TMI Blog2005 (7) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term 'family' has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successionis so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The Courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the Courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sake of convenience. In these three appeals of the assessees, the relevant assessment year involved is 1996-97 pertaining to the financial year 1995-96. 2. The only common issue in these appeals is that as to whether, in view of family arrangement as arrived at by the assessees to rearrange their shareholdings to avoid possible litigation among themselves will attract capital gain or not and whether it is a transfer or not. 3. The briefly stated facts are that the assessees, along with their family members in the previous year ended 31-3-1996, had transferred shares owned by the assessees and family members in M/s. Lakshmi Mills Ltd. and Lakshmi Card Clothing Co. Ltd. to the family members of Shri G.K Sundaram. The assessees in regard to these transfers had submitted as under: The assessee has transferred ICC and IMC shares and converted into Vijayeswari Textiles Ltd. share. In this connection we beg to submit the following: Shri K. Rajagopal and his family members are part of the Lakhsmi Group of families, certain companies were managed and controlled by the families of Sri G.K. Sundaram and Sri K. Rajagopal, jointly subsequent to certain family arrangement in which certain compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . N. Thayarammal, Minor K. Arjun and Minor K. Nithin, represented by Smt. K. Vijayashree Karivaradhan And minor R. Adityakrishnan, represented by father and guardian Sri S. Pathy. The Assessing Officer further found that the other family of Shri G.K. Sundaram had offered capital gain tax arising out of sale of shares of M/s. Vijayeswari Textiles Ltd. to Shri K. Rajagopal. According to the Assessing Officer these assesses have accepted that there was no family arrangement involved in the transfer of shares and the transfer of shares, according to them, was liable to capital gain tax under the Income-tax Act. Further, the Assessing Officer found that there was extinguishment of title as a result of transfer of shares of M/s. Lakshmi Mills Ltd., M/s. Lakshmi Card Clothing Co. Ltd. and M/s. Vijayeswari Textiles Ltd. All the transferees have lost their rights and title over the shares held by them previous and had acquired new shares and rights consequent to the transaction. Accordingly, the Assessing Officer held that this was a transfer of shares as there was no family arrangement as such and taxed the capital gains arising out of this transaction. Aggrieved, the assessees preferred a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sundaram N. Thayarammal (sister of V. Narayanaswamy Naidu) K. Rajagopal Maniammal K. Mani 3rd Son-in-law V. Narayanaswamy B/O: N. Thayarammal Wife is cousin of K. Sundaram Brother-in law of K. Sundaram N. Jayachannder N. Udayachander R. Shantharam S. Sunitha (D/o K. Sundaram) R. Gopinath Madhaavi Gopinath Jayanthi Ramachaandra A.L. Ramachandra S. Harishankar S. Sunitha S. Pathy Rajashree Path S. Karivardhan Vijayashree P. Aditya Krishna(Minor) P. Aishwarya Lakshmi(Minor) K. Arjun (Minor) K. Nithin (minor) A large business house has controlled by many companies but to avoid litigation among families, they have reached at a family arrangement to rear-range the shareholdings between the elders of the families as it was necessary to control the companies effectively by the major shareholders to produce better profit and exert effective supervision both in the administration and production for the functioning of the companies. Shri K. Rajagopal and his family members were one part of Lakshmi Group of Companies and other part was Shri G.K. Sundaram and his family members. A family arrangement was reached between Sri K. Rajagopal and Sri G.K. Sundaram to rearrange the shareholdings among ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... family arrangement is an 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 its honour. The agreement may be implied from a long course of dealing, but it is more usual to embody or to effectuate the agreement in a deed to which the term family arrangement applied.' The principles the Courts should bear in mind in appreciating the scope of such family arrangement are stated thus: 'Family arrangements are governed by principles which are not applicable to dealings between strangers. The Court, when deciding the rights of parties under family arrangements or claims to upset such arrangements, considers what in the broadest view of the matter is most for the interest of families, and has regard to considerations which, in dealing with transactions between persons not members of the same family, would not be taken into account. Matters which would be fatal to the validity of similar transactions between strangers are not objections to the binding effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly arrangements are governed by a special equity peculiar to themselves, and will be enforced if honestly made, although they have not been meant as a compromise, but have proceeded from an error of all parties, originating in mistake or ignorance of fact as to what their rights actually are, or of the points on which their rights actually depend: The object of the arrangement is to protect the family from long drawn litigation or perpetual strifes which mar the unity and solidarity of the family and create hatred and bad blood between the various members of the family. To-day when we are striving to build up an egalitarian society and are trying for a complete reconstruction of the society, to maintain and uphold the unity and homogeneity of the family which ultimately results in the unification of the society and, therefore, of the entire country, is the prime need of the hour. A family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term 'family' h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 Hon'ble Apex Court relying on the decision in the case of K. Shanmugam Pillai v. K. Shanmugam Pillai AIR 1972 SC 2069 aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 981, were in pursuance of a family arrangement and, hence, the capital gains from these transactions could not be assessed to capital gains tax. The Income-tax Officer took the view that the transactions amounted to transfer of title in respect of which capital gains was exigible to tax. The Tribunal came to the conclusion that the transaction was a family arrangement and did not involve any transfer of title of properties. On a reference: Held, that the dispute arose in the family and the family arrangement was arrived at in consultation with the panchayatdars and, accordingly, re-alignment of interest in several properties resulted. The family arrangement was arrived at in order to avoid continuous friction and to maintain peace among the family members. The family arrangement was governed by the principles which were not applicable to dealings between strangers. So such re-alignment of interest by way of effecting family arrangements among the family members would not amount to transfer. The Tribunal found that the family arrangement was a bona fide one inasmuch as it was made voluntarily and not induced by any fraud or collusion and the conduct of the parties was consistent wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee and the family of Shri K. Rajagopal transferred the shares of M/s. Lakshmi Mills Ltd. and M/s. Lakshmi Card Clothing Mfg. Co. Ltd. and in turn, the other family of Shri G.K Sundaram and Sri Narayanaswamy Naidu transferred the shareholdings of M/s. Vijayeswari Textile Mills to the assessee and the family members of Shri K. Rajagopal. This is happened within March 1996. This arrangement was entered into between the family members who transacted the shares and in view of the nature of arrangement, this arrangement cannot be called as a transfer within the meaning of section 2(47) of the Income-tax Act. Here, we have to consider the reply submitted by the assessee which was submitted before the Assessing Officer dated 18-2-1999 which is being reproduced as it is: The partners of the assessee-firm are all family members of Shri K. Rajagopal and family and the shares were exchanged pursuant to a family arrangement into with Shri G.K. Sundaram family and Shri Narayanaswamy Naidu family. The matters were settled by way of family arrangement and the shares held by each members were so reorganized that the family members of Shri K. Rajagopal and family will have the holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term 'family' has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spes successionis so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The Courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the Courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits. 9.1 As regard to another aspect o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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