) noted that assessee
had acquired Bungalow at New Delhi, due to relinquishment of rights in said
property by three brothers of assessee for Rs.NIL. Assessing Officer noted that
assessee had got sanctioned a bank loan of Rs. 15 crore and disbursement was
made by bank of Rs. 12 crore, Rs. 4 crore to each of three brothers and this
meant that brothers were paid a sum against relinquishment of their rights in
property. Thus, taking into consideration that property had been purchased by
assessee from brothers for Rs. 12 crore and there being difference of Rs. 28
crore, in stamp value determined by Registrar for this property, Assessing
Officer made addition of difference under section 56(2)(vii)(b). Commissioner
(Appeals) confirmed addition under section 56(2)(vii)(b). On appeal, it was
found that in pursuance of Family Settlement, assessee and his three brothers
had distributed various properties among themselves and necessary rights and
title were transferred in favour of each brother which would show that parties
had entered into genuine transaction. Further, Release Deed was also executed,
in which it was nowhere recorded that assessee paid any consideration to his
other three brothers. Moreover, loan as considered by authorities below of Rs.
12 crore received by assessee had been received after execution of aforesaid
Release Deed and thus, there was no question of parting with any consideration
for execution of Release Deed. Thus, there being no commercial transaction in
distribution of property, provisions of section 56(2)(vii)(b) were not
attracted. [In favour of assessee] (Related Assessment Year : 2015-16)
– [Govind Kumar Khemka v. ACIT (2020) 181 ITD 586 : 113 taxmann.com 5 (ITAT Delhi)]
In the case of individual properties, there can be a valid
family settlement, therefore, such a settlement will not fall within the ambit
of Section, 64
In the case of individual
properties, whether in respect of Hindus or other communities, there can be a
valid family settlement. The other family members can have claims in the estate
either on account of rights of maintenance or otherwise and in settlement of
such claims a family arrangement can be arrived at which will be considered to
be one for a valid consideration and, therefore, such a settlement will not
fall within the ambit of Section, 64 of the Income Tax Act, 1961. Such a
transaction is clearly with and for a valid consideration. Obligations
regarding maintenance are to be found under the general law and specifically,
under the Hindu Adoption and Maintenance Act, 1956 and if any settlement takes
place in this connection, it will be for a valid and valuable consideration.
·
Transfer
of shares was for equalization of wealth of the family members which had
monetary connotation, the same cannot be said to be voluntary
Family
arrangement was to equalize the holdings between the respective families of three
brothers. Therefore, it cannot be said that consideration for transfer of
shares cannot be measured in terms of money or monies worth. The equalization
of wealth has only monetary connotation. To avoid disputes cannot be said to be
without monetary consideration as it is common knowledge that family disputes
ruin the family financially. The family disputes are being settled in monetary
terms by resorting to arbitration and in case such settlements is not done,
matter travels to the court and the family suffers heavily not only mentally
but also financially. There is a proverb according to which it is said that a
person who wins a case actually looses it as by the time matter is settled in
his favour he is already a ruined person. Thus, it cannot be said that the
consideration for transfer of shares was not for monetary consideration.
Further
the transfer was in pursuance of family arrangement, the same was not voluntary
as the family arrangement was enforceable and binding on the parties. The
argument made on behalf of the assessee that since the family arrangement was
voluntary the subsequent action of the parties to the arrangement was also be
considered voluntary. But it was held that the argument advanced by assessee
devoid of any merit because if this argument of the assessee is accepted then
what was the need of signing enforceable binding family agreement in the first
place. - [In favour of revenue] (Related Assessment
year : 2002-03) - [Addl. CIT, Vapi v. Bilakhia Holdings (P) Ltd. (2014) 49 taxmann.com 91
(ITAT Ahmedabad)]
