1. Tax Planning
A rupee of tax saved is much more than the rupee of income earned. After understanding the tax laws, availing of various exemptions, deductions and incentives provided under the tax laws and resorting to tax management / tax planning, many tax payers could promote their resources and prosper. So much so that one could reduce the tax burden to a tolerance limit. Brunt of taxation can be substantially reduced by adopting proper tax planning. Tax Management is sound law and certainly not bad morality to so arrange one’s affairs as to reduce the brunt of taxation to a minimum. Arranging affairs in such a manner that charge of tax is reduced is not prohibited. Availing various recognized methods of tax planning is lawful and has the sanctity of the courts. Avoidance of tax is not tax evasion. End effect of tax planning, tax avoidance and tax evasion is one and the same but tax evasion alone deserves to be deprecated and need not be resorted to. Adopt / Suggest Tax Planning – It is your duty. Not Tax Evasion – It is a crime against Society and needs to be deprecated and tax evaders socially boycotted.
2. Hindu Undivided Family
The Expression “Hindu Undivided Family” has not been defined under the Income-tax Act or in any other statue. When we dissect – essentials are (I) Should be Hindu, (Jain, Sikh and Buddhist are treated as Hindus but not Musalman or Christian); (ii) A family i.e. group of persons – more than one; and (iii) should be undivided i.e. living jointly and having commonness amongst them. All the three essentials are cumulative. It is a body consisting of persons lineally descended upto three generations or three degrees from a common ancestor and include their wives, children and adopted child. By the Hindu Succession (Amendment) Act, 2005 w.e.f. 9th September, 2005, daughter, even after marriage, would be a co-parcener, of which her father is a co-parcener and in addition, on her marriage, shall become a member of her husband’s joint Hindu Undivided Family. Her rights in the parental family would remain intact as that of a son. Discrimination on account of gender stands abolished for good, though belated..
3. Concept and Assessment
The concept of Joint Family under Hindu law as well as the HUF in Income-tax Act, 1961 is broadly the same. HUF is purely a creature of law and cannot be created by an act of parties (except in case of adoption and reunion). A HUF is a fluctuating body, its size increases with birth of a member in the family and decreases on death of a member of the family. Females come into HUF on marriage. If there is family necleus, under the Hindu system of law a joint family may consist of a single male member and widows of deceased male members, and the Income-tax Act does not indicate that a Hindu undivided family as an assessable entity must consist of at least two male members (Refer Gowli Buddanna v. C.I.T. (1966) 60-ITR-293 (SC). Where a Coparcener having a wife and minor daughters and no son receives his share of joint family property on partition, such property, in the hands of the coparcener, belongs to the HUF of himself, his wife and minor daughters. (Refer N. V. Narendranath v. C.W.T. (1969) 74-ITR-190 (SC). Assessment in the status of a Hindu undivided family can be made only when there are two or more members of the Hindu undivided family. (Refer C. Krishna Prasad v. C.I.T. (1974) 97-ITR-493 (SC). Husband and wife can constitute H.U.F. if property is received on partition. (Refer CIT v. Parshottamdas K. Panchal (2002) 257-ITR-96 (Gujarat).
4. Ancestral Property
All property inherited by a male Hindu from his father, father’s father or father’s father’s father, is ancestral property. The essential feature of ancestral property according to Mitakshara Law is that the sons, grandsons and great-grandsons of the person who inherits it, acquire an interest, and the rights attached to such property at the moment of their birth. Thus, if ‘A’ inherits property, whether movable or immovable, from his father or father’s father, or father’s father’s father, it is ancestral property, as regards his male issue. (AIR 1936 Orissa 331). A person inheriting property from his three immediate paternal ancestors holds it, and must hold it, in coparcenary with his sons, son’s sons, and son’s son’s sons. Dipo v. Wassan Singh – AIR 1983 SC 846 at 847-48; Arjun Singh v. Pingle Devi – AIR 1993 HP 34; Om Prakash v. Sarvjit Singh – AIR 1995 HP. 92. The share, which a coparcener obtains on partition of ancestral property, is ancestral property as regards his male issue. They take an interest in it by birth (Lal Bahadur v. Kanhaiya Lal, (1907) 29 All 244: 34 IA 65; Chatturbhooj v. Dharamsi, (1885) 5 Bom HCOCJ 128: Rulla Ram v. Amar Singh, AIR 1994 HP 102 relying on AIR 1987 SC 558 and AIR 1986 Pat 1753).
4.1 Accumulations of income of ancestral property, property purchased or acquired out of income or with assistance of ancestral property, the proceeds of sale of ancestral property, and property purchased out of such proceeds, or obtained in lieu of such property, are ancestral property. (Maya Ram v. Satnam Singh, AIR 1967 Punj 353). It is well established that sons, grandsons and great-grandsons acquire a vested interest not only in the income and accretions of ancestral property, which accrued after their birth, but also in the income and accretions, which accrued prior to their birth. (Isree Persad V. Nasif Koover – AIR 10 Cal 1017 at 1021; Jagmohan Das v. Mangal Das) 11 Mad 246.
4.2 According to the Mitakshara School of Hindu Law all the property of a Hindu joint family is held in collective ownership by all the coparceners in a quasi-corporate capacity. The textual authority of the Mitakshara lays down in express terms that the joint family property is held in trust for the joint family members then living and thereafter to be born (See Mitakshara, Chapter 1.1-27). The incidents of co-parcenership under the Mitakshara law are : first, the lineal male descendants of a person up to the third generation, acquire on birth ownership in the ancestral properties of such person; secondly that such descendants can at any time work out their rights by asking for partition; thirdly, that till partition each member has got ownership extending over the entire property conjointly with the rest; fourthly, that as a result of such co-ownership the possession and enjoyment of the properties is common; fifthly, that no alienation of the property is possible unless it be for necessity, without the concurrence of the coparceners, and sixthly, that the interest of a deceased member lapses on his death to the survivors. A coparcenery under the Mitakshara School is a creature of law and cannot arise by act of parties except in so far that on adoption the adopted son becomes a co-parcener with his adoptive father as regards the ancestral properties of the latter.” State Bank of India v. Ghamandi Ram – AIR 1969 SC 1330.
To divide and distribute assets / property amongst the members of the family is called partition. Now it has to be total and by metes and bounds. It can be oral. However, if in writing would attract stamp duty. (Refer Bhanwari Devi v. Arvind Kumar & Anr. – AIR 2016 Rajasthan – 198). It can be unequal and not in accordance with share of each member. It need be recognised under Section 171 of the Income-tax Act for those which have been hythertofore assessed.
6. Family Arrangement
When a partition is effected between the co-parceners / members of a joint Hindu Family, the partition deed attracts stamp duty under the State Law. However, it can be avoided by arriving at a family arrangement in between the members. The family arrangement may be even oral. If the terms of the family arrangement are reduced to writing; 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. It has been held that in such a case the memorandum, itself, does not create or extinguish any rights in immovable property and is, therefore, not compulsorily registrable. (Refer Tek Bahadur Bhujil – AIR 1966 SC 292; Sahu Madho Das v. Mukund Ram – AIR 1955 SC 481; Vijay Kumar v. Sanjay Kumar – AIR 2003 Delhi 168; Digambhar Adhar Patil v. Deoram Girdhar Patel – AIR 1995 SC 1728, AIR 1973 Allahabad 158, AIR 1988 AP 147; AIR 1966 SC 1836; AIR 1966 (SC) 252; AIR 1997 (Raj.) 211; AIR 1998 (Raj.) 348 and Kale and others v. Dy. Director of Consolidation and Others, AIR 1976 SC 807. Thimma Reddy v. Chandrashekhar Reddy – AIR 2018 Karnataka 54; Priya Ranjan Bhagat v. Saroj Bhagat – AIR 2016 Jharkhand 22; Subraya M.N. v. Vittala M. N. – air 2016 s.c. 3236
6.1 The family arrangement 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) It must be voluntary and should not be induced by fraud, coercion or undue influence; (3) The family arrangement may be 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. Which create or extinguish any rights in immovable properties and would fall within the mischief of section 17(1)(b) of the Registration Act; (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 arrangement 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 bona fide disputes, present or possible, which may not involve legal claims are settled by a bona fide family arrangement which is fair and equitable, the family arrangement is final and binding on the parties to the settlement. (Refer Kale v. Deputy Director : AIR 1976 SC 807; Lakshmi Ammal v. Chaprovahthi – AIR 1999 SC 336; C.G.T. v. D. Nagrirathinam (2004) 266-ITR-342 (Madras).
6.2 Like partition, family arrangement is not a transfer. A family arrangement, on the contrary, is a transaction between members of the same family for the benefit of the family so as to preserve the family property, the peace and security of the family, avoidance of family dispute and litigation and also for saving the honour of the 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 that title is. It is for this reason that a family arrangement by which each party takes a share in the property has been held as not amounting to a conveyance of property from a person who has title to it to a person who has no title. (Refer : S.K. Sattar SK Mohd. Choudhari v. Gundappa Amabadas Bukate (1966) 6 SCC 373; CIT. v. A.L. Ramnathan (2000) 245-ITR-494 (Madras.)
6.3 A Memorandum of Understanding cannot be said as a bogus document on account of one being a stranger or allotted more than his share, if it is established that he had some semblance of interest and disputes have cropped up between the said persons. Memorandum of Understanding actuated to resolve disputes can be treated as family settlement (Refer Ramdev Food Products Pvt. Ltd. v. Arvindbhai Rambhai Patel & Others AIR 2006 S.C. 3302). It is settled law that when parties enter into a family arrangement, the validity of the family arrangement is not to be judged with reference to whether the parties who raised disputes or rights or claimed rights in certain properties had in law any such right or not. CIT. v. Ponnammal (R.) (1987) 164-ITR-706 (Mad.); CIT v. Ramanathan (AL) (2000) 245-ITR-494 (Mad.); Kele V. Deputy Director of Consolidation (1976) AIR 1976 SC 807 and Maturi Pullaiah v. Maturi Narasimham (1966) SC 1936 relied on in C.I.T. v. Kay Arr Enterprises and Others (2008) 299-ITR-348 (Madras)
6.4 Transfer of shares in Companies can be possibly made by way of family arrangement between the family members as held in CIT v. Kay Arr Enterprises (2008) 299-ITR-348 (Madras). Mrs. P. Sheela v. I.T.O. (2009) 308-ITR-(AT) 350 (Bangalore). The Apex Court in Hari Shanker Singhania & Ors. v. Gaur Hari Singhania & Ors. AIR 2006 SC 2488 held that family settlement or arrangement is to be treated differently from any other formal commercial settlement and technicalities of limitation etc. should not come in the way of implementation for maintaining peace and harmony in a family. However as a matter of caution in such cases there may be long drawn litigation and for one or other lapse it may be a faulty proposition. It should be the last resort.
6.5 A family arrangement must be entered into by all parties thereto. The concept of family arrangement has now been accepted in our country and the Supreme Court has generally taken a broad view of the matter and leaned heavily in favour of upholding any such arrangement. The enjoyment of properties by different members of the joint family, who have been put into possession pursuant to a family arrangement, operates as an estoppel against such member and cannot be jeopardized by a member resiling from the arrangement, more particularly when the arrangement had been entered into a considerable time ago. (AIR 2002 Bombay 129). There is thin difference between joint family property and joint property. If the property is acquired with the contributions of the coparceners and the income or savings from joint family fund or from the ancestral property, that property will be a joint family property in which each and every coparcener has a right to claim. A joint property is being created by investment made by individuals from their independent earning. Priya Ranjan Bhagat v. Saroj Bhagat – AIR 2016 Jharkhand 22 at 34. There was f family arrangement by a dead among the children of R and S. Each of the members held apart from personal properties, family properties and shared in business concerns and each of the family businesses was independently managed by one of the parties. Disputes arose between the parties. The disputes were referred to an arbitrator. The arbitrator suggested a settlement to which the parties agreed. In terms of the settlement, the assessee had to resign from KB, a firm and transfer his interest to NR for a consideration of ₹ 35,000/- being the capital balance of the firm. Accordingly, the assessee transferred the shares. NR transferred the shares held by him in favour of the assessee. The assessee claimed that there was no transfer which gave rise to any capital gains. However, the assessing authority held that there was a transfer, there was a capital gain and, therefore, the assessee was liable to pay the tax. The Commissioner(Appeals) confirmed the order. The Tribunal held that there was no transfer and it was only a family arrangement. Therefore, the assessee was not liable to pay tax on capital gains. On appeal to the High Court It was held : “A partition is not a transfer. What is recorded in a family settlement is nothing but a partition. Every member has an enterior 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 family properties and, therefore, it cannot be construed as a transfer in the eye of law. When there is no transfer there is no capital gains and consequently no tax on capital gains is liable to be paid”. CIT v. R. Nagaraja Rao (2013) 352-ITR-565 (Karnataka) at 566.
6.6 Family arrangement / settlement though not registered can be used as piece of evidence. Subraya M.N. v. Vitalla M.N. & Others – AIR 2016 S.C. 3236. An oral partition of joint family property amongst members of a HUF is permissible : AIR 1958 S.C. 706; AIR 1988 S.C. 881; 259-ITR-265 (S.C.)
7. Family Settlement
There is slight distinction in between a Family Arrangement discussed hereinabove and a Family Settlement. Where there is family settlement and relinquishment taking away shares of sisters, mother etc. in immovable property, such document needs registration and attracts stamp duty. If unregistered would be inadmissible for collateral purposes until same is impound as hold in Sita Ram Bhama v. Ramavtar Bhama – AIR 2018 S.C. 3057 – Kale and Others were explained and distinguished. Punjab and Haryana High Court in Hargurusharan Singh v. Lt. Col. Hargovind Singh – AIR 2017 P&H 3 held a family settlement deed as compulsorily registerable when there was no pre-existing right in property and there had been failure to establish genuineness.
Always a sincere attempt should be to resort to tax management, so as to have large cash flow and expand the trade and promote new industries. Each one of the functionary should resolve to act for common good and for the welfare of the citizens. It is high time that ways and means are evolved whereby honest and law abiding taxpayers are not put to inconvenience, harassment and witch-hunting. The tax administration need to be geared up to come up to the expectations of the honest tax-payers. It is high time that during 71st year of Independence, all citizens resolve to eliminate tax evasion and bring glory to Bharat. Let each tax payer to pledge to pay the due taxes forthwith after due planning.
[Source : Article printed in the Souvenir of National Tax Conference held on 6th & 7th April, 2019 at Ranchi]