R. Kumar, B.Com. MBA (Finance)
Family disputes and consequential family partition and family arrangements are not new in Indian history. Since ages, the human civilization has been exposed to disputes, settlement and arrangements within the family. The destruction of property and human lives in Mahabharata was the outcome of the family dispute that could not be resolved by partition and/or arrangement. Hence, family partition and family arrangement assume significant importance in not only preserving the property but also human lives and values. This is the subject that has travelled through the time and across the geographical boundaries, religion, caste and creed enveloping in its fold all and sundry. In the recent past, we have come across family disputes and arrangements in a number of industrial houses.
There is no specific legislation enacted by the Government to deal with the family disputes, family partition and family arrangement. The whole concept of family partition and family arrangement has been evolved over the years and further and refined by the judiciary keeping in mind the spirit behind the family arrangement.
Halsbury’s Law of England defines family arrangement as an agreement between 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. The agreement may be implied from a long course of dealing but it agreement in a deed to which the term ‘family arrangement’ applied. However, there is no specific definition of ‘family arrangement’ under the Indian laws. The concept of family arrangement has not been codified in any law but is evolved over the period of time by way of customs and judicial pronouncement.
The main ingredients of family arrangement are:-Family; Property; Disputes and Arrangement.
Explanation 10(5) of Income-tax Act, 1961 defines the term ‘family’ as follows:
Family in relation to individual means:- i) the spouse and children of the individual; and ii) the parents, brothers and sisters of the individuals or any of them wholly or mainly dependent on individual.
As per Oxford Dictionary the expression ‘family’ is as follows:
The body of persons who live in one house or under one head including parents, children, servants etc. The group consisting of parents and their children whether living together or not; in a wider sense all those who are connected by blood or affinity.
Therefore the word ‘family’ is not to be understood in a narrower sense of being a group of persons who are recognised in law as having a right of succession or having a claim to share in the property dispute. It is also not correct to say that a person by reason of his inheritance alone become, ipso facto, a member of the family whose property he succeeds. The word ‘family’ has to be used in a broader sense and would mean all those who are connected by blood relationship or marriage and are, therefore, to be considered to be belonging to the ‘family’. The girl who is married and goes to her husband’s family hence ceases to be a member of her father’s family, will still be considered to be a member of her father’s family under certain circumstances like family settlement-arrangement etc.
In other case an adopted child can be a member of the ‘family’ for the purposes of family arrangement. Under the Hindu Law, an adopted child for all intent and purpose is like a natural born child. He is treated equivalent to full blood relation. Thus an adopted child becomes the member of the ‘family’ for the purpose of family arrangement.
The position of illegitimate child in Hindus is governed by Sec. 3(1)(j) of the Hindu Succession Act. These succession laws do not strictly dictate as to who can be a party to the family arrangement. An illegitimate child can have an antecedent title, interest in the property of its father and mother. Hence such a child can be constituent of ‘family’ for the purposes of family arrangement.
Joint property in the family hotchpotch is considered for the purposes of family arrangement. Individual properties or the self-acquired properties generally don’t become the subject of family arrangement. However, if the antecedent title, claim or interest in such property is shown to be in existence, family arrangement in respect of such properties can be validly arrived at. Antecedent title of the participants to the family arrangement in subject property is a guiding factor for family arrangement.
In case of Bansari Lal Aggarwal Vs. CGT [(1998) 230-ITR-114 (P&H)], in this case 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.
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.
Halsbury’s Law of England in para 303(2) states that an agreement dividing up family property, though entered into under misapprehension of legal rights of the parties, can be supported as a family arrangement provided the misapprehension is not induced by any party to the agreement, even where misapprehension existed has been established by any subsequent legal decision.
In the case of Shambhu Prasad Vs. Phool Kumar [AIR 1971 SC 1337], In this case 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.”
The word ‘arrangement’ means to come to an agreement about, to settle the dispute. The process of ‘arrangement’ is just like the process of arbitration. The process of arrangement is not synonyms with process of determination of the rights of the parties like in a legal suit instituted in any court of law by the warring parties. The arrangement is not arrived at strictly in accordance with law of inheritance as in vogue for the time being. Consequently, even the person who has no right to inherit particular property may get some share in an arrangement arrived at. The arrangement is more about compassionate nature, arrived at to take care of mutual interest, desire to co-exist peacefully. As held by the Apex Court in number of cases, ‘arrangement’ with reference to family arrangement is to bring about harmony in a family and do justice to its various members and avoid in anticipation future disputes, which might ruin them all.
In the case of S.K. Sattar S.K. Mohd. Vs. Gundappa Ambadas [(1996) 6-SCC-373 ] 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.
Transfer under Sec. 2(47) and Sec. 45(4) of the Income-tax Act, 1961:-
In the case of Roshan Singh Vs. Zile Singh [AIR 1988 SC 881] 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.
In the case of CIT Vs. A.N. Naik Associates [265 ITR346, Bom], by the Memorandum of Family Settlement dated 30th January, 1997 it was agreed between the parties thereto that the business of six firms as set out therein would be distributed in terms of the family settlement as the parties desired that various matters concerning the business and assets thereto be divided separately and partitioned. Under the terms and condition of the settlement, it was set out that the assets proposed to be divided in partition under the settlement were held by the firms and the individual partners. With reference to the firms, the manner in which the firms were to be reconstituted by retirement and admission of new partners was also set out. Based on these documents and subsequent deeds of retirement of Partnership an order of the assessment was made holding that the respondents was liable for tax on capital gains. The Tribunal held that the business continued to be run and there was no dissolution of the firm and consequently Sec. 45(4) of the Act was not attracted.
Gift under Sec. 2(xii) and Sec. 4(1) of the Gift Tax Act, 1958:-
In the case of CGT Vs. D. Nagrirathinam (266-ITR-342, Mad.), the assessee was the owner of a half share in the building which consisted of ground floor and first floor. She also owned a residential house and a building. Pursuant to the dispute between the assessee and her son, at the intervention of the Panchayatdars, the assessee executed the deed of partition with a view to settle dispute with her son. As per the deed of partition, one of the properties was absolutely allotted to the son which was belonging to the assessee. Therefore, the gift tax assessment was made in respect of the value of the said property allotted to the son. The Tribunal held that only to solve the family dispute and bring harmony in the family the transactions were entered into and there was a family arrangement which did not constitute gift within the meaning of Sec. 2(xii) and 4(1)(a). The said decision of the Tribunal was upheld by the Court on the ground that the 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 Sec. 2(xii) and 4(1)(a) of the Gift-tax act.
Long-term asset/short-term asset:-
The term “short-term capital asset” is defined in Sec. 2(42A) of the Act to mean a capital asset held by the assessee not for more than 36 months immediately preceding the date of its transfer. In respect of a share held in a company or any other security listed in a recognised Stock Exchange in India, a unit of the Unit Trust of India or a unit of a Mutual Fund, the period of holding should be less than 12 months for treating it as short term capital asset. One of the prime conditions on the basis of which the Court recognises family arrangement is that the members of the family who are 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. Once the antecedent title of the recipient of the property is accepted, the period of holding of the said property by the person from whom it is transferred to the recipient will be the period of holding of the said property by the recipient.
Stamp Duty and Registration of Family Settlements:-
One of the main issues under a family settlement is that whether the instrument which records the family arrangement between the family members requires registration under the Registration Act, if it affects the rights or interests in immovable properties. A natural corollary of registration is the payment of stamp duty. Stamp duty is leviable as on rates as applicable on a conveyance.
Stamp Duty on other Instruments:-
The parties to a family settlement may implement the same through other modes, such as Release Deed, a Gift Deed, an HUF Partition, etc.
In order to ascertain the exact implications under the Tax Laws the facts of each case are required to be ascertained very carefully and proper recitals of the family history as well as family disputes are required to be recorded in the Memorandum of Family Arrangements wherein the reallocation and realignment of property amongst the members of the family is recorded. However, one can get broad idea from the ratios of the decisions discussed herein above to understand the implications of the Tax Laws while arriving at a family arrangement.
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Republished with Amendments