Introduction

Violence is a ubiquitous feature of a family life. When a property is a self acquired one, the doctrine of family settlement stricto sensu may not be applicable but in a case where two individuals declare each other to be owners of the property having equal share therein, an arrangement between them by way of a family settlement is permissible in law. Such a family settlement is not only in relation to the title of the property but also in relation to the use and possession thereof.

Disputes among members of business families have been the stuff of numerous novels and films, except for providing headlines in daily newspapers. Various families have ruined themselves fighting until the closing stages, the last scene of which is usually performed in the court. The judiciary is generally averse to enter into the paddle because the law should come after everything else in family relations. The same view has been reiterated in the present state of affairs when compared to the days of Privy Council. The concept of family arrangement is applicable to all the communities in which there is a common unit, common mass and the practice of joint living. Consequently, so long as the arrangements are made for settling the disputes with or without litigation, the validity cannot be questioned. Only when the dispute cannot be settled by way of family settlement, is adjudication by the way of arbitration possible.

Before moving on and talking about the objectives and requirements of a family arrangement or settlement, it is imperative to discuss about the term family. The Supreme Court in Ram Charan v. Girja Nandini , observed "the word 'family' is not to be understood in a narrow sense of being a group of persons whom the law recognizes as having a right of succession or having a claim to a share in the disputed property.” A family is not the one which is normally understood for purposes of Hindu Law.

It may be understood in proper sagacity in the case of a family settlement, as constituting a group of persons who are recognised in law as having a right of succession or having a claim to a share in the property in dispute. But every party taking benefit under a family settlement need not necessarily be shown to have under the law, a claim to share in the property. All that is necessary is that the parties should be related to one another in some way and have a possible claim or a semblance of a claim on some ground, as, say, affection.

The consideration for a family settlement is the expectation that such a settlement will result in establishing or ensuring amity and goodwill amongst the relations and after that consideration has been passed by each of the disputants, the settlement consisting of recognition of the right asserted by each other cannot be impeached. The court held that the consideration for the family settlement being compromise between parties even to a previous suit would be a family settlement.

Essential pre-requisites, objectives and advantages of a family settlement or arrangement

As per Halsbury’s Laws of England, “ A 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 useful to embody or to effectuate the agreement in a deed to which the term family agreement is applied.” A family settlement is entered into for achieving a superior purpose, viz., accomplishing tranquility and accord in the family.

The intention of the arrangement is to shield the family from long drawn litigation or perpetual strives which mark the unity and solidarity of the family and create hatred and bad blood between the various members of the family. It promotes social justice through wider distribution of wealth. Family therefore has to be construed widely. It is not confined only to people having legal title to the property.

One of the earliest cases where such view was taken was in Lala Khunni Lal v. Kunwar Gobind, when the Privy Council stressed that it was the duty of the courts to uphold and give full effect to a family arrangement. In Sadhu Madho Das v. Pandit Mukand Ram, the Supreme Court held that a family arrangement can, as a matter of law, be implied from a long course of dealings between the parties.

It is an understanding for the dissection of the family property by way of compromise to elude family squabble or litigation. The arrangement results in dividing family property. It becomes an agreement among the members of a family to share equitably whatever they obtained. It is an agreement between co-heirs dividing the property amongst them to conduce to the family serenity. It quite often emerges as an agreement between the heirs and the person supposed to be entitled under a lost will.

By virtue of a family settlement or arrangement, members of a family descending from a common ancestor or a near relation seek to sink their differences and disputes, settle and resolve their conflicting claims or disputed titles once and for all in order to buy peace of mind and bring about complete harmony and goodwill in the family. A family settlement is treated differently from any other formal commercial settlement as such a settlement in the eyes of the law ensures peace and goodwill among the family members. Such family settlements, bona fide and without fraud, meet with the approval of the courts. Such settlements are governed by a special equity principle, as decided by the Supreme Court.

Essential Conditions

• An imperative prerequisite in a family arrangement is that there should be a family dispute or rival claims which require to be settled by an equitable division or allotment of property between the claimants who are necessarily family members belonging to the same family. The dispute could relate to any aspect, but is usually relates to the rights or claims in respect of property, assets, enjoyment of rights in respect of properties, claims, shares, possible claims, family feuds, refusal to recognise rights of family members, etc. It could relate to any aspect which may threaten the rights of any member or the family as a whole, if the disputes are prolonged or escalated or in the nature of creating situations or circumstances that the members are not able to meet eye to eye. It could be a genuine dispute or a controversy, rival claims, assertions and denials. It is unfortunate that many disputes revolve around the sheer ego of the persons involved. The law says that these disputes are not in the best interest of the members of the family.
• The family arrangement should be for the benefit of the family in general.
• The family arrangement must be bonafide, honest, voluntary and it should not be induced by fraud, coercion or undue influence.
• The parties to the family arrangement must have antecedent title, claim or interest. Even if a possible claim in the property which is acknowledged by the parties to the settlement will be sufficient for the same.
• The consideration for entering into family arrangement should be preservation of family property, preservation of peace and honour of the family and avoidance of litigation.

Advantages of Family Arrangement

• The transaction is not treated as a transfer and hence capital gains tax will not arise.
• It is not treated as a gift.
• The clubbing provision will not be applicable.
• Equitable distribution of the wealth instead of concentrating the same in the hands of a few.
• Establishing or ensuring a calmness and goodwill amongst the members of the family.

Registration and Stamping

Family arrangement as such can be arrived orally or may be recorded in writing as memorandum of what had been agreed upon between the parties. The memorandum need not be prepared for the purpose of being used as a document on which future title of the parties be founded. It is usually prepared as a record of what had been agreed upon so that there are no hazy notions about it in future.

Depending on the wordings employed, facts and circumstances and other factors, it may or may not required be stamped and registered. Each document has to be scrutinized on the basis of the wordings contained in the document to arrive at a conclusion whether the same requires being stamped and registered or otherwise. At times, it may only be stamped, but not registered in which case it can be looked into for collateral purposes. If it is required to be stamped and registered, but is not properly stamped and registered, it cannot be looked into for any purpose. Whether a purpose is collateral or not, is a matter which has to be gathered from the facts and circumstances concerned.

Courts lean in favour of family arrangements and all trivial grounds are overlooked. Rule of estoppel is pressed into service to prevent unsettling of a settled dispute. Family arrangement may be even oral in which case no registration is necessary. Registration would be necessary only if the terms of the family arrangement are reduced into writing. The family settlement arrived at between the parties which is in writing requires registration and an unregistered family settlement will not be admissible as an evidence . Here also, a distinction should be made between the 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 circumstances, the memorandum itself does not create or extinguish any rights in immovable properties and for that reason does not fall within the mischief of Section 17(2) of the Registration Act and is, hence, not compulsorily registrable. So a document which was no more than a memorandum of what had been agreed to did not require registration. Hence a document which is in the nature of a memorandum of an earlier family arrangement and which is filed before the court for its information for mutation of names is not compulsorily registrable and therefore can be used in evidence of the family arrangement and is final and is binding on the parties. Even if a family arrangement that required registration was not registered, it would operate as a complete estoppel against the parties who have taken advantage of the family arrangement

A decree of partition is an instrument of partition and therefore is required to be stamped under Schedule 1 of Article 45 r/w Section 2(15) of the Stamp Act. However, an oral family settlement dividing or partitioning the property is not required to be stamped. Similarly, a memorandum recording an oral family settlement which has already taken place is not an instrument dividing or agreeing to divide property and is therefore not required to be stamped.

On the other hand, an oral partition by the way of family settlement does not require registration. While dealing with a memorandum of family arrangement through family settlement, the Apex Court held that the principles which apply to the case of an ordinary compromise between strangers does not equally apply to the case of compromises in the nature of family arrangements. Family arrangements are governed by a special equity peculiar to them and that the family arrangement may have been oral in which case, no registration is necessary and that the registration would be de rigueur only if the terms of the family arrangement are reduced into writing.”

It is settled law that a memorandum of family settlement does not create or extinguish any rights in immovable properties and, therefore, does not fall within the mischief of Section 17(2) of the Registration Act, 1908 and is, therefore, not compulsorily registrable. Hence, any decree drawn by the court recognizing an oral partition between the members of the family which had taken place earlier and concretised in a memorandum of family settlement does not require execution on a stamp paper or require compulsory registration.

While an instrument of partition which operates or is intended to operate as a declared volition constituting or serving ownership and causes a change of legal relation to the property divided amongst the parties to it, requires registration as enumerated under Section 17(1)(b) of the Act, writing which merely recites that there has in time passed been a partition, is not a declaration of will, but a mere statement of fact, and it does not require registration. Also, a memorandum of family arrangement filed for its information for mutation of names, is not compulsorily registrable and can be used in evidence and is final and binding on the parties.

In Tek Bahadur v. Debi Singh and Ors. the Constitution Bench of this Court considered the validity of the family arrangement. The question was whether it is requiresd to be compulsorily registered under Section 17. This Court, while upholding oral family arrangement, held that registration would be necessary only if the terms of the family arrangements are reduced into writing. A distinction should be made between the document containing the terms and recital of family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made either for the purpose of record or for information of the court for making necessary mutation.

In such a case, the memorandum itself does not create or extinguish any right in immovable properties and therefore, does not fall within the mischief of Section 17(2) of the Registration Act. It was held that a memorandum of family arrangement made earlier which was filed in the court for its information was held not compulsorily registrable and therefore it can be used in evidence for collateral purpose, namely, for the proof of family arrangement which was final and binds the parties.

The same view was reiterated in Maturi Pulliah and Anr. v. Maturi Narasimhan and Ors. , wherein it was held that the family arrangement will need registration only if it creates any interest in immovable property in present time in favour of the parties mentioned therein. In case where no such interest is created, the document would be valid, despite it being non-registered and will not be hit by Section 17 of the Act. The essence of the matter is whether the deed is a part of the partition transaction or contains merely an incidental recital of a previously completed transaction. It is equally well settled that a mere list of properties allotted at a partition is not an instrument of partition and does not per se require registration. Where the division or allotment of properties takes place on the face of the document and contemporaneously with it, it will require stamp duty on an ad valorem basis.

In India, this mode of transfer is recognized by the Supreme Court in Sahoo Madhab Das vs. Mukand Ram . According to this decision, the dispute need not be a present dispute; even the threat of it to erupt imminently is also considered a good cause for such settlement. What would be the test of existence of a dispute would depend on the circumstances of each individual case. No strait jacket formula was possible. There must be some circumstances indicating some forms of controversy threatening the family unity. Another test may be that whether the settlement really removes the cause of discord and makes the family more secure and happier.

Even the parties to family settlement need not belong to the same family. The word ‘family’ in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy. In this connection, reference may be made to Krishna Baharilal vs. Gulab Chand & Ors.

The court, in this case was encountered by the question that whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was prima facie in respect of certain property which was originally owned by their common ancestors and that was considered sufficient for a family settlement or arrangement.

Weight must also be given to the use of that particular asset during the relationship. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family. The Court must be very vigilant and must ensure that the Order it makes is still just and equitable .

Family Settlement vis-à-vis taxation

A family arrangement is not treated as a conveyance. It is only in the nature of allocation, distribution, re-distribution or recognition of pre-existing rights. This is like re-alignment of rights. In the process, some of the pre-existing rights of one of more members may even be extinguished by their consent. So long as it meets the other requirements of a valid family arrangement, this is also recognised. The matter to be considered is the recognition of a claim or a right and not the transfer of the same even though there could be relinquishment by one or more members or acknowledgement of rights of others by one or more members.

Under the Income-tax Law, family arrangements are not considered as `transfer'. Therefore, even though properties and assets are settled among the family members, it is not subject to taxation under capital gains in respect of profits derived by the members who are parties to the arrangement. On the other hand, in case the properties are straightaway sold and bought among the family members, it would amount to transfer and result in capital gains tax. Where the properties consist of immovable assets like land and buildings, the amount of capital gains subject to tax would be enormous, considering the value appreciation they would have gained.

In this context, a study of the basic aspects of family arrangements gains importance. Despite the significance of the subject, there is no precise and specific law governing Family Settlement/Family Arrangement in India. All the principles are arrived on the basis of pronouncements laid down by various High Courts and the Supreme Court.

Conclusion

Thus, from the above discussion and also from a review of the above mentioned decisions, in my opinion, it would appear that the courts have taken a very liberal and broad view of the validity of the family settlement and have always tried to uphold it and maintain it. In Ram Charan Das v. Girjanandini Dev,i the Supreme Court observed: “Courts give effect to a family arrangement upon the broad and general ground that its object is to settle existing or future disputes regarding property amongst members of a family. The consideration for such a settlement will result in establishing or ensuring amity and goodwill amongst persons bearing relationship with one another.”

The real perception in the approach made by the courts is that the family settlement is a conciliatory and a pacific mean of division of property and if by consent of parties, the matter has been settled, it should not be allowed to be reopened by the parties to the agreement on frivolous or untenable grounds.

Family arrangement being a modification and alteration of title among parties having antecedent rights and interest does not result in any kind of transfer. It is analogous to allocation of properties under a partition of a HUF and hence no conveyance is de rigueur. Now, the terms of a family arrangement may have tax saving effect because the property is deconcentrated and divided. This would certainly go to minimize taxation if the distribution of income resulting there from comes in for taxation at lower slab rate as a result of such diffusion.

However, it should be kept in mind that family arrangement or settlement should not be entered into with an object of escaping tax. It then becomes a fraud. The unparalleled intent of family arrangement is fortification of family vanity, unanimity and tranquility. So, if one aims family settlement or arrangement as a device to save tax it would certainly cast a cloud on the authentic and genuine parties of the whole transaction. It would result in contrive to delude the income. The arrangement should be made in good faith. Good faith can be stated to be the essence of the family arrangement.

It should not be made with a view to circumvent provisions of law relating to stamp duty or provide an advantageous position with regard to stamp duty and registration costs. It must not be in the nature of extinguishing or limiting the rights of a family member who is not a consenting party to the arrangement. It should be in the nature of settling disputes, promoting harmony and not in the nature of inciting disputes or disrupting the harmony. There should not be any fraud or undue influence played in any member or members of the family. It must be a voluntary arrangement.

In view of the widespread practice of using this mode of transaction for avoiding capital gains tax and stamp duties, family arrangements are looked upon with greater degree of suspicion by the Income-tax Department and other Government authorities. Therefore, it is all the more important to strengthen the documentation of family arrangement in line with the above ingredients. Otherwise, the litigation within the family may be extended to the various revenue departments also.