Family Settlement & Wills

Family arrangements are governed by principles which are not applicable to dealing between strangers. When deciding the rights of parties under a family arrangement or a claim to upset such an arrangement, the court considers what in the broadest view of the matter is most in the interest of the family, and has regard to considerations which, in dealing with transactions between persons not members of the same family, would not be taken into account (para 304 of Halsbury’s Laws of England).

Should be bona fide

Since the consideration for a family arrangement is partly value and partly love and affection, the pecuniary worth of the consideration is not regarded too closely. The court will not, as a general rule, inquire into the adequacy of the consideration, but there is an equity to set aside a family arrangement where the inadequacy of the consideration is so gross as to lead to the conclusion that the party either did not understand what it was about, or was the victim of some imposition (see para 312 of Halsbury’s Laws of England).

What is family

The word “family” is not to be interpreted in the narrow sense of members of a joint Hindu family as defined in Hindu Law but it would include wide range of persons who belong to one family in its comprehensive sense. The basis on which such family settlements are held as valid and binding between all parties is the mutual consideration which flows between the parties while putting an end to the claims and counter claims between them. It has been held under the law of contract that it is lawful consideration for a party when he gives up his claim to any property in return for any payment or transfer of property made to him or any obligation undertaken by the party. Existence of the right in the property is not necessary in order to make the family settlement valid and binding for a valuable consideration. The existence of the dispute or a threatened dispute between the members of the family is considered to be a precondition for a valid family settlement and such disputes and the consequent giving up of claims and counter-claims between the various members of the family constitutes good and valid consideration between the parties for enforcement of the rights and obligations created by such a family settlement. The family settlement, therefore, is not founded on existing rights or liabilities but rather on existing claims and disputes between the parties which are amicably resolved; notices may be given by contending parties, even suits may be filed matters may be referred to arbitration and award may work out as family settlement.

Some principles governing family arrangements

Except where there is a specific provision of the IT Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. – CIT v. Bhagyalakshmi & Co., 55 ITR 660 (SC). In other words, while construing family settlements for tax purposes, the courts would apply the settled principles applicable to such settlements.

1) In Maturi Pullaiah & Anr. v. Maturi Narasimham & Ors. AIR 1966 SC 1836, the Apex Court has held as follows :

“Briefly stated, though conflict of legal claims in praesenti or de futuro is generally a condition for the validity of a family arrangement, it is not necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims will suffice. Members of a joint Hindu family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an arrangement is entered into bona fide and the terms thereof are fair in the circumstances of a particular case, Courts will more readily give assent to such an arrangement than to avoid it.”

2) The real consideration in a family arrangement is based upon a recognition of a pre-existing right hence, there is no transfer of property at all. The Hon’ble Apex Court in CGT v. NS Getti Chettiar 82 ITR 599 (SC) based its observation on that ground in a case of unequal family partition and held that it is not transfer, hence no gift tax liability is attracted.

3) The Hon’ble Supreme Court in Sahu Madho Das v. Pandit Mukand Ram AIR 1955 SC 481 has laid down the principles of family settlement and the requirement of registration of a document of family settlement. The Hon’ble Apex Court observed as under:

“It is well-settled that a compromise or family settlement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges and defines what that title is, each party relinquishing all claims to property other than that falling to his share and recognising the right of others, as they had previously asserted it, to the portions allotted to them respectively. That explains why no conveyance is required in these cases to pass the title from the one in whom it resides to the person receiving it under the family arrangement. It is assumed that the title claimed by the person receiving the property under the arrangement had always resided in him or her so far as the property falling to his share is concerned and therefore no conveyance is necessary. But, in our opinion, the principle can be carried further and so strongly do the courts lean in favour of family arrangements that bring about harmony in a family and do justice to its’ various members and avoid in anticipation, future disputes which might ruin them all, and we have no hesitation in taking the next step (fraud apart) and upholding an arrangement under which one set of members abandons all claim to all title and interest in all the properties in dispute and acknowledges that the sole and absolute title to all the properties resides in only one of their number and are content to take such properties as are assigned to their shares as gifts pure and simple from ……..”.

4) A family arrangement does not result into a transfer or a conveyance Ramcharan Das v. Girija Devi AIR 1966 SC 323. In this case, the Hon’ble Apex Court held as under:

In Mst. Hiran Bibi v. Mst. Sohan Bibi AIR 1914 PC 44 (3) L.R. 53 I. All approving the earlier decision in Khunni Lal v. Govind Krishna Narain IL..R. 33. An. 356, the Privy Council held that a compromise by way of family settlement is in no sense an alienation by a limited owner of family property. Once it is held that the transaction being a family settlement is not an alienation, it cannot amount to the creation of an interest. As the Privy Council pointed out in Mst. Hiran Bibi’s (supra), case, 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.

5) It is not necessary, as would appear from the decision in Rangasami Gounden v. Nachiappa Gounden L.R. 46 I.A. 72, 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 semblance of a claim on some other ground as, say, affection.

6) That apprehended conflict can also be a ground for such settlement – AIR 1932 Cal 600, AIR 1932 Cal 664.

7) Even the parties to family settlement need not belong to the same family. The word ‘family’ in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy – Krishna Baharilal v. Gulab Chand & Ors. AIR 1971 SC 104. The court, in that case, encountered by the question whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was in respect of certain property which was originally owned by their common ancestors, that was considered sufficient for a family settlement or arrangement. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family.

Registration of the family deed

8) Section 17 of the Registration Act, 1908 enlists the documents which shall be registered under the Act. Clause (b) of Section 17(1) reads:

Other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property.

Section 17(2), inter alia, provides that nothing in clause (b) of Section (1) of Section 17 applies to:

(v) Any document other than the documents specified in sub-section(1A)] not itself creating, declaring, assigning, limiting or extinguishing any right, title or interest of the value of one hundred rupees and upwards to or in immovable property, but merely creating a right to obtain another document which will, when executed, create, declare, assign, limit or extinguish any such right, title or interest; or

(vi) any decree or order of a Court [except a decree or order expressed to be made on a compromise and comprising immovable property other than that which is the subject- matter of the suit or proceeding].

9) Section 49 of the Registration Act provides that no documents required by Section 17, inter alia, to be registered shall affect any immovable property comprised therein; confer any power to adopt; or be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered. Consequently, unlike under Section 35 of the Stamp Act, an instrument/document that is compulsorily registrable, but is not so registered, is denuded of its efficacy and it is not receivable in evidence, and the law does not enable the party relying upon the instrument/document to unilaterally get the same subsequently registered.

10) It is settled position that a family settlement does not require registration- Kale v. Dy. Director AIR 1976 SC 807; Shahu Madho das v. Mukand Ram AIR 1955 SC 804. Hence no registration is required since there is no conveyance involved in this family settlement; the right/title/interest of the all the family members already existed in the property.

11) In Tek Bahadur Bhujil v. Debi Singh Bhujil AIR 1966 SC 292 it was observed that where the document was drawn up only to serve the purpose of proof or evidence of what had been decided by the parties, and not to form the basis of their rights in any form over the property, the same constitutes a mere memorandum recording something that has already taken place, and such a document would not require registration or stamping. Same view
in Roshan Singh v. Zile Singh AIR 1988 SC 881.

12) In K. Panchpagesa Ayyar & Anr. v. Kalyansundaram Ayyar & Ors. AIR 1957 Madras 472, it was observed:

“If the parties elect to reduce the transaction of partition into writing with the intention that the document itself should constitute the sole repository and the only appropriate evidence of the partition and to serve, so to speak, as a document of title, the writing must be regarded as the formal and operative deed of partition and as such requiring registration under Section 17, Cl. (b), provided the property affected is of the value of over ₹100. It is not the less a partition deed because its terms and contents were previously discussed and decided upon and then alone put into writing. But if the document is drawn up only with the intention of reciting an already completed oral partition and is merely in the minutes or incidental recital of a fait-accompli it is not compulsorily registrable.”

12) Thus documents so drawn up may fall under two heads viz.,

(a) a document may be drawn up with the intention of reciting an already completed oral partition or

(b) with that of superseding the oral bargain and formally reducing the terms of the partition to the form of a document.

In the former case when the document itself does not effect any partition but which maintains a partition already effected, or which simply acknowledges, or makes an admission, as to a prior partition, or which merely gives a right to have a document of partition executed it is not an instrument of partition which is compulsorily registrable.

But when the document is not intended by the parties to be merely the minutes or incidental recital of a fait accompli, i.e., of a partition that had already taken place, perhaps by oral arrangement, and was complete when the document was executed but forms an integral and essential part of the partition transaction i.e., of the process of dividing the property and was intended to be the only evidence of and to be the formal instrument of partition superseding and embodying the oral bargain and was intended to serve as the sole repository of the arrangement of partition arrived at by them, and to be the only evidence, the document would undoubtedly require registration. The question to be determined in effect is, does the document constitute a bargain between the parties i.e., is it a deed of partition effected in praesenti or is it merely the record of an already completed transaction, i.e., partition or to put it shortly is it a speaking partition instrument.

13) In The Chief Controlling Revenue Authority v. Rasikchandra Tulsidas Patel (1958) 50 Bom. L.R. 1379, the Court broadly classified deeds pertaining to partitions as
follows:

• When you have a joint Hindu family, you may have a partition effected, which partition may only result in a division of interest. Members of the joint family may not specifically divide the joint family property. The result of this would be that the members of the joint family would cease to be co-parceners and would become tenants-in-common and would hold the property as tenants-in-common. At a subsequent stage by a document the tenants-in-common may specifically divide the property. In such a case, although in one sense the partition has already taken place, still the fact that the tenants-in-common are specifically dividing the property would attract the application of Section 2(15).

• You may have another case where a partition may take place not only in interest but also a specific partition of property. The co-parceners may by this partition divide the property which belongs to the joint family and then you may have a subsequent document which may recite the fact not only of partition in interest but the actual partition specifically of the property of the joint family. In such a case it is difficult to understand how the document which merely admits and acknowledges a past event, which recites a partition which has already taken place, and which does not in any sense of the term bring about a partition, can be considered to be an instrument of partition under Section 2(15).

• The third case may be where the document itself may bring about both a division in interest and a partition with regard to specific property. That would be a clear case of an instrument of partition partitioning the joint family property. If these principles are understood and appreciated, then there is not much difficulty in deciding in which category the document we are considering falls.

The Court further emphasised on one of the tests which may be safely applied, that is:

• Has everything which is necessary to be done in order to bring about a partition been done before the document is executed? If everything has been done, then there is nothing which the document brings about. If something is left to be done which is done by the document, then the document may be considered as an instrument of partition.

The court held that members of a joint family who have effected a partition, though not an actual physical partition by metes and bounds, cease to be co-parceners but continue to be tenants in common. If, at a subsequent stage the tenants in common specifically divide the property, the document by which the property is partitioned would attract the application of Section 2(15) of the Stamp Act as it would be an instrument of partition.

14) Where one of the brothers relinquishes all right/title/interest in an inherited property, in favour of another brother, in consideration of certain amount, Article 52 (a) of the Stamp Act is applicable. Under this article, the stamp duty will be
₹ 200/- .

15) Article 34-Amendment from April 2015 – if residential & agricultural property is gifted to husband, wife, son, daughter, grand son, grand daughter, wife of deceased son, the duty would be ₹ 200/-.

Provided further that, if the residential and agricultural property is gifted to husband, wife, son, daughter, grandson, grand-daughter, wife of deceased son, the amount of duty chargeable shall be rupees two hundred.”

INCOME-TAX ACT

1) A reference may be made here to the decision of the Hon’ble Madras High Court in the case of KAY ARR Enterprises 299 ITR 348 (Mad.). In this case there was a rearrangement of share holding between the family to avoid disputes. The Hon’ble Madras High Court held that this was not a case of ‘transfer’. Also a reference may be made to the decision of the Hon’ble Apex Court in the case of Kale v. Dy. Director {1976} 3 SCC 119 – family arrangements are governed by a special equity peculiar to themselves and that the Courts should endeavour to enforce such arrangements if made honestly. Also see: Sachin Ambulkar (Bom. HC) – Does NOT amount to transfer and hence not exigible to capital gains – CIT v. Sachin Ambulkar ITXA/6975 of 2010 (decided on 23rd Oct. 2012); R. Nagaraja Rao 352 ITR 565 (Kar.). Ashwani Chopra 352 ITR 620 (P&H.).

2) Relative – Section 2(41) – “relative”, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

Explanation, clause (e) of section 56:

For the purposes of this clause, “relative” means—

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the persons referred to in clauses (ii) to (vi)

3) HUF is a relative – Where individual received gift from its HUF – B.Dhanalaxmi ITA/897/Hyd./2012 dated 24th February 2016. Same in Vineet Kumar Bhalodia 140 TTJ (Raj.) 58.

4) Where HUF received gift from an uncle of its Karta – Harshadbhai Dahayabhai Vaidya HUF – 155 TTJ (Ahmd.) 71.

TRUSTS

1) For income tax purposes a private trust is treated as individual

Since the trusts represents individual(s), tax is to be levied & recovered from the representative, in the like manner & to the same extent as it would be leviable upon & recoverable from the person represented – Arundhati Balkrishna 177 ITR 275 (SC). There should be as many assessments as the no. beneficiaries – CWT v. Trustees of H.E.H. Nizam’s Family Trust 108 ITR 555 (SC).

2) As a corollary, a trust is entitled to the benefit of Sec.54- Amy Cama 237 ITR 82 (Bom.). Similarly, advance tax paid by the beneficiaries should be set off against the trustee –Trustees of Late Sir R.J. Vakil 33 ITR 517 (Bom.).

3) The underlying principle is that the object of the scheme of taxing a representative assessee is that the state should be able to secure a proportion of profits & this purpose is served by taxing them wherever they are found. – Executors of the Estate of K. Dubash 19 ITR 182 (SC).

4) Even though, by virtue of s. 166, the Revenue has an option in the case of a discretionary trust either to make an assessment upon the trustees or to make an assessment upon the beneficiaries, both the trustee and the beneficiary cannot be simultaneously taxed in respect of the same income. {See: Jyotendrasinghji v. S.I. Tripathi 201 ITR 611 (SC)}.

5) The Hon’ble Supreme Court has held that Section 166 is clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that Sections 160 – 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereon, provided that is permissible under any other provisions of the Act. Even so, since the word used in Section 166 is ‘receivable’, it cannot apply to a discretionary trust, for it cannot be said that the income thereon is receivable for one or more beneficiaries, it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all”. Kamalini Khatau 201 ITR 101 (SC); D.P. Agarwal v. DCIT ITA/4591-4592/Mum./2016 dt. 5th Oct., 2017.

6) Income distributed by a trust settled by employer, to the beneficiaries/employees, does not attract sec. 56(2)(vi) i.e. receipt without consideration – Mrs. Sharon Nayak v. DCIT ITA/1594/Bang./2014. Dt. 27th May 2016. Reference made to CIT v. Managing Trustee, Nagore Dargha 57 ITR 321(SC) wherein it was held that the trust and beneficiaries were not two different entities.

7) CBDT has issued a Circular No.157, dated 26th December, 1974 very dearly states that even though the assessing officer has a discretion under Section 166, the same can be invoked only at the time of raising an initial assessment either by the Trust or the beneficiary and whichever may be beneficial to the Revenue. Having once exercised the option it will not be open to the ITO to assess the same income for the same period in the hands of other persons namely the beneficiary or the trustee.

8) Taxabiility of trust income at maximum marginal rate ITAT Mumbai held in the case of Mahindra & Mahindra Employees Stock Option Trust vs. ADCIT {2015} 128 DTR (Mum.) 49. Relying on the judgment of Bombay Bench of ITAT in the case of Jamsetji Tata Trust v. JDIT (Exemption) 148 ITD 388 it was held that the long term capital gains on shares is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s. 112.

[Source : Paper printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]