TAX PLANNING THROUGH FAMILY SETTLEMENT

	BASIC FEATURES OF A FAMILY SETTLEMENT :
	Justice Fazal Ali of the Supreme Court in Kale v. Dy. Director of Consolidation has laid down the following situations, where there can be family settlement :
	a)	Members must have some antecedent title, claim or interest, even a possible claim in the property which is acknowledged by the parties to the settlement.
	b)	If one of the parties has no title but another party to settlement relinquishes all its claim or title in favour of such a person and acknowledges him to be sole owner, then antecedent title must be assumed.
	c)	Even if bonafide disputes, either existing or possible, and which may not involve legal claims, are settled by bonafide family arrangement which is fair and equitable, the family arrangement is final.
	d)	A family arrangement being binding on the parties, clearly operates as an estoppel so as to preclude any of the parties who have taken advantage under the agreement from invoking or challenging the same.
	e)	If by consent of parties a matter has been settled, it should not be allowed to be reopened by the parties to the agreement on frivolous grounds.
		The Privy Council had held that in a family settlement, each party takes a share in the property by the virtue of the independent title which is admitted to that extent by other parties and the party concerned cannot be regarded as having received or made a gift when the settlement is concluded and the property is received or given - Smt. Hiran Bibi v. Sohan Bibi AIR 1914 PC 44.
		The Supreme Court has held in Ramcharandas v. Girja Nandini Devi AIR 1966 SC 323 that the transaction consequent to a family settlement entered into by the parties, who are members of a family, bonafide 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 the other parties. Every party who takes benefit under it need not necessarily be shown to have, under the law, a claim to a share in the property. All that is necessary, is to show that the parties are related to each other in some way and have a possible claim to the property or a claim, even a semblance of claim on some other grounds as, say, affection.
	HOTCH-POT OF PROPERTIES FOR FAMILY SETTLEMENT:
	In Arvind Chandulal v. C.I.T. [1983] 140 ITR 241 (Guj.). there was written deed of family arrangement under which all the parties to the deed forthwith brought into hotch-pot all the movable and immovable properties either belonging to them or standing in their names or being anywhere in their possession and thereafter these were distributed among the members by effecting family arrangement. The Gujarat High Court held that what was put into the family arrangement was HUF property and therefore what the assessee, Arvind, got in the family arrangement was also HUF property.
	Their Lordships observed as under :- “The character of the property, namely the property of a HUF as a joint family property, would not change by virtue of being thrown into the family arrangement and then being re-allotted to them under the family arrangement. The consequences of the observations of the Privy Council are that once there was previous title or claim or antecedent title before the family arrangement, that title would attach to the properties which they got under the family arrangement. That is the only meaning which can be given to the decisions of the Privy Council in Rani Mewa Kunwar v. Rani Hulas Kunwar (1874 LRIG-A 157) and Khunilal v. Govind Krishna Narain [1911] LR 38: IA 87). These decisions of the Privy Council have been approved by the Supreme Court in Sahu Madho Das v. Mukand Ram (AIR 1955 SC 481) and therefore, that is the law so far as the whole of India is concerned.” In case of family settlement it is assumed that a right had always vested in the concerned parties so far as the property falling to his/her share is concerned, and therefore, no conveyance is necessary.
	SCOPE OF FAMILY SETTLEMENT :
	Scope of family settlement is quite wide and it is always necessary that a party to a family settlement should have a title of his own. Even if the party to settlement had no title but, under the arrangement, the other parties relinquish all its claim or titles in favour of such a person and acknowledges 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 relative who are not strictly speaking , members of the HUF, can be brought into family arrangement. - C.I.T. v. R. Poonammal [1986] 28 Taxman 26 (Mad.).
	CONDITIONS FOR ENTERING INTO FAMILY SETTELEMENT :
	The following two conditions should be satisfied for entering into a proper family settlement or arrangement;
	a)	A dispute must exist between the family members at the time or there should be sufficient possibility of arising of such disputes in near future. Such disputes should be regarding the rights of the family.
	b)	There may be some claims by the members of the family or the outsiders which are required to be satisfied according to the wishes of the family members or outsiders in the interest of maintaining peace in the family.
	TAX ASPECTS IN FAMILY SETTLEMENT :
	Family settlement is mainly a medium for resolving disputes but simultaneously one should take care of the tax aspects.
	Many a times, it is seen that disputes arise on death of the father without any Will. In such cases family settlement can take the place of Will if the legal heirs agree to divide the assets and liabilities among themselves in a particular manner. In such cases it is advisable to achieve the twin objective of resolution of family disputes and tax planning.
	It is open to the Karta of the family who is single co-parcener with the widowed mother and un-married sisters to allow the properties to the un-married sisters in lieu of the claim of marriage and maintenance through the family settlement- C.I.T. v. Narain Dass Wadhwa [1980] 123 ITR 281 (P&H).
	Following the Supreme Court decision the case of Sahu Madho Das v. Mukand Ram AIR 1955 SC 481, Madras High Court held inC.G.T. v. Pappathi Anni [1981] 127 ITR 655 (Mad.) that an agreement between widowed mother and son for division of property to be family arrangement not attracting gift tax as the parties genuinely and bonafide, thought that both mother and son had right to half share in the property left behind by the father and that allotment of property to son or the mother was not without any consideration.
	The family settlement is the best medium of planning the distribution of the assets in such a way that assets may pass to those who may have to bear the least possible tax. As already stated the division of assets through family settlement is not a transfer, therefore it neither attracts capital gain tax nor gift tax - CIT v. A.L. Ramanathan 159 CTR (Mad) 255. The clubbing provisions of section 64 of the Income Tax Act are also not attracted to the family settlement. But one should be careful and cautious. The family settlement should be bonafide, otherwise it may fail. In a case before the Madhya Pradesh High Court in S.R. Kalani (HUF) v. C.I.T. [1989] 177 ITR 259(MP), a partnership was formed by family arrangement giving a lump sum amount to the mother under family settlement. On the basis thereof, she was admitted as a partner in the firm with the Karta of HUF, her only son. Earlier, it was claimed as a partition which was rejected and the family was assessed in the status of HUF as before. Later on the plea of partition was given up and it was claimed that the mother was given a sum of rupees one lakh in lieu of her right to maintenance under the family arrangement. It was found on the facts that the mother did not withdraw any amount for her maintenance. The story of quarrel with her daughter-in-law was also found incorrect because she made a gift of her jewellery to the daughter-in-law after the alleged family arrangement. Thus, the family arrangement was not found to be bonafide and was rejected by the Court.
	SAVING OF STAMP DUTY AND TRANSFER EXPENSES :
	The expenses on stamp duty and registration charges may be avoided if the Panchnama or Memorandum of Settlement or any similar document containing proof of division of the family property is registered with the Registering Authority. Such registration will provide contempranious proof of ownership of respective property by its recipients as per family settlement.