Mukesh Patel.in
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Tax planning through family settlement!

Distribution of assets under a family arrangement is not treated as a ‘transfer’ and can help save tax, stamp duty!

The Halsbury’s Laws of England’ has defined a Family Settlement or Family Arrangement as an agreement between the members of the same family intended to be generally or reasonably for the benefit of the family, either by compromising doubtful or disputed rights or by preserving the family property or peace and security of the family by avoiding litigation.

THE TAX ADVANTAGE OF FAMILY SETTLEMENT

                    ‘Family Settlement’ or ‘Family Arrangement’ is one of the practical modes of distribution of assets amongst the members of a family, where there are disputes or conflicting claims amongst the family members with reference to family properties. The advantage of resorting to a Family Settlement or Family Arrangement from the tax point of view is that distribution of assets under such a Settlement or Arrangement is not treated as ‘transfer’ for the purpose of Income-tax Act, as held by various judicial pronouncements and hence it does not attract liability to capital gains tax or gift-tax. Thus, a Family Settlement or Arrangement is a useful mode of tax planning recognized by law.


CONDITIONS FOR FAMILY SETTLEMENT

                    The following two conditions are required to be satisfied before entering into a proper Family Settlement or Arrangement: 

  • Disputes must exist between the family members at the time or there should be sufficient possibility of arising of such disputes in near future as regards rights of the members of the family.

  •  There should be claims by the members of the family which are required to be satisfied according to the wishes of the family members in the interest of maintaining peace in the family.

                     As held by the Madras High Court in the case of ‘CIT vs. R. Ponnamal’ 164 ITR 706(Mad.), the scope of Family Settlement is quite wide. Even if the party to the Settlement has no title of his own, but, under the Arrangement, other parties relinquish their claim or title in favour of such a person and acknowledge him to be the sole owner, then the antecedent title must be assumed and the Family Arrangement should be upheld. This means that even such relatives, who are not strictly speaking members of the HUF, can be brought within the scope of a Family Arrangement.


FAMILY SETTLEMENT NOT A TRANSFER

                      The Supreme Court of India has held in ‘Ramcharandas vs. Girija Nandini Devi’ AIR 1966(SC)323 that the transaction consequent to a Family Settlement entered into by parties, who are members of a family, bonafide and to put an end to the dispute amongst themselves is not a transfer. It is also not creation of an interest, for, in a Family Settlement, each party takes share in the property by virtue of the independent title which is admitted to that extent by other parties. Every party who takes benefit under it need not necessarily be shown to have under the law, a claim to share in the said property. All that is necessary, is to show that the parties are related to each other and have a possible claim to the property or even a semblance of some claim.

                      The Gujarat High Court also had occasion to consider the various aspects in relation to Family Arrangement or Family Settlement in the case of ‘Arvind Chandulal vs. CIT’ 140 ITR 241(Guj.).

                       In view of the various judicial pronouncements, which have held that a Family Arrangement or Settlement is not a transfer, it would be also possible to contend that there would be no liability to stamp duties or registration charges which are generally attracted in case of a normal transfer.

 

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