1. It is arrangement between member of a family descending from a common ancestor or near relation trying to sink their differences ...
1. It is arrangement between member of a family descending from a common ancestor or near relation trying to sink their differences and disputes, settle and solve their conflicting claims once and for all to buy peace of mind and bring about harmony and goodwill in the family by an equitable distribution or allotment of assets and properties amongst member of the family.
FAMILY IN A FAMILY ARRANGEMENT HAS A WIDER MEANING
2. The Supreme Court in Ram Charan Das v. Girja Nandini Devi (AIR 1996 SC 323, 329 ) held that : “ Court give effect to a family settlement upon the broad and general ground that it’s object is to settle existing or future disputes regarding property amongst members of a family. The word ‘family’ in this context is not to be understood in the narrow sense of being a group of person who are recongnised in law as having a right of succession or having a claim to a share in the property in dispute.” While it is necessary that there should be some common tie between the parties to such family arrangement, it need not be between persons who are commonly understood as constituting a Hindu Family or for that matter, a family in any restricted sense. It is not necessary that there should be a strictly legal claim as member of the same family. It is enough if there is a possible claim or if they are related, a semblance of a claim (Krishna Beharilal v. Gulabchand AIR 1971 SC 1041, 1045 ).
A family arrangement wherein an adopted son was a party was held to be valid though he turned out to be a stranger as the adoption was subsequently held to be invalid in the case of Shivamurteppa Gurappa Ganiger v. Fakirapaa Basangauda Channappagaudar (AIR 1954 Bom. 430) C.G.T. v. Smt. Gollapude Saritammn (116 ITR 930, 936 AP.)
It is possible that married daughters or sisters who are not treated as members of the family of a parent/ brother on their marriage may still be considered as members of the family for purposes of a family arrangement.
ESSENTIALS OF A FAMILY ARRANGEMENT
(i) The family arrangement should be for the benefit of the family in general.
(ii) The family arrangement must be bonafide, honest, voluntary and it should not be induced by fraud, coercion or undue influence.
(iii) The purpose of the family arrangement should be to resolve present or possible family dispute and rival claims not necessarily legal claims by a fair and equitable division of the property amongst various members.
(iv) 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.
(v) 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. Kale v. Deputy Director of Consolidation (AIR 1976 SC 807)
(vi) Family peace is sufficient consideration
A question arises as to what is the consideration for allotment of property under a family settlement. It is said that a family settlement is arrived at between the members of the family with a view to compromise doubtful and disputed right. It, therefore, follows that the allotment of shares under a family settlement is not what a person is legally entitled to since some of the members can be allotted a much lesser share of asset than what they are entitled to under the law, while others a much larger share than what they are entitled to , yet some others may get a share to which are not legally entitled to since the main consideration is surely and certainly purchase of peace and amity amongst the family members and such a consideration cannot be deemed as being without consideration.
Antecedent title, claim or interest or even a possible claim:
The members who may be parties to the family arrangement must have some antecedent title, claim or interest or 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 Court will find no difficulty in giving assent to the same. Kale v. Deputy Director of Consolidation (AIR 1976 SC 807).
But where the person, in whose favour certain properties have been transferred under the guise of a family arrangement, has no and cannot have any claim or possible claim against the transferor, & therefore, the same cannot be regarded as a family arrangement.
l CED v. Chandra Kala Garg 148 ITR 737 ( All.)
l CIT v. R.Ponnammal 164 ITR 706 (Mad.)
In the case of Roshan Singh v. Zile Singh (AIR 1988 SC 881) the Supreme Court held that the parties to family arrangement set up competing 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 an antecedent title of the parties to the properties and the settlement acknowledged and defined title of each of the parties.
1. A family settlement is considered as a pious arrangement by all those who are concerned and also by those who administer law. A family settlement is not within the exclusive domain of the Hindu Law but equality applies to all families governed by other religions as well. Thus, it shall apply to Muslims, Christians, Jews, Parsees and other faiths equally.
2. The concept of family arrangement is an age old one. It is not only applicable to Hindus but also to other communities in which there is a common unit, common mess and joint living. In the case of Bibijan Begum v. Income Tax Officer (34 TTJ 557), the Gauhati Bench of the Appellate Tribunal in a very elaborate judgement held that there is no bar for Mohammedans to effect a family arrangement. In that case the assessee had an absolute right over her Mehr property and in exchange of that land the assessee received another land over which a multi-storeyed building was to be constructed. The assessee’s two daughters and two sons had antecedent right to the properties in the capacity as her heirs though their shares were not specified. The Tribunal held that by a family arrangement the rights of those children had been specified. The family arrangement by which the assessee and her four children received 1/5th share each in the multi-storeyed building was, therefore, valid. The Tribunal therefore, held that the assessee lady could not be assessed in respect of that share of house property which was given to her children pursuant to the family arrangement.
3. Three parties to the settlement of a dispute concerning the property of a deceased person comprised his widow, her brother and her son-in-law. The latter two could not under the Hindu Law be regarded as the heirs of the deceased, yet, bearing in mind their near relationship to the widow, the settlement of the dispute was very properly regarded as a settlement of a family dispute – Ram Charan Das v. Girija Nandini Devi AIR 1996 SC 323 at page 329.
4. A family arrangement differs from partition in as much as in a family settlement there can be a division of income without the distribution of assets and there is no bar to a partial partition. The provision of section 271 of the Act, which places restriction on a partial positions do not apply to a family settlement.
5. The Gauhati High Court in the case of Ziauddin Ahmed v. CGT, 102 ITR 253 held that the family arrangement amongst the members of Mohammedan family is valid and therefore, the shares given by a father to his sons at less than market value in order to preserve the family peace is not liable to gift tax.
WHETHER REGISTRATION OF DOCUMENT IS REQUIRED FOR EFFECTING FAMILY ARRANGEMENT
1. Family arrangement as such can be arrived orally or may be recorded in writing as 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 would amount to a document of title declaring for future what rights in what properties the parties possess. Tek Bhadur Bhuji v. Debi Singh AIR 1966 SC 292 . Also see Awadh Narain Singh v. Narian Mishra, AIR 1962 pat. 400; Mythili Nalini v. Kowmari, AIR 1991 Ker 266; Klae v. Dy Director of Consolidation AIR 1976 SC 807.
2. Another aspect that attracts our attention is whether family arrangement, if recorded in a document, requires registration as per the provisions of section 17(1)(b) of the Indian Registration Act, 1908. Section 17(1)(b) lays down that a document for which registration is compulsory should, by its own force, operate or purport to create declare, assign, limit or extinguish either in present or in future any right, title or interest in immovable property. Thus if an instrument of family arrangement is recorded in writing and operates or purports to create or extinguish rights, it has to be compulsorily registered. But where a document, merely records the terms and recital of the family arrangement after the family arrangement had already been made which per se does not create or extinguish any right in immovable properties, such document does not fall within the ambit of section 17(1)(b) of the Act and so it does not require registration.
3. According to the Supreme Court in Roshan Singh v. Zile Singh AIR 1988 SC 881, the true principle that emerges can be stated thus ‘If the arrangement, of compromise is one under which a person having an absolute title to the property transfers his title in some of the items thereof to others, the formalities prescribed by law have to be complied with, since the transferees derive their respective title through the transferor. If, on the other hand, the parties set up competing titles and the differences are resolved by the compromise, then, there is no question of one deriving title from the other and therefore, the arrangement does not fall within the mischief of section 17 (1) (b) it read with section 49 of the Registration Act as no interest in property is created or declared by the document for the first time.
4. Family Arrangement does not amount to transfer : The transaction of a family settlement entered into by the parties bonafide for the purpose of putting an end to the dispute among family members, does not amount to a transfer Hiran Bibi v. Sohan Bibi, AIR 1914 PC 44, approving, Khunni Lal v. Govind Krishna Narain, (1911) ILR 33 All 356 (PC). It is not also the creation of an interest. For, as pointed out by the Privy Council in Hiran Bibi’s case AIR 1914 PC 44, 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 party. It is not necessary, as would appear from the decision in Rangaswami Gounden v. Nachiappa Gounden AIR 1918 PC 196, that every party taking benefit under a family settlement must necessarily be shown to have, under the law, a claim to a share in the property. All that is necessary is that the parties must be related to one another in some way and have a possible claim to the property or a claim or even a resemblance of a claim on some other ground as say, affection. Ram Charan Das v. Girija Nandini Devi, AIR 1966 SC 323.
5. 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 information of the court for making necessary mutation. In such a case memorandum itself does not create or extinguish any rights in immovable properties and therefore does not fall within the mischief of section 17 of the Registration Act and is, therefore not compulsorily registrable –Kale v. Dy. Director AIR 1976 SC 807.
6. The family arrangement will need registration only if it creates any interest in immoveable property in present in favour of the party mentioned therein. In case however no such interest is created, the document will be valid despite its non-registration and will not be hit by section 17 of the Indian Registration Act, 1908. Maturi Pullaih v. Maturi Narasimhan AIR 1966 SC 1836.
7. Even a family arrangement, which was registrable but not registered, can be used for a collateral purpose, namely, for the purpose of showing the nature and character of possession of the parties .In pursuance of the family settlement. Kale v. Director of Consolidation AIR 1976 SC 807, (1976) 3 SCC 119.
8. To record a family arrangement arrived at orally, a memorandum of family arrangement-cum-compromise is required to be drawn up wherein the properties and assets belonging to the parties to the family arrangement are required to be specified. Thereafter the fact of arriving at family arrangement sometime in the past with the help of well-wishers and family friends is required to be mentioned. In the operative portion of the Memorandum of Family Arrangement-cum-Compromise the properties and business which have been allotted to different parties are required to be specified.
In addition to the Memorandum of Family Arrangement –cum-Compromise, other documents like affidavits of each of the parties to the Family Arrangement are required to be obtained wherein each of the parties confirms on oath that he has received a particular asset and the family arrangement is arrived to his total satisfaction and it is binding on him. In such an affidavit the party giving up his right in other properties which are allotted to other parties to the Family Arrangement states that the said other properties may be transferred in the records of the registering authorities without notice to him. On the basis of the affidavit which is required to be executed before a Notary Public; mutation entries can be made by the concerned authorities.
In order to enable the member of the family to whom a particular property is allotted on arriving at a family arrangement, a power of attorney is required to be given by a member in whose name the said property was standing prior to the family arrangement to enable the party receiving the property to deal with the property as his own. Depending on the facts of each case, various other documents may be required to be drawn up to effect a proper and binding family arrangement.
9. Family arrangement is arrived at for a consideration namely, to resolve the dispute amongst the parties, to preserve the family peace and harmony and to avoid litigation and therefore, the provisions of Gift Tax Act are not attracted.
G.T.O. v. Bhupati Veerbhsadra Rao ( 9 ITD 618 )
C.G. T. v. Pappathi Anni ( 123 ITR 655, Mad )
Ziauddin Ahmed v. CGT ( 102 ITR 253 Gau. )
In the case of N. Durgaiah v. C.G.T. 99 ITR 477 (AP), the assessee executed a registered deed of settlement on March 26, 1962, conveying certain immovable properties to his five sons and two daughters out of whom one of the sons was a minor in whose favour a house worth Rs. 64,800/-was settled. The assessee contended before the G.T.O. that the transaction was in the nature of a family arrangement which does not amount to a taxable gift under the G.T.Act. The G.T.O. A.A.C. and the Tribunal rejected the contention of the Assessee.
When the matter reached the High Court, the Andhra Pradesh High Court held that in order to constitute a family arrangement, there must be an agreement or arrangement amongst the members of the joint family who wish to avoid any plausible or possible disputes and secure peace and harmony amongst the members. Where one of the parties executes a document styled as settlement deed where under some of the properties exclusively belonging to him as his self-acquired properties are settled in favour of the other members of the family, the terms of such document do not amount to a family arrangement. There is no family arrangement as the same is only a unilateral act.
Hence a purely voluntary act of giving up one’s right in property without compelling circumstances indicating an existing or a possible dispute resulting in a compromise may well constitute a conveyance by way of gift and not valid family arrangement. It is, therefore, necessary that the preamble to the family arrangement should advert to the existence of difference which are likely to escalate to possible litigation and cause lack of peace and harmony in the family and likely to bring dishonor to the family name and prestige.
In the case of Ram Charan Das v. Girja Nandini Devi (Supra), the Supreme Court held that a compromise by way of family settlement is in no sense an alienation by a limited owner of the family property and since it is not an alienation it cannot amount to a creation of interest.
The definition of the term “transfer” contained in section 2(47) of the Income Tax Act, 1961 prior to its amendment by the Finance Act, 1987 with effect from 1.4.1988 has been considered by the Supreme Court in the case of Dewas Cine Corporation ( 68 ITR 240), Bankey Lal Vaidya ( 79 ITR 594 ) & Malbar Fisheries Co. ( 120 ITR 49) wherein the High Court, was called upon to consider whether on dissolution of a firm there is a transfer of assets amongst the partners. The Supreme Court in all the decisions unequivocally held that on dissolution of a firm there is a mutual adjustment of rights amongst the partners and therefore, there is no transfer of assets by sale, exchange, relinquishment of the asset or extinguishments of any rights therein.
Their Lordships of the Supreme Court in the case of Sunil Siddharthabhi v. CIT (156 ITR 509) after considering the decisions of their Court in the case of Dewas Cine Corporations, Bankey Lal Vaidya & Malbar Fisheries Co. and the Gujarat High Court decision in the case of Mohanbhai Pamabhai ( 91 ITR 393 ) held, that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realized by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realization of a pre-existing right.
With effect from 1.4.1988 sub-clause (v) is added to the definition of the term “transfer” in section 2(47) of the Income Tax Act which provides that any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract amounts to a transfer. Sub-clause (vi) which is added to the definition of the term transfer provides that transaction which has the effect of transferring or enabling the enjoyment of any immovable property amounts to a transfer for the purpose of Income Tax Act.
Whether distribution of assets amongst the members of the family amounts to transfer pursuant to the amended definition of the term transfer ?
In the case of Ramgowda Annagowda Patil v. Bhausaheb ( AIR 1927 PC 227), the family settlement was between parties which included the brother and son-in-law of a widow of the deceased. Though the widow was a necessary party, her brother and son-in-law were not, but they had been allotted shares in the properties which formed the subject-matter of the family arrangement. It was held that in view of the closeness of the relationship between the persons who were disputing the right over the property with one another, the arrangement between them was legal and enforceable ( Mehdi Hasan v. Ram Ker AIR 1982 All. 92).