Transcript Family arrangements - Indian Merchants' Chamber

Family Arrangement
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Family arrangement – What does it mean?
 Family arrangement is not necessarily confined to Hindu families but is familiar one
under the English Law as well.
Halsbury’s Law of England defines family arrangement as:
“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.
The word ‘arrangement’ suggests the existence of either the actual dispute or the
prosperity of the persons concerned to raise the dispute in future. Even the possibility
and/or plausibility of bona fide disputes, which may not involve legal claim, will suffice to
arrive at a valid family arrangement.
S.K. Sattar S.K. Mohd. v. Gundappa Ambadas (1996) 6 SCC 373
‘family arrangement’ means as a transaction between members of the same family for the
benefit of the family so as to preserve the property, peace, and security of the family,
avoidance of family dispute and litigation and for saving the honour of 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 title is.
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Ingredients of family arrangement
1.
2.
3.
4.
Family [see Expln. 10(5) of Income-tax Act, 1961] ;
Property – every participating party should have legal claim to share in family
property;
Disputes (lawful claim but also a possible claim or semblance of a claim or a
pretended title as long as other parties acknowledge it. (Ramcharan Das v. Girija
Nandini Devi AIR 1966 SC 323, Shambhu Prasad v. Phool Kumar AIR 1971 SC 1337)
and
Arrangement – transaction should be one which is for the benefit of the family
generally
Family in relation to individual means:
i) the spouse and children of the individual; and
ii) the parents, brothers and sisters of the individuals or any of them wholly or mainly
dependent on individual.
As per Oxford Dictionary the expression ‘family’ means:
The body of persons who live in one house or under one head including parents,
children, servants etc. The group consisting of parents and their children whether
living together or not; in a wider sense all those who are connected by blood or
affinity.
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The word ‘family’ is not to be understood in a narrower sense and would mean all those
who are connected by blood relationship or marriage or a group of persons who are
recognised in law is having a right or succession or having a claim to a share in the property
in dispute [pls see Ramcharan Das v. Girija Nandini Devi AIR 1966 SC 323].
An adopted child becomes the member of the ‘family’ for the purpose of family
arrangement but position of illegitimate children is different
Property
Joint property in the family hotchpotch is considered for the purposes of family
arrangement. Individual properties or the self-acquired properties generally don’t become
the subject of family arrangement.
Bansari Lal Aggarwal v. CGT (1998) 230 ITR 114 (P&H) - Family settlement must be a bona
fide
The Court disregarded the family arrangement arrived at between the husband on the one
side and wife and 4 sons on the other as collusive one effected with a view to avoid
payment of tax. In the said case, property owned by the assessee was an individual
property. Wife and 4 sons had only lent money to husband to buy the said property. Mere
creating an antecedent title, claim or interest of the five persons in the individual property
of husband and consequently, the family arrangement decree obtained by the parties
concerned was set aside on the ground of being collusive, obtained with a view to avoid
payment of tax.
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Family arrangement should be genuine / bonafide
1. In CIT v. R. Ponnammal [1987] 164 ITR 706 (Mad), it was held that for income-tax
purposes, a bona fide arrangement is not regarded as a transfer even when some assets
change hands in consequence of such family arrangement.
2. In a family arrangement, where it was done with minor son it was found to be a
disguise and was thus declared ineffective [CIT v. A.L. Ramanathan (2000) 245 ITR 494
(Mad)]
Shuffling of interest in partnership / company can be incidental to family arrangement
CIT v. Kay Arr Enterprises [2008] 299 ITR 348 (Mad)
Where the family members decided to settle a possible dispute by a family
arrangement involving an exchange of shares as between the family members, such
exchange would not attract capital gains tax. Merely because firms and companies are
not members, shuffling of interest therein does not fall outside the scope of family
arrangement. Such shuffling of interest in firms and companies in consequence of a
family arrangement between members of the family, should not attract liability.
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Family arrangement whether requires registration?

Family partition and family arrangement under the Hindu Law can be oral it does not
require registration under sec 9 of the Transfer of Property Act despite provisions of
sec 54 of Transfer of Property Act, 1882, which require a registered instrument for
sale of rights in tangible immovable property exceeding Rs.100 in value.

Where the family arrangement is in writing, it may require registration

A document containing the terms and recital of the family arrangement including
respective rights of the parties in the partition properties requires registration and to
be stamped. Similarly, a document which purports to effect partition is to be
registered.

Settlement without registration may not be accepted as evidence but the same can
be admissible as a corroborative evidence of the transaction.
Kale v. Dy. Director of Consolidation, AIR 1976 SC 807

A document which purports to effect partition is required to be registered and this
decision would equally apply for family arrangement.
Nanibai v. Geethabai AIR 1958 SC 1925
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 Whether transfer of property in family settlement is chargeable to capital
gains tax under sec 2(47)?
 Family arrangements made voluntarily to resolve the disputes or even
possible dispute among members of a family do not amount to transfer.
 No capital gain arises from the transaction.
CIT v. R. Ponnammal (2987) 164 ITR 706 (Mad)
CIT v. AL Ramanathan (2000) 245 ITR 494 (Mad)
CIT v. Kay Arr Enterprises (2008) 299 ITR 348 (Mad) [Member of a family were
shareholders in a company. They re-adjusted their shareholdings to solve internal
differences and to avoid litigation. The necessity was to control companies
effectively by major shareholders to produce better prospects and active
supervision. Such arrangement is not transfer chargeable to capital gains tax.]
CIT v. R. Nagaraja Rao (2013) 352 ITR 565 (Kar) [Adjustment of shares among
family members does not amount to transfer within the meaning of sec 45]
CIT v. Ashwani Chopra (2013) 352 ITR 620 (P&H) [Payment to the assessee in the
form of immovable property to compensate inequalities in partition of assets is
not chargeable to capital gains.]
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Family Arrangements
• Cost of acquisition in the hands of the member receiving the asset after
the settlement
• Cost to the previous owner and not the amount mentioned in the family
settlement deed
CIT v. Shanti Chandran (2003) 127 Taxman 475 (Mad)
Family arrangement whether chargeable to tax under sec 56(2)(vii)
Sec 56(2)(vii) exempts gifts as between relatives. However, since there is no
transfer in a family arrangement, there is no scope for seeking assistance of
sec 56(2)(vii) of the Act for non-liability.
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Other forms that can be employed in a family arrangement
1. Creation of discretionary / Non-discretionary Trust and pooling of assets in
the Trust [sec 56(2)(vii)
2. Demerger of undertaking / division of undertaking / business – sec 2(19AA)
r.w.s 391 to 394 of the Companies Act
3. Gift of movable / immovable assets to an individual or HUF– sec 47(iii) r.w.s
56(2)(vii)
4. Diversion of income at source
How to tackle GAAR application
A. Purpose of arrangement: To determine the purpose of family arrangement, time of
implementation of arrangement is crucial and not the time of conceptualization.
B. Sole or main purpose: Regard must be given to the relevant facts and circumstances
of the family arrangement and not to the subjective purpose or intention of
participating taxpayers, either at the time of arrangement entered into or
subsequently.
C. Bona fide purpose test – a general concept, but once all the facts are understood in a
given situation, one instinctively knows what is bona fide and what is not.
Preferably the family arrangement should be effected through a written instrument for
the purpose of using it as a proof of partition or arrangement, though such instrument
may
attract stamp duty and registration costs.
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