Commissioner of Income Tax vs R. Ponnammal

M.N. Chandurkar, C.J.—The two questions which are the subject-matter of these two references, one u/s 26(1) of the Gift-tax Act, 1958

(T.C. No. 186 of 1979) and the other u/s 256(1) of the Income Tax Act, 1961 (T.C. No. 141 of 1978) arise out of the same set of facts. One Sri

Ranga Konar, who was the paternal grandfather of the assessee, executed a will of his property on September 11, 1930, by which he bequeathed

his property to five of his sons. After the death of Sri Ranga Konar, the five sons, experiencing some difficulty in partitioning the property according

to the will, decided to ignore the will and effected a partition by a duly drawn up partition deed dated December 3, 1934. As a result of the

partition, Chinna Venkatachala Konar, one of the sons of the deceased, Sri Ranga Konar, received some property in respect of which he executed

a will on March 11, 1938, bequeathing his property to his wife and daughter, Smt. Ponnammal, the assessee. Chinna Venkatachala Konar died on

March 31, 1955, leaving behind the two legatees, namely, the widow and the daughter. There were some disputes raised by the brothers of the

deceased, Chinna Venkatachala Konar, with regard to the property bequeathed by him by the will. They claimed that Chinna Venkatachala Konar

had no right to make a will in respect of the property which he got at the partition. The dispute which became the subject-matter of a suit, O.S.

No. 294 of 1962 in the Court of the Subordinate Judge, Coimbatore, filed by the brothers of the deceased, Chinna Venkatachala Konar, finally

came to an end by the decision of the Supreme Court on February 6, 1964, and it was held that Chinna Venkatachala Konar had obtained the

property absolutely and was entitled to bequeath the property in favour of his wife and daughter.

Disputes arose with regard to the property which the assessee received as a result of the will of her father, Chinna Venkatachala Konar. While

the assessee claimed absolute title over the property, her sons and daughters claimed that the since the assessee''s father had died before the Hindu

Succession Act, 1956, came into force, the assessee was entitled only to a limited estate while the assessee claimed that she was the absolute

owner of the property which came to her by the will of her father. These rival claims were settled by a family arrangement incorporated in a duly

registered document dated December 17, 1971. The family arrangement was made not only in respect of the property which came to the assessee

from her father, but also in respect of the property left behind by the husband of the assessee to which she and her sons and daughters were

entitled. As a result of this family arrangement, the assessee was given property worth Rs. 1,00,000 and the rest of the property was divided

between the two sons and the two daughters. One son was a minor at the time when the family arrangement was entered into.

The Income Tax Officer, who was also exercising powers as the Gift-tax Officer, took the view that the family arrangement had resulted in a

transfer of property as contemplated by section 2(xxiv) of the Gift-tax Act, and was, therefore, liable to be treated as a gift for purposes of section

4(1)(a) and section 4(2) of the Gift-tax Act. He, therefore, proceeded to make an assessment order and found that there was a transfer of

property which was in the nature of a gift as contemplated by the Gift-tax Act, inasmuch as by the family arrangement, the assessee had

relinquished her title over some of her absolute properties.

This order of the Gift-tax Officer was set aside by the appellate authority. The Revenue took the matter on appeal to the Income Tax Appellate

Tribunal. The Tribunal recorded a finding that a situation of a possible dispute or at least an apprehension in the mind of the assessee of a possible

dispute and disharmony in the family regarding the properties bequeathed to her under the will was created as a result of the claims made by the

sons and daughters of the assessee. The Tribunal further found :

Such an apprehension in the mind of the assessee is well founded in view of the tortuous course adopted for establishing the validity of the will by

taking up the matter right up to the Supreme Court.

Viewed in this background, there is some basis for a genuine apprehension in the mind of the assessee of a possible dispute regarding the nature of

the estate in the properties bequeathed to her under the will and to avoid litigation and preserve the family peace and harmony, she thought it fit to

part with a portion of the properties received by her under a will in favour of her sons and daughters and secure for herself recognition and consent

of her sons and daughters that she is the absolute owner of the properties bequeathed to her under the will.

The Tribunal took into account the fact that the document of family arrangement dated December 17, 1971 was the result of the intervention of

the panchayatdars and observed that the family arrangement was entered into as directed by the panchayatdars. Having taken this view, the

Tribunal found that the document dated December 17, 1971, constituted a valid family arrangement and there was no transfer of property involved

within the meaning of section 2(xxiv) and there was no liability to gift-tax either u/s 4(1)(a) or u/s 4(2). Arising out of this order, at the instance of

the Revenue, the following question had been referred to this court.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that there was no gift by the

assessee to her children in respect of the transfer of the properties inherited by the assessee from her father ?

Consequent upon the view taken by the Gift-tax Officer that there was a transfer of property as a result of the family arrangement, the Income

Tax Officer passed an assessment order for the assessment year 1972-73 including the income of the property which had fallen to the share of the

minor son of the assessee, in the income of the assessee, u/s 64(iii) of the Income Tax Act, 1961. There is no doubt that this view was merely

consequential to the view he took in the proceeding under the Gift-tax Act.

However, the Appellate Assistant Commissioner giving effect to his finding in the appeal in the gift-tax proceedings excluded from the total

amount of the income of the assessee the income from the property given to the share of the minor. He, therefore, allowed the appeal. The appeal

filed by the Revenue therefrom to the Tribunal came to be dismissed in view of the order of the Tribunal in the appeal arising out of the gift-tax

proceedings. Consequently, arising out of the proceedings under the 1961 Act, the following question has been referred to this court.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the surrender of a portion of the

properties bequeathed to the assessee by her father in favour of her minor son, Shri Navaneetha Krishnan, amounted to only a family arrangement

and there was no transfer of properties so as to attract the provisions of section 64(iii) of the Income Tax Act, 1961, and the inclusion of the

income from the surrendered properties in the assessee''s hands was improper and, therefore, should be deleted.

The decision of both the questions must necessarily depend on whether the finding recorded by the Tribunal that the document dated December

17, 1971 was a family arrangement can or cannot be sustained. The learned counsel appearing on behalf of the Revenue, at whose instance the

reference has been made, has urged before us that even prior to the date of the family arrangement, the exclusive title of the father of the assessee

to the property bequeathed by him was upheld by the Supreme Court and since the family arrangement has been entered into after the Hindu

Succession Act came into force, it was clear that the property which was bequeathed in favour of the assessee by her father had, as a result of the

provisions of section 14 of the Hindu Succession Act, become her absolute property at the time of the family arrangement. If this was in law the

correct position, according to the learned counsel, there was no necessity for the assessee to part with her property and if she has under the family

arrangement parted with some property, that would clearly result in a transfer of property as contemplated by section 2(xxiv). This argument, in

our view, ignores the settled law that when parties enter into a family arrangement, the validity of the family arrangement is not to be judged with

reference to whether the parties who raised disputes or rights or claimed rights in certain properties had in law any such right or not.

The Supreme Court in Maturi Pullaiah and Another Vs. Maturi Narasimham and Others, , has observed as follows (p. 1841) :

Briefly stated, though conflict of legal claims in praesenti or in futuro is generally a condition for the validity of a family arrangement, it is not

necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims will suffice. Members of a joint Hindu family may,

to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an arrangement is entered into bona fide

and the terms thereof are fair in the circumstances of a particular case, courts will more readily give assent to such an arrangement than to avoid it.

These observations have been reiterated by the Supreme Court in a later decision in Kale and Others Vs. Deputy Director of Consolidation

and Others, . In paragraph 10, the Supreme Court has laid down the following propositions in the matter of the binding effect and the essentials of

a family settlement, which are as follows (p. 812 of AIR) :

In other words, to put the binding effect and the essentials of a family settlement in a concretised form, the matter may be reduced into the form of

the following propositions :

(1) The family settlement must be a bona fide one so as to resolve family disputes and rival claims by a fair and equitable division or allotment 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 arrangement 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. Here also, a distinction

should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum

prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making

necessary mutation. In such a case, the memorandum itself does not create or extinguish any rights in immovable properties and, therefore, does

not fall within the mischief of section 17(2) (sic) (section 17(1)(b)) of the Registration Act and is, therefore, not compulsorily registrable;

(5) The members who may be parties to the family arrangement must have some antecedent title, claim or interest or even a possible claim in the

property which is acknowledged by the parties to the settlement. Even if one of the parties to the settlement has no title but, under the arrangement,

the other party relinquishes all its claims 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 will be upheld and the courts will find 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 which is fair

and equitable, the family arrangement is final and binding on the parties to the settlement.

The fifth proposition quoted above clearly contemplates that even if a party to the settlement had no title but, under the arrangement, the other

party relinquishes all its claims 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 will be upheld and the courts will find no difficulty in giving assent to the same.

There is no doubt in the instant case and indeed it has been so found by the Tribunal as a fact that the family settlement was a bona fide

settlement intended to resolve family disputes and to settle rival claims made by the assessee and her sons and daughters against her. The very fact

that the family arrangement has been brought about by the intervention of the panchayatdars clearly shows that the sons and the daughters of the

assessee were laying claims to the property which the assessee got under the will made by her father. It was not relevant at the time when the

family arrangement was entered into whether such claims, if made in a court of law, could be sustained or not. If the assessee found it worthwhile

to settle the dispute between herself, her sons and daughters by making the family arrangement as contained in the document dated December 17,

1971, that family arrangement cannot be ignored by the tax authorities. Accordingly, we must hold that the findings recorded by the Tribunal that

the document dated December 17, 1971, constituted a valid family arrangement and there was no transfer of property involved within the meaning

of section 2(xxiv) and there was no liability to gift-tax either u/s 4(1)(a) or u/s 4(2), are correct.

In the view which we have taken, the question raised in the proceedings under the Gift-tax Act, 1958, must be answered in the affirmative and

against the Revenue. Consequently, the question referred u/s 256(1) of the Income Tax Act, 1961, must also be answered in the affirmative and

against the Revenue.

The two questions are, accordingly, answered. There is no appearance on behalf of the assessee. There will be no order as to costs.