A brief on Family Arrangement

FAMILY SETTLEMENT

I.          Introduction

1.1       Maximum disputes take place within family members rather than among strangers. Family fights are something which India has witnessed right from the times of the Mahabharata.  Corporate India has witnessed a spate of family feuds in almost all major corporate houses, such as Bajajs, Modis, Birlas, Appollo Tyres, Ranbaxy, BPL, Mafatlals, Thapars, etc. The Reliance dispute is the newest entrant to the fast growing list of family disputes.   

1.2       A family arrangement is one of the oldest alternative dispute resolution mechanisms which is known. The scope of a family arrangement is extremely wide and is  recognised even in ancient English Law. This is because the world over, Courts lean in favour of peace and amity within the family rather than family disputes.  

1.3       In the last about 50 years, a good part of the law relating to Family Arrangement / Settlement is well settled through numerous court decisions including several decisions of the Supreme Court.  It is ironic that in a country where a substantial part of businesses are run and owned by joint families, there is no legislation which governs or regulates such family settlements or arrangements. Hence, the entire law in this respect is case-law made.  

           

II.        What is a Family Settlement/ Arrangement?

            It is important to analyse the basic principles governing family settlement involving properties held mainly by individuals.  Various Courts, including the Supreme Court of India,  have laid down the basic principles relating to family arrangements.  

2.1       Concepts and principles of family arrangements/settlement

            From the analysis of the numerous judgments of the Supreme Court, the concepts and principles of family arrangement are summarised below :

(a)      A family arrangement is an agreement between members of the same family intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour.

(b)      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 the others, the formalities presented 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 differences are resolved by the compromise, there is no question of one deriving title from the other and, therefore, the arrangement does not fall within the mischief of s. 17 read with s. 49 of the Registration Act, as no interest in property is created or declared by the document for the first time.  It is assumed that the title had always resided in him or her, so far as the property falling to his or her share is concerned, and therefore, no conveyance is necessary.

(c)      A compromise or family arrangement 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 the others, as they had previously asserted it, to the portions allotted to them respectively. 

(d)       By virtue of a family settlement or arrangement members of a family descending from a common ancestor or a near relation  seek to sink their  differences and disputes, settle and resolve their conflicting claims or disputed titles once for all in order to buy peace  of mind and bring about complete harmony and goodwill in the family.  Family arrangements are governed by a special equity  peculiar to themselves, and will be  enforced if honestly made.                               

(e)      The term "family" has to be understood in a wider sense so as to  include within its fold not only close relations or legal heirs  but even those persons who may have some sort of antecedent title, a semblance of a claim  or even if  they  have a spes successions. The word 'family' in the context of a family arrangement is not to be understood in a narrow sense of being a group or a group of persons who are recognised in law as having a right of succession or having a claim to a share in the property in dispute.  

(f)       Courts have made every attempt to sustain a family arrangement rather than to avoid it, having regard to the broadest considerations of family peace and security. 

(g)        The said settlement must be voluntary and should   not be induced by fraud, coercion or undue influence. 

(h)        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. 

       

(i)         The consideration for such a settlement, if one may put it that way, is the expectation that such a settlement will result in establishing or ensuring amity and goodwill amongst persons bearing relationship with one another.

          (j)          The ultimate aim of the agreement is to preserve amity and goodwill within the family and avoid bad blood. However, every document cannot be styled as a family arrangement. For example, if the patriarch of a family makes a will under which he divides his personal shares in various businesses and family properties among his family members, then the same cannot be called a family arrangement as it is merely a distribution of the deceased’s estate as per his  will. One of the key requirements for a family arrangement is the existence of a dispute or a possible dispute. 

(k)        Consideration is one of the important aspects of any contract. Under the Indian Contract Act, any contract without consideration is null and void. In the case of a family settlement, the consideration is the giving up of mutual claims and rights and love and affection. In India, the Courts do not enquire into the adequacy of consideration as in the case of USA. 

III.       What properties can be covered? 

3.1       Types of properties: From the various principles laid down regarding valid family arrangements, it is clear that valid family arrangements can  relate  to self-acquired properties, or other properties of the family.  It is neither a pre-requisite nor even a necessary condition that a valid family arrangement must relate to ancestral property only. An analysis of the various decided Case Laws reveals that even where the property involved in the family settlement was other than an ancestral property, and the family arrangements were held to be valid :

(a)        The family settlement was valid and the transaction was not a transfer for the purposes of the Gift tax. A family settlement entered into bona fide by the parties who are members of a family to put an end to disputes among themselves is not a transfer.  It is not also the creation of an interest. 

(b)        The property involved was that of the relatives of the partners of a firm, which firm had mounting creditors.  These relatives conveyed their properties for the benefit of the creditors of the firm to discharge debts incurred by the firm.  It was held that the conveyance amounted to a valid family arrangement and hence was not exigible to gift tax

(c)        An oral family arrangement, made by father, during his lifetime, under which he directed a larger share to one son out of his self-acquired non-ancestral property was held to be a valid family arrangement.

(d)       The property involved was certain joint family land.  Major part of the  property was apportioned to the sons of the Karta.  It was held that the transaction was a family settlement and no gift tax was leviable.

(e)        Payments promised under a family arrangement to be made to the assessee's son out of the assessee's private property, was held to be a valid family arrangement.

 IV.      CAPITAL GAINS TAX LIABILITY 

4.1       Primary Condition: U/s. 45 of the I.T. Act, "Any profits or gains arising from the transfer of a capital asset" are chargeable to capital gains tax.       Thus, the primary condition for levy of capital gains tax is that there must be a "transfer" as defined in s.2(47) of the I.T. Act. This primary condition must be satisfied before a tax levy on a capital gain may come in (C.A. Natarajan v. CIT, 92 ITR 347 (Mad)).

4.2       No Transfer: A family arrangement, in the interest of settlement, may involve movement of property or payment of money from one person to another.  As explained above in numerous case laws of the Supreme Court, High Courts and Tribunals, there is no "transfer" involved in a family arrangement.  Therefore, there is no question of capital gains tax incidence under a family arrangement.       

4.3       Principles: The following principles emerge from various decided cases:

(a)        The transaction of a family settlement entered into by the parties bona fide for the purpose of putting an end to the dispute among family members, does not amount to a "transfer".  It is not also the creation of an interest.

(b)        The assumption underlying the family arrangement is that the parties had antecedent rights in all the assets and this proposition of law leads to the legal inference that the same does not amount to any transfer of title.  Section 47 of the I. T. Act excludes certain transfers and since the family arrangement is not held to be a transfer, it would not require to be listed in section 47 unlike a partition which is a transfer and had to be specifically excluded from section 45.  Since section 45 can apply only to capital gains arising from transfers, family arrangements fall outside the scope of section 45, in view of the legal position that a family arrangement is not a transfer at all. 

(c)        In a family settlement, the consideration for assets received is the mutual relinquishment of the rights in joint property and hence, cost of assets received on settlement is the cost to the previous owner. 

(d)       Even a married daughter can be made a party to a family settlement between her paternal family members – State of AP v M. Krishnaveni (2006) 7 SCC 365. If she surrenders shares held by her pursuant to a family arrangement, then it would not be a taxable transfer – Mrs. P. Sheela, 308 ITR (AT) 350 (Bangl).

(e)        A Family settlement is analogous to partition attracting s. 49(1) hence, in case of property acquired by way of a family settlement dated 1^st September, 1997 effective from 31st July 1992, for the purposes of computing capital gains, deduction has to be allowed on indexed cost of acquisition by taking in to account its fair market value as on 1st April, 1981, since the property was acquired by the previous owner before 1981 - ACIT vs. Baldev Raj Charla & Ors. (2009) 121 TTJ 366 (Del.)