Taxation of Hindu Undivided Family &
Family Arrangement
A. INTRODUCTION :
1. The Hindu Undivided Family (HUF) is a
special feature of Hindu society. Hindu Undivided Family is defined as
consisting of a common ancestor and all his lineal male descendants together
with their wives and unmarried
daughters. Therefore a Hindu Undivided Family consists of males and females.
Daughters born in the family are its members till
their marriage and women married into the family are equally members of the
undivided family. On the other hand at any given point of time a coparcenary is
limited to only members in the four degrees of the common male ancestor.
2. Hindu : In this term are included all the
persons who are Hindus by religion. Section 2 of the Hindu Succession Act, 1956,
elaborately declares that it applies to any person, who is a Hindu by
religion in any of its forms or developments,
including a Virashaiva, a Lingayat or a follower of Brahmo, Prathana or Arya
Samaj, a Buddist, Jain or Sikh. In CWT. Smt. Champa Kumari Singh (1972) 83 ITR
720, the Supreme Court held that the HUF includes Jain Undivided Family.
3. Hindu Undivided Family (HUF) is a legal
expression which has been employed in taxation laws as a separate taxable
entity. It is the same thing as “Joint Hindu Family”. It has not been defined
under the Income Tax Act, as it
has a well defined connotation under Hindu Law.
4. A Hindu Undivided Family (HUF) is a
separate entity for taxation under the provisions of sec. 2(31) of the
Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity,
it means that the same person can be assessed in two different capacities viz.
as an individual and as Karta of his HUF.
B. How HUF comes into
existence:
A Hindu male with his wife and children
automatically constitutes the HUF. The HUF is a creature of Hindu Law. It cannot
be created by acts of any party save in so far as by adoption or marriage, a
stranger may be affiliated as a member thereof. An Undivided Family which
is a normal condition of the Hindu society is ordinarily joint not only in
estate but in food and worship. The joint family being the result of birth,
possession of joint property is only an adjunct of the Joint Family and is not
necessary for its constitution.
C. Basic requirements for the
existence of an HUF are as follows :
(i) Only one co-parcener or member
cannot form an HUF Family is a group of people related by blood or marriage. A
single person, male or female, does not constitute a family. However the
property held by a single co-parcener does not lose its character of Joint
Family property solely for the reason that there is no other male or female
member at a particular point of time. Once the co-parcener marries, an HUF comes
into existence as he alongwith his wife constitutes a Joint Hindu Family as held
in the case of Prem Kumar v. CIT , 121 ITR 347 (All.)
(ii) Joint Family continues even in
the hands of females after the death of sole male member :
Even after the death of the sole male member so
long as the original property of the Joint Family remains in the hands of the widows of the members of the family
and the same is not divided amongst them; the Joint Hindu Family continues to
exist. CIT v. Veerapa Chettiar,
76 ITR 467(SC)
(iii) An HUF need not consist
of two male members- even one male member is enough :
The plea that there must be at least two male
members to form an HUF as a taxable entity, has no force. – Gauli Buddanna v.
CIT, 60 ITR 347 (SC); C. Krishna Prasad v. CIT 97 ITR 493 (SC) and Surjit Lal
Chhabda v. CIT, 101 ITR 776 (SC)
A father and his unmarried daughters can
also form an HUF, CIT v. Harshavadan Mangladas, 194 ITR 136 (Guj.)
Further on partition of an HUF a family
consisting of a co-parcener and female members is to be assessed in the status
of an HUF.
D. Nucleus of HUF:
It is many times argued that existence of nucleus
or joint family property is necessary to recognize the claim of HUF status in
respect of any property or income of an HUF. It has been established now that
since the HUF is a creature of Hindu Law, it can exist
even without any nucleus or ancestral joint family property.
E. Manager of HUF or Karta
:
The person who manages the affairs of the family
is known as Karta. Normally the senior most male member of the family acts as
Karta. However a junior male member can also act as Karta with the consent of
the other member. Narendrakumar J. Modi v. Seth Govindram Sugar Mills 57 ITR 510
(SC). However in view of the present social mores and needs of the modern
progressive society this decision of the Supreme Court needs to be revised /
reviewed.
Besides the same person can be taxed as both
individual and Karta of an HUF . The
individual and the HUF are two different units of
taxation i.e. two different assesses CIT v. Rameshwarlal Sanwarmal 82 ITR 628
(SC).
F. Joint Family Property
:
The following types of properties are generally
accepted as joint family property :
(i) Ancestral property;
(ii) Property allotted on
partition;
(iii) Property acquired with the aid
of joint family property;
(iv) Separate property of a
co-parcener blended with or thrown into a common family hotchpot. The provisions
of sec. 64 (2) of the Income Tax Act, 1961 have
superseded the principles of Hindu Law, in a case where a co-parcener impresses
his property with the character of joint family property.
A female member cannot blend her separate
property with joint family property but she can make a gift of it to the HUF.
Pushpadevi v. CIT 109 ITR 730 (SC). A female member can also bequeath her
property to the HUF, CIT v. G.D. Mukim, 118 ITR 930 ( P & H ).
G.
Branches of HUF:
An HUF can have several branches or
sub-branches. For example, if a person has his wife
and sons, they constitute an HUF. If the sons have wives
and children, they also constitute smaller HUFs. If the grandsons also
have wives and children, then even they will also
constitute still smaller or sub-branch HUFs. As stated above, the HUF is a
creature of Hindu Law and these entities are HUFs alongwith the bigger HUF of
the father or the grandfather. It is immaterial whether these smaller HUFs
possess any property or not. Property can be acquired by any mode; by partition
of bigger HUF or by gifts from any member of the family or even by a stranger or
by will with unequivocal intention of the donor or the testator that the said
gift or bequest will form the joint family property of the donee or the
testatee.
An HUF can be composed of a large number of
branch families, each of the branch itself being an HUF and so also the
sub-branches of more
branches. CIT v. M.M.Khanna 49 ITR 232 (Bom).
H. Partition of HUF :
Section 171 of the Income
Tax Act, 1961 deals with assessment of an HUF, after partition. Clauses
(a) of the explanation to sec.171 defines “Partition” of an HUF. Where the
property admits of a physical division, then a physical division of the property
thereof, but, where the property does not admit of a physical division then such division as the
property admits of, will be deemed to be a “partition”.
`Partition need not be by Metes & bountes, if
separate enjoyment can, otherwise the secured and such division is effective so
as to bind the members. Cherandas Waridas, 39 ITR 202 (SC).
However the members of an HUF can live separately
and such an act would not automatically amount to partition of the HUF. Shiv
Narain Choudhary v. CWT 108 ITR 104 (All.)
A finding of partition by the assessing officer
u/s. 171 of the Income Tax Act, 1961 is necessary.
Partial partition of an HUF has been derecognised
by the provisions of sec. 171(9) & moreover, according to sec. 171(9), any
partial partition effected after 31.12.78, is not recognized.
Motive or need for partition cannot be questioned
by the Income Tax Department. T. G. Sulakhe v. CIT, 39
ITR 394 (AP).
I. Following methods or devices may
prove useful in reducing the tax incidence in the case of HUF :
(i) By increasing the number of
assessable units through the device of partition of the HUF;
(ii) By creation of separate taxable
units of HUF through will in favour of HUF or gift to HUF;
(iii) Through family settlement /
arrangement;
(iv) By payment of remuneration to the
Karta and other members of the HUF;
(v) By use of loan from HUF to the
members of the HUF;
(vi) Through gift by HUF to its
members specially to the female members;
(vii) Through other methods /
devices;
The aforesaid methods / devices are discussed in
detail below as follows:
(I) Partition of
HUF
In the case of certain HUFs, the tax liability
can be reduced by partition of the HUF. This can be easily done in a case where
the partition results in separate independent taxable units. Suppose an HUF
consists of father and two sons and there are two business establishments, a
house property and other sources of income with the HUF. If the members of the
HUF have no other sources of income then partition of the HUF can be done by
giving one business establishment to each of the sons, house property to the
father and dividing the other sources in such a manner so as to make the
partition equitable. Such a partition of HUF will reduce the tax liability
considerably.
The position may, however, be different in a case
where the members of the HUF have got high individual incomes. In such a case it
is not advisable to break or partition the HUF. The HUF should be allowed to
continue as a separate taxable unit.
Then there may be a case where the HUF has got
only one business establishment which does not admit of a physical division. For
the sake of partition the business may be converted into a partnership firm or a
company. At present, rate of firm’s tax and the rate of tax in case of a
company, is 30% flat, therefore conversion of HUF business into a partnership or
a company is not advantageous. The incidence of , in such a case, can be better
reduced by payment of remuneration to the members of the HUF.
Partial partition of HUF is also a very effective
device for reducing its tax liability. Partial partition is recognized under the
Hindu Law. However partial partition of an HUF has been de-recognised by the
provisions of sec. 171(9) of the Income Tax Act, 1961 according to which any
partial partition effected after 31.12.78, will not be recognized.
The provisions of sec. 171(9) have been declared
ultra-vires by the Madras H.C. in the case of M.V.Valliappan v. ITO, 170 ITR
238. The Supreme Court has granted S.L.P. and stayed the operation of the above
decision of Madras H.C. as reported in 171 ITR (St.) 52. The Gujrat H.C. has,
however, held the ITAT justified in following the aforesaid decision of Madras
H.C., CIT v. M. M. Panchal HUF, 210 ITR 580 (Guj.)
Notwithstanding the provisions of sec. 171(9)
partial partition, can still be used as a device for tax planning in certain
cases. An HUF not hitherto assessed as undivided family can still be subjected
to partial partition because it is recognized under the Hindu Law and such
partial partition does not require recognition u/s. 171 of the Income Tax
Act,1961. Thus a bigger HUF already assessed as such, can be partitioned into
smaller HUFs and such smaller HUFs may further be partitioned partially before
being assessed as HUFs. Besides any HUF not yet assessed to tax can be
partitioned partially and thereafter assessed to tax.
The following legal aspects in respect of
partition of HUF, should also be kept in mind while the partition of HUF which
are as under :-
(i) Distribution of the assets of
an HUF in the course of partition, would not attract any capital gains tax
liability as it does not involve a transfer.
(ii) On the basis of the same
reasoning distribution of assets in the course of partition would not attract
any gift tax liability, and
(iii) There would be no clubbing of
incomes u/s. 64 as it would not involve any direct or indirect transfer.
(II) Creation of HUFs as separate
taxable units by will in favour of or gift to HUF :
It is now well settled law that there can be a
gift or will for the benefit of a Joint Hindu Family . It is immaterial whether
the giver is male or female, whether he or she is a member of the family or an
outsider. What matters is the intention of the donor or testator that the
property given is for the benefit of the family as a whole.
Suppose there is an HUF consisting of Karta, his
wife, his two sons, daughter-in-law and grand children. A gift or will can be
made for the benefit of the two smaller HUFs of the sons. The bigger HUF will
continue as a separate taxable unit evenafter the death of the Karta.
There may also be a case where the father or
mother has got self acquired properties. They have a son and his family but
there is no ancestral property as a corpus of their family. Then, father &
mother or both can leave their property for the benefit of their son’s family,
through their will (s).
Similar result can be obtained by means of a gift
for the benefit of a joint family. It may be pointed out here that an HUF cannot
be created by act of parties but a corpus can be created for an already existing
HUF through the medium of a gift or will etc.
(III) Through Family
Settlement / Arrangement :
Family settlements / arrangements are also
effective devices for the distribution of ancestral property. The object of the
family settlement should be broadly to settle existing or future disputes
regarding property, amongst the members of the family. The consideration for a
family settlement is the expectation that such settlement will result in
establishing or ensuring amity and goodwill amongst the members of the family.
Ram Charan Das v. G.N.Devi, AIR 1966 SC 323 and Krishna Beharilal v. Gulabchand,
AIR 197 SC 1041. Such an agreement is intended to avoid future disputes and to
bring about harmony amongst the members of the family . Sahu Madho Das v. Mukand
Ram, AIR 1955 SC 481. Briefly stated though conflict of legal claims, present or
future is generally a condition for the validity of family arrangement, it is
not necessarily so. Even bonafide disputes, present or possible in future, which
may not involve legal claims, will also suffice to effect a family
arrangement.
As family arrangement does not involve a
transfer, there would be no gift and capital gains tax liability or clubbing
u/s. 64.
By a family arrangement tax incidence is
considerably reduced or it may even be nil. Suppose a family consists of Karta,
his wife, two sons and their wives and children and its income is Rs.
6,00,000/-. The tax burden on the family will be quite heavy. If by family
arrangement, income yielding property is settled on the Karta, his wife, his two
sons and two daughter-in-law, then the income of each one of them would be
Rs.100,000/- which would attract no tax & if the assessment year is 2007-08,
then the tax liability would be reduced form Rs. 100,000/- to nil.
(IV) By payment of
remuneration to the Karta and / or other members of the family :
The other important measure of tax planning for
an HUF is to pay remuneration to the Karta and / or other members of the HUF for
services rendered by them to the family business. The remuneration so paid would
be allowed as a deduction from the income of the HUF and thereby tax liability
of the HUF would be reduced, provided the remuneration is reasonable and its
payment is bonafide. There is no legal bar against payment of remuneration to
the Karta or other members of HUF for services rendered to the family in
carrying on the business of the family or looking after the interests of the
family in a partnership business. Jugal Kishore Baldeo Sahai v. CIT 63 ITR 238
(SC). The payment must be for service to the family for commercial or business
expediency. Jitmal Bhuramal v. CIT 44 ITR 887(SC). Remuneration paid to the
Karta or other members of the HUF should be under a valid agreement. The
agreement must be valid, bonafide, on behalf of all the members of the HUF and
in the interest of and expedient for the family business. Further the payment
must be genuine and not excessive. J. K. B. Sahai v. CIT, 63 ITR 238 (SC).
Agreement with whom to be
entered:
The agreement should be between the Karta and
other members of the family. The agreement need not always be in writing. An
agreement to pay salary / remuneration can also be inferred from the conduct of
the parties. CIT v. Raghunandan Saran, 108 ITR 818 (All.). However, it would be
better if the agreement to pay remuneration is reduced in writing.
For A.Y. 2007-08, if the total income of an HUF
is Rs. 5,00,000/- then income tax on HUF would be Rs.1,00,000/-. If salary is
paid to four members @ Rs.1,00,000/- net income of HUF would be Rs. 5,00,000 -
Rs.4,00,000 ( 4 x 1,00,000 ) = Rs.1,00,000/-, tax on it would be Rs. NIL. The
income of each member would be Rs.1,00,000/-. Therefore tax on members would be
NIL. Thus the tax saving would be of Rs.1,00,000/-.
The distinction between ordinary and specified
HUF’s has been done away w.e.f. 1.4.1997 i.e. A.Y. 1997-98. For Assessment Year
2007-08 the rate of tax on all HUF’s would be the same as in the case of an
individual. This change in the rates of tax has brought a lot of relief to
specified HUF’s i.e. the HUF’s with one or more members having taxable income.
After the aforesaid amendment whereby the concept of specified HUF’s has been
done away with, w.e.f. A.Y. 1997-98 this method of tax planning will be much
easier and it will bring more tax relief to the HUF’s.
(V) By loan to the
members from the HUF :
If the business, capital or investment of the HUF
is expanding then such expansion can be done in the individual names of the
members of HUF by giving loans to the members from the HUF. The HUF may or may
not charge interest on the loans given.
Where property was purchased by members of HUF
with loan from the HUF, which was later on repaid the income from such property
would be assessable as individual income of the members
L. Bansidhar and Sons v. CIT 123 ITR 58 (Delhi
).
Where after partition of an HUF, two members
became partners in three firms on behalf of their respective HUFs and they also
became partners in a fourth firm, the funds were obtained by means of loans from
other three firms, the share incomes of the members from the fourth firm was
assessable as their individual income only.
CIT v. Champaklal Dalsukhbhai, 81 ITR 293
(Bom.).
(VI) By gift of movable
assets of the HUF to its female members:
The Karta of an HUF cannot gift or alienate HUF
property but for legal necessity, for pious purposes or in favour of female
members
of the family. Gift of immovable property within
reasonable limits, can be made by a Karta to his wife, daughter, daughter-in-law
or even to a son out of natural love and affection. Gift of immovable property
within reasonable limits can be made only for pious purpose e.g. marriage of a
daughter.
Therefore, if the HUF has excess funds or
property, then, the Karta can make gift of movable assets to his wife, daughter
or daughter-in-law at one go or over a period of time. However, it may be noted
that with effect from 1.10.98, the applicability of Gift Tax is no more in
force. Therefore, no Gift Tax will be payable by a person making the gift from
on or after 1.10.98. However, w.e.f. 1.10.2004 Gift received from other than
relatives exceeds
Rs.25,000/- then that amount is liable to Income
Tax u/s. 57 of Income Tax Act, 1961. It may be remembered that gift for marriage
or maintenance of daughter(s) is not liable to Gift Tax. Further clubbing
provisions of sec. 64 would not be applicable if the gift in validly made in
accordance with the rules of Hindu Law. Besides, if a gift made to the minor
daughter of the Karta is valid then the provisions of sec. 60 of the Income Tax
Act would not be attracted. CIT v. G. N. Rao, 173 ITR 593 (AP). Whereby,
section 60 relates to transfer of income where there is no transfer of
assets.
(VII) Through other
Methods / Devices :
There are other methods / devices which may be
used to reduce the incidence of taxation in the case of an HUF, e.g. :
(i) Vesting of individual or
self-acquired property in a family hotchpots.
(ii) Family reunion after
partition.
(iii) Through inheritance by
succession – Bequests by Will, now recognized by sec. 30 of Hindu Succession
Act, can also be utilized for tax-planning.
J. Properties received under a
Will:
The status of the property would be the same as
is analysed in the case of properties received by way of gifts as discussed
above, that is to say, that the properties will be regarded as the properties of
the Hindu Undivided Family only, if the recipient has a son.
K. Properties inherited from an ancestor on the
ancestor dying
intestate:
As held by the Supreme Court in the case of CWT
v. Chander Sen (161 ITR 370 ) the person inheriting the property from his
ancestor, even if he has a wife and son would receive the property absolutely in
his own right and his son would not have any interest in that property.
L. Unequal Distribution on partition :
The Supreme Court in the case of Commissioner of
Gift-Tax v. N. S. Getti Chettiar, 82 ITR 599 held that there is no liability to
Gift Tax if there is an unequal distribution of assets amongst members of the
family on partition.
M. Reunion : The conditions for a valid reunion are
brought
out in the case of CIT v. A. M. Vaiyapuri
Chettiar and another 215 ITR 836
The condition precedent for a valid reunion under
the Hindu Law are : (1) There must have been a previous state of union. Reunion
is possible only among the persons who were on an earlier date members of a
Hindu Undivided family ; (2) There must have been a partition in fact ; (3) The
Reunion must be effected by the parties or some of them who had made the
partition; and (4) There must be a junction of estate and reunion of property
because, reunion is not merely an agreement to live together as tenants in
common. Reunion is intended to bring about a fusion in the interest and in the
estate among the divided member of an erstwhile Hindu Undivided Family, so as to
restore to them the status of an HUF once again and therefore, reunion creates a
right in all the reuniting coparcener, in the joint family properties which was
the subject matter of partition among them, to the extent they were not
dissipated before the reunion.
The reunion effected by the assessee under the
deed of reunion was valid. The entire properties of the erstwhile joint family
prior to the partition would be the properties of the reunited joint family. The
Income Tax Officer might have the option to assess the income arising from the
entire properties belonging to the erstwhile joint family prior to the partition
in the hands of the reunited, Hindu Undivided Family.
Representative of HUF in a Partnership
Firm :
An HUF cannot become a partner in a firm. The
Karta or a member of the HUF can represent the HUF in a firm. A female member
can also represent HUF in a partnership firm, CIT v. Banaik Industries 119 ITR
282 (Pat.)
Remuneration to Karta or Member from Firm
:
Where remuneration was received by a member of
HUF from a firm, where he was partner on behalf of HUF for managing firms
business such remuneration was his individual income, CIT v. G. V. Dhakappa 72
ITR 192 (SC); Premnath v. CIT 78 ITR 319 (SC).
However, income received by a member of HUF from
a firm or company is taxable as the income of the HUF, if it is earned detriment
to or with the aid of family funds, otherwise it is taxable as the separate
income of the member, P.N. Krishna v. CIT 73 ITR 539 (SC).
HUF and Firm :
Members of HUF can constitute Partnership without
effecting a partition or without disturbing the status of joint family.
Ratanchand Darbarilal v. CIT 15 ITR 720 (SC). However , on viewing at the
present rate of firms tax, conversion of HUF business into partnership is not
advantageous.
The Landmark decisions on the subject of
HUF are as follows:
(i) Krishna Prasad v. CIT, 97 ITR
493 (SC)
On partition between father and sons, the shares
which sons obtained on partition of the HUF with their father, is the ancestral
property. As regards his male issues who take interest in the said property on
birth. Therefore one of the sons who was not married at the time of partition
will receive the property as his HUF property, however income therefrom will be
taxed as the HUF income from the date of his marriage.
(ii) A.G. v. A.R. Arunachalam
Chettiar, 34 ITR 421 (PC)
A Mitakshara joint family consisted of father and
son. On death of a son the father and the widow of the son constitute the
HUF.
(iii) Gowli Buddanna v. CIT, 60 ITR
293 (SC)
A Joint family may consist of a single male
member with his wife and daughter/ s and it is not necessary that there should
be two male members to constitute a joint family.
(iv) N.V. Narendranath v. CWT, 74 ITR
190 (SC)
The property received by a coparcener on
partition of the HUF is the HUF property in his hands vis-Ã -vis the members of
his branch i.e. with his wife and a daughter.
(v) L. Hirday Narain v. ITO, 78 ITR
26 (SC)
After the partition between the father and his
sons, the father and his wife constitute a Hindu Undivided Family which gets
enlarged on the birth of a son.
(vi) CIT v. Veerappa Chettiar, 76 ITR
467 (SC)
Even when a joint family is reduced to female
members only it continues to be a HUF.
(vii) CIT v. Sandhya Rani Dutta, 248 ITR
201 (SC)
Female members cannot create or form an HUF by
their acts even under the Dayabhaga School of Hindu Law.
(viii) Pushpa Devi v. CIT, 109 ITR 730
(SC)
The right to blend the self-acquired property
with HUF property is restricted to a coparcener ( male member of HUF ) and not
available to a female member. However, there is no restriction on a female
member gifting her property to the HUF of her son.
(ix) Surjit Lal Chhabda v. CIT, 101
ITR 776 (SC)
The property which was thrown into the common
hotchpot was not an asset of a pre-existing joint family of which the assessee
was a member. It became an item of joint family property for the first time when
the assessee threw what was his separate property into the common family
hotchpot. Therefore, the property may change its legal incidence on the birth of
the son, but until that event happens, the property, in the eye of Hindu Law, is
really the property of the assessee.
II
FAMILY ARRANGEMENT
A. 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.
B. FAMILY IN A FAMILY ARRANGEMENT HAS A WIDER
MEANING
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.
C. 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.
CED v. Chandra Kala Garg 148 ITR 737 ( All.)
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.
- 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.
- 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.
- 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.
- 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.
- 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.
D. WHETHER DOCUMENT OR REGISTRATION IS REQUIRED
FOR EFFECTING FAMILY ARRANGEMENT
- 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 are 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 some time 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. )
10. 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 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).
