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Home » Articles » Family Settlements And Tax Planning

Family Settlements And Tax Planning

Article Posted On Date : Friday, May 22, 2009

Family Settlements And Tax Planning

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Family Settlements And Tax Planning

Tax Planning

Tax planning as a concept had at a point of time suffered degradation and for a while seemed to be a euphemism for tax evasion. This was the fall­out of some observations in McDowell's case, [154 ITR 148 (SC)] especially in the separate opinion of Justice Chinnappa Reddy. But the libel did not stay too long. Sabyasachi Mukherjee, Justice of the Supreme Court salvaged its respectability by observing tax avoidance by genuine transactions is not evil. It is any subterfuge or simulation of a transaction or rather a hoax of a make-believe transaction which is despicable and cannot be countenanced. In Playworld Electronics, he observed [184 ITR 308 (SC)] : "It is true that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also true that, in order to create an atmosphere of tax compliance, taxes must be reasonably collected and when collected, should be utilised for proper expenditure and not wasted. (See the observations in CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC), it is not necessary, in the facts of this case, to notice the change in the trend of judicial approach in English (Sherdeley vs. Sherdeley (1987) 2 All ER 54 (HL). While it is true, as observed by Chinnappa Reddy J., in McDowell and Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) that it would be too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the device for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Greenberg vs. IRC (1971) 47 TC 240 (HL), that one must find out the true nature of the transaction, it is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law".

Family Settlement or family arrangement and Tax planning

Family settlement or family arrangement is a transaction effecting distribution of family assets. This has fortuitous effect of division of a family's assets and income resulting therefrom. But it is a misnomer to describe family settlement or arrangement.

As a means of tax planning because the object of such settlement or arrangement is resolving the actual dispute or the potential threat of a dispute striking or threatening to strike at unity and dignity of the family and bringing it to disrepute through public exposure.

Paradoxically, though the family ties are nowhere as strong as they are in the Indian society, the concept of so resolving a family dispute through internal amicable settlement has travelled from England to India. It followed the flag.

The sanctity of a family and its preservation caused the evolution of it as a manner of realignment of family properties for family peace, the motto being that the society must have self-respecting and self-adjusted families, at peace with itself.

That way, the concept of family settlement had its voyage from England and has had a good harbour in the law of this land. Though upholding the family dignity is not a matter alien to Indian genius, the idea of settlement as a form of legal transaction was not there. So we are indebted to the English jurisprudence. Halsbury defines the settlement in the following words :

A family 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 honour. The agreement may be implied from a long course of dealing. But it is more useful to embody or to effectuate the agreement in a deed to which the term family agreement is applied.

It is an agreement for the division of the family property by way of compromise to avoid family quarrel or litigation.
The arrangement results in dividing family property.

It becomes an agreement among the members of a family to share equitably whatever they obtained.

It is an agreement between co-heirs dividing the property between them to conduce to the family peace.

It quite often emerges as an agreement between the heirs and the person supposed to be entitled under a lost will.

In India this mode of transfer is recognized by the Supreme Court in Sahoo Madhab Das vs. Mukand Ram AIR 1955 SC 481. According to this decision, the dispute need not be a present dispute, even the threat of it to erupt imminently is also considered a good cause for such settlement. What would be the test of existence of a dispute will depend on the circumstances of each individual case. No strait jacket formula is possible. There must be some circumstances indicating some forms of controversy threatening the family unity. Another test may be that whether the settlement really removes the cause of discord and makes the family more secure and happier.

That apprehended conflict can also be a ground for such settlement draws support from the decision of Calcutta High Court AIR 1932 Cal 600, AIR 1932 Cal 664. Even the parties to family settlement need not belong to the same family. The word 'family' in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy. In this connection, reference may be made to Krishna Baharilal vs. Gulab Chand & Ors. AIR 1971 SC 104. The court, in that case, encountered by the question whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was in respect of certain property which was originally owned by their common ancestors, that was considered sufficient for a family settlement or arrangement. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family.

But the most important aspect for such settlement is that the parties to the family settlement or arrangement must have same antecedent title, claim or interest, even a possible claim in the property. The meaning of antecedent title taken out from the dictionary means existing or occurring before any time or order often with consequential effects. Thus, it refers to some prior right or pre-existing right but it is not to be understood in the sense too pat on the dictionary meaning. In the context of Lord Halsbury's definition, it means not only existing or prior right but also presumptive right. So a family arrangement cannot be denounced or struck down on the plea that the parties or anyone of the parties did not have pre-existing right at the time of settlement. This view is vindicated by the decision of the Supreme Court in Kale vs. Deputy Director – AIR 1976 SC 807. It says that even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all his claims or title in favour of such party and acknowledges him to be the sole owner, the antecedent title could be said to be there residing in such party.

Antecedent title according to the decision must be assumed in such a situation and the family arrangement was upheld.

The last important view is that the family settlement is not a transfer because here property goes to parties who had antecedent rights. The Supreme Court observed in Sahoo Madodas vs. Mokand Ram (supra) that 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 what the title is, each party relinquishing all claims to properties other than his share under the agreement and recognizing right of the others to the portion allotted to them respectively. The court has widened the concept of antecedent title by holding that antecedent title would be assumed in a person who may not have any title but who has been allotted a particular property by the other party to the family arrangement by relinquishing his claim in favour of such a donee. In such a case the party in whose favour the relinquishment is made would be assumed to have an antecedent title.

Thus, the family arrangement being a realignment of title among parties having antecedent rights and interest does not lead to any transfer. It is akin to distribution of properties under a partition of a HUF and needs no conveyance.
Now, the terms of a family arrangement may have tax saving effect because the property is deconcentrated and divided. So is income yield of the property. This would certainly go to minimize taxation if the distribution of income resulting therefrom comes in for taxation at lower slab rate as a result of such diffusion. It is also equally true about Wealth Tax. It also used to save gift tax when gift tax had been in vogue.

But family arrangement or settlement cannot have as its object that of saving tax. It then becomes a fraud. The sole object of family arrangement is preservation of family dignity, unity and peace. So if one targets family settlement or arrangement as the tax saving device, that would certainly cast a cloud on the bona fides of the whole transaction. It would be a subterfuge to hoodwink the revenue.


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