2007 (1) TMI 130 - HC - Income Tax

Summary

Issues Involved:
1. Whether the property is a "tavazhi" property under section 48 of the Madras Marumakkattayam Act, 1932.
2. Whether the settlement deed dated October 1, 1984, constitutes a family arrangement.
3. Whether the assessee is liable to pay gift-tax if the Marumakkattayam law of inheritance does not apply.

Detailed Analysis:

Issue 1: Whether the property is a "tavazhi" property under section 48 of the Madras Marumakkattayam Act, 1932

The court examined whether the property settled by the father of the assessee constituted a "tavazhi" property, which would invoke section 48 of the Madras Marumakkattayam Act, 1932. The Act defines "tavazhi" as a group of persons consisting of a female, her children, and all her descendants in the female line. The court noted that the father of the assessee, Dr. K. N. Kesari, was governed by the Marumakkattayam law due to his marital alliance with a lady governed by the same law. However, the settlement deed executed by Dr. Kesari explicitly granted absolute ownership to the assessee after the life interest of her mother, indicating a contrary intention to exclude the property from being treated as "tavazhi" property. The court referred to precedents, including the Full Bench decision in Chakkra Kannan v. Kunhi Pokker and the Division Bench decision in Bhaskaran Thirumulpad v. Kavunni Thirumulpad, to support its conclusion that the absence of an explicit intention to benefit the "tavazhi" members precludes the property from being treated as "tavazhi" property.

Issue 2: Whether the settlement deed dated October 1, 1984, constitutes a family arrangement

The court analyzed whether the settlement deed executed by the assessee in favor of her children and grandson could be considered a family arrangement. The Tribunal had previously held that the settlement deed amounted to a bona fide family arrangement, referencing the Supreme Court's decision in Maturi Pullaiah v. Maturi Narasimham, which stated that the existence of legal claims or disputes is not a necessary condition for a valid family arrangement. However, the court found that the assessee's initial return declaring a taxable gift, followed by a revised return claiming a family arrangement, indicated an afterthought to avoid gift-tax liability. The absence of explicit references to family disputes in the settlement deed and the specific exclusion of one son from the property further weakened the claim of a family arrangement.

Issue 3: Whether the assessee is liable to pay gift-tax if the Marumakkattayam law of inheritance does not apply

Given the court's conclusion that the property settled by the father did not constitute "tavazhi" property and thus did not invoke the Marumakkattayam law of inheritance, the court held that the properties gifted by the assessee to her children and grandson were subject to the provisions of the Gift-tax Act. The court emphasized that the revised return filed by the assessee, claiming the settlement as a family arrangement, was an attempt to avoid gift-tax liability. Therefore, the properties gifted by the assessee were liable to be assessed as income and taxed under the Gift-tax Act.

Conclusion:

The court concluded that the property settled by the father of the assessee did not constitute "tavazhi" property under the Madras Marumakkattayam Act, 1932, and the settlement deed executed by the assessee did not qualify as a family arrangement. Consequently, the properties gifted by the assessee were subject to gift-tax. The reference was answered in the negative, in favor of the Revenue and against the assessee.