1985 (1) TMI 137 - AT - Income Tax

Summary

Issues Involved:
1. Validity of family arrangement as a defense against gift tax.
2. Applicability of gift tax on cash given as part of a family arrangement.
3. Treatment of property re-allocation in family settlements under Hindu Law.

Detailed Analysis:

1. Validity of Family Arrangement as a Defense Against Gift Tax:

The Tribunal examined whether the family arrangement executed on 30th March, 1979, could be considered a valid defense against the imposition of gift tax. The family arrangement was made to avoid future disputes and to settle existing disagreements among the family members. The Tribunal referred to several legal precedents, including Mullah's Hindu Law and judgments by the Supreme Court, which emphasize that family arrangements are generally favored by courts as they promote peace and goodwill among family members. The Tribunal concluded that the family arrangement in question was bona fide and aimed at resolving disputes, thus it should not be treated as a gift.

2. Applicability of Gift Tax on Cash Given as Part of a Family Arrangement:

The Gift Tax Officer (GTO) had imposed gift tax on the Rs. 1 lakh given by each of the assessee to their brother Kaliappan, arguing that it constituted a taxable gift under the Gift Tax Act (GT Act). The Tribunal, however, disagreed with this assessment. Citing the Supreme Court's rulings in cases like Ram Charan Das vs. Girija Nandini Devi, the Tribunal noted that family settlements are not considered transfers or gifts but are instead mechanisms to resolve disputes and avoid litigation. Therefore, the Rs. 1 lakh given to Kaliappan was deemed part of a family arrangement and not subject to gift tax.

3. Treatment of Property Re-Allocation in Family Settlements Under Hindu Law:

The Tribunal also addressed the issue of whether the re-allocation of property among family members as part of the family arrangement could be considered a gift. The GTO had accepted that the re-opening of the original partition to allot shares to Velayutham, who was in his mother's womb at the time of the original partition, did not attract gift tax. However, the GTO argued that the shares allotted to Kaliappan, who was born after the original partition, were taxable. The Tribunal referred to Section 309 of the Principles of Hindu Law, which states that a son born after a partition is entitled to a share from his father's property but not from his brothers' shares. Despite this, the Tribunal held that the re-allocation of property through a family arrangement to avoid disputes is not a taxable event under the GT Act.

Conclusion:

The Tribunal concluded that the family arrangement executed on 30th March, 1979, was a bona fide attempt to resolve disputes and maintain harmony within the family. Therefore, the Rs. 1 lakh given by each of the assessee to Kaliappan and the re-allocation of property should not be subjected to gift tax. The Tribunal set aside the gift-tax assessments made by the authorities below and allowed the appeals filed by the assessee.