TC/28/1999 of Vs on 10 December 2002

:JUDGMENT

N.V.BALASUBRAMANIAN,J.

This is a reference under the Gift Tax Act, 1958, and inpursuance of the direction of this Court, the Income-tax Appellate Tribunalhas stated a case and referred the following questions of law for ourconsideration:-

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law and also had valid materials inholding that transaction by which a self-acquired property of the assessee wasalienated in favour of her son by way of a partition deed is only a familyarrangement and therefore, is outside the purview of the Gift-tax Act?

2. Whether on the facts and in the circumstances of the case,the Appellate Tribunal is right in law and also had valid materials in holdingthat the transaction by which the assessee leased out the properties to herhusband and two daughters at a lease rent which is far below the annual incomeof the property is only a family arrangement and is outside the purview of theGift-tax Act?

2. The assessee is an individual and the assessment year with which we are concerned is 1988-89. The assessee is the owner of a half share in the building known as 'SRM Lodge' at E.V.N. Street, Erode which consistedof ground floor and first floor. She also owned a residential house at No.13,Pumping Station Road, Erode and a building at No.29, Pumping Station Road,Erode. The assessee's husband became an insolvent and the assessee along withher son carried on the business and acquired certain properties jointly withher son. On 9.5.1984, the assessee instituted a suit before the SubordinateJudge's Court, Erode against her son for division of the property known as SRMLodge, Erode and the Suit ended in a compromise and a compromise decree waspassed on 7.8.1984 and under terms of the compromise, the assessee wasentitled to the shops in the ground floor and she was to discharge the loan ofRs.98,000/- and the son of the assessee was entitled to life interest in thelodge building situate in the first floor of the property, 'SRM Lodge' andafter him, the same should go to his male children. On 16.4.1987 the assesseeexecuted a deed of partition, at the intervention of panchayatdars, with aview to settle the dispute with her son and under the deed of partition, theassessee was allotted the property at Door No.29, Pumping Station Road, Erodeabsolutely. She was also granted the life interest both in the shops in theground floor and the lodge in the first floor of the building, ' SRM Lodge'which should go to her son absolutely after her death. Under the deed ofpartition, the son of the assessee was allotted the property at No.13, PumpingStation Road, Erode. On 1.8.1987 the assessee along with her son executed adeed of lease in respect of the properties; (i) No.29, Pumping Station Road,Erode, (ii) Ground Floor in SRM Lodge, and (iii) No.13, Pumping Station Road,Erode in favour of the assessee's husband and her two daughters for a sum ofRs.16,000/- per annum for a period of eight years.

3. The Gift-tax Officer was of the view that by the partition

3. The Gift-tax Officer was of the view that by the partition deed dated 16.4.1987, the property at No.13, Pumping Station Road, Erodeabsolutely belonging to the assessee was allotted to the assessee's sonwhich involved a gift of Rs.1,50,000/- being the value of the property. Healso held that the lease amount fixed was much lower than the rent which wasreceived during the earlier assessment years and brought the transaction togift-tax under section 4(1)(a) of the Gift-tax Act. The assessee preferred anappeal before the Commissioner of Income-tax (Appeals) against the order ofassessment made under the Gift-tax Act. The assessee pleaded that there was afamily arrangement. The Commissioner of Income-tax (Appeals) held that therewas no reference to the family arrangement in the deed of partition and theallotment of property in favour of the assessee's son could only be termed asa gift. He also held that the lease amount fixed was less than the marketrent and in this view of the matter, he confirmed the order of the Gift-taxOfficer.

4. The assessee carried the matter in further appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal took into accountthe nature of the dispute in the family of the assessee and the facts of thecase and also the circumstances which led to the execution of the partitiondeed and lease deed, and held that only to solve the family dispute and tobring harmony to the family, the transactions were entered into and there wasa family arrangement which did not constitute 'gift' within the meaning ofsections 2(xii) and 4(1)(a) of the Gift-tax Act. The Appellate Tribunal alsoheld that the transactions were involuntary in nature and therefore there wasno question of levy of gift-tax. In this view of the matter, the AppellateTribunal cancelled the order of assessment for the assessment year 1988-89

levying gift-tax and allowed the appeal preferred by the assessee. Againstthe order of the Appellate Tribunal, the Revenue sought for a reference andthe Appellate Tribunal, on the basis of the directions of this Court, referredthe questions of law mentioned above.

5. The assessee was served, but, in spite of that, there is no representation for the assessee. Mrs.Pushya Sitharaman, learned seniorstanding counsel appearing for the Revenue submitted that the AppellateTribunal was not correct in holding that there was a family arrangement andaccording to her, the assessee was the owner of the property at No.13, Pumpingstation Road, Erode and the property was transferred in favour of theassessee's son who had no pre-existing right in the property and the transferwas without any consideration. Learned senior standing counsel submitted thatthe assessee's son originally had no interest in the property at No.13,Pumping Station Road, Erode and hence, the transaction is only a gift as thetransaction was entered into voluntarily and without consideration.

6. We have carefully considered the submissions of the learned senior standing counsel for the Revenue. The essentials of a familyarrangement have been the subject matter of consideration in several decisionsof this Court as well as by the Supreme Court. The Supreme Court in KALE v.DY. DIRECTOR OF CONSOLIDATION (AIR 1976 S.C. 807) laid down the followingprinciples essential for family arrangement:-"1. The family settlement must be a bona fide one so as toresolve family disputes and rival claims by a fair and equitable division orallotment of properties between the various members of the family;

2. The said settlement must be voluntary and should not be induced by fraud, coercion or undue influence;

3. The family arrangements may be even 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. Herealso, a distinction should be made between a document containing the terms andrecitals of a family arrangement made under the document and a mere memorandumprepared after the family arrangement had already been made either for thepurpose of the record or for information of the court for making necessarymutation. In such a case the memorandum itself does not create or extinguishany rights in immovable properties and therefore does not fall within themischief of section 17(2) (sic) (Sec.17(1)(b)?) of the Registration Act andis, therefore, not compulsorily registrable;

5. The members who may be parties to the family arrangement must have some antecedent title, claim or interest even a possible claim inthe property which is acknowledged by the parties to the settlement. Even ifone of the parties to the settlement has no title but under the arrangementthe other party relinquishes all its claims or titles in favour of such aperson and acknowledges him to be the sole owner, then the antecedent titlemust be assumed and the family arrangement will be upheld and the courts willfind 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 whichis fair and equitable the family arrangement is final and binding on theparties to the settlement."

7. The Supreme Court in SK.SATTAR SK.MOHD. v. GUNDAPPA

AMABADAS (1 996) 6 SCC 373) has held that there is no transfer in the case ofa family arrangement and laid down the law as under:-" A family arrangement, on the contrary, is a transactionbetween members of the same family for the benefit of the family so as topreserve the family property, the peace and security of the family, avoidanceof 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 antecedenttitle in the parties and the agreement acknowledges and defines what thattitle is. It is for this reason that a family arrangement by which each partytakes a share in the property has been held as not amounting to a 'conveyanceof property' from a person who has title to it to a person who has no title."

8. The Supreme Court in the case of LAKSHMI AMMAL v.

8. The Supreme Court in the case of LAKSHMI AMMAL v.

CHAKRAVAHTHI (AIR 1999 S.C.3363) has laid down the basic features of a familyarrangement. Applying the principles laid down by the Supreme Court in theabove cases, it is clear that the assessee's husband was declared an insolventand after that, the assessee along with her son carried on the business andacquired certain properties. Though one of the properties was acquired in thejoint names of the assessee and her son, a dispute seems to have arisen and itis stated that the assessee's son was a chronic drunkard and he was picking upquarrels in the family and he ultimately died on 8.11.1990 when he was 38years old. The Appellate Tribunal held that the conduct of various members ofthe family showed that the family members intended to maintain peace in thefamily and to bring harmony in the family and they also wanted to avoidpossible disputes by the heirs of the assessee at a later date. Therefore apanchayat was convened and a family arrangement was arrived at. The AppellateTribunal has found that the family arrangement was a bona fide one.9. As far as the property which is subject matter ofpartition is concerned, we hold that the proposition No.5 laid down by theSupreme Court in Kale's case (AIR 1976 SC 807) would apply and the SupremeCourt held that even if one of the parties to the settlement had no title, butunder the arrangement the other party relinquished all his claims or titles infavour of such a person and acknowledged him to be the sole owner, then theantecedent title must be assumed and the family arrangement would be upheld.Further, it was held that even a semblance of claim in the property by amember would be sufficient to validate the family arrangement. It is clearfrom the facts of the case that the assessee had recognised the rights infavour of her son in the property allotted in his favour in the partition.10. The Supreme Court in LAKSHMI AMMAL v. CHAKRAVAHTHI (AIR1999 SC 3363) has held that it is not necessary that the parties being themembers of the family and claiming right in the property are in law entitledto some share and once the basic features of family arrangement, viz.,disputes have been raised by the parties and settled in a panchayat and theparties have also been put in possession of the property in question, thedocument should be held to be a valid family arrangement, though the document may be termed as a deed of partition. It is also well settled that it is notnecessary that the arrangement should be among all members of the familyarrayed one against the other and the prime factor is that it should be in theinterest of the family (vide: Mulla Principles of Hindu Law (18th Edition,Vol.I), paragraph 248B at page 446).

11. We find that the Appellate Tribunal has found that there

was a bona fide family arrangement to resolve the family dispute and theprinciple laid down by the Supreme Court in Kale's case (AIR 1976 SC 8 07) isthat the antecedent title of the son must be assumed and the familyarrangement should be upheld. We therefore hold that the fact that there wasa panchayat in which the disputes between the members of the family weresettled clearly shows that the arrangement entered into between the assesseeand her son was a family arrangement and consequently, we hold that theAppellate Tribunal was right in holding that there was a valid familyarrangement to resolve the disputes in the family and to bring harmony to thefamily. Similarly, we are of the view that no exception could be taken to theopinion arrived at by the Appellate Tribunal in respect of the lease deedexecuted by the assessee and her son in favour of the assessee's husband, whowas adjudged as insolvent, and her two daughters for a sum of Rs.16,000/- perannum for eight years. The lease deed was found to have been executed inorder to avoid any possible dispute by the heirs to whom nothing was allottedin the family arrangement and in order to have a harmony among the familymembers. Hence, the transaction did not constitute a gift within the meaningof section 2(xii) and 4(1)(a) of the Gift-tax Act as the transactions wereentered into not voluntarily and there was no transfer of property involved inthe transactions.

12. Accordingly, we answer both the questions of law referredto us in the affirmative, against the Revenue and in favour of the assessee.

Index:YesWebsite: Yesna.

To

1. The Assistant Registrar,Income-tax Appellate Tribunal,Rajaji Bhavan, Besant Nagar,Chennai 600 090 (five copies with records)

2. The Secretary,Central Board of Direct Taxes, New Delhi (3 copies)

3. The Commissioner of Gift-tax,Coimbatore.

4. The Commissioner of Income-tax (Appeals),Coimbatore.

5. The Gift-tax Officer,Ward I(2), Erode.