[Opinion] Family Settlement Agreement | An Effective Tool to Save Disputes & Taxes

Mayank Mohanka – [2024] 162 taxmann.com 112 (Article)

Introduction

Seeding and nurturing a business with one’s entrepreneurial acumen, skills, hard work, perseverance and capital to grow it into a big fruit-bearing tree with branches spread-out, is the hallmark of a successful businessman. But equally important is ensuring that the said tree (business) continues to grow and bear fruits for the future generations to come, without there being any feuds and disputes among the different branches. A ‘Family Arrangement’ is an important and quintessential instrument, which if effectively executed, can turn out to be a game changer in avoiding family feuds and also in saving substantial taxes.

Meaning of Family Arrangement

The hon’ble Supreme Court in the decision of ‘Maturi Pullaiah v. Maturi Narasimham AIR 1966 SC 1836’, has defined the ‘family arrangement’ as,

“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 usual to embody or to effectuate the agreement in a deed to which the term ‘family arrangement’ is applied.”

Essential Features of a Legally Binding Family Arrangement

Usually, for any proposition/recital (verbal or written) to have a binding force, it should ideally be executed in the form of a binding contract or a registered agreement. Similarly, for passing on the clean title of any immovable property, its registration is usually considered essential. However, these general conceptions do not hold good in the case of a “Family Arrangement”.

The essential pre-requisites of a legally binding “family arrangement/family settlement agreement”, have been stipulated by the Hon’ble Apex Court in the landmark judgement in the case of ‘Kale v. Deputy Director of Consolidation [1976] 3 SCC 119.

The Hon’ble SC had held that for a ‘family arrangement’ to have a legal binding effect on the parties to the settlement, it should be bonafide, voluntary and aimed at resolving family disputes and rival claims. It may be oral, and registration is not required even if the terms and recitals of the family arrangement are spelled out in a memorandum prepared for the purpose of record or mutation in court, after the oral family arrangement had already been effected. The members of the family arrangement should ideally have some antecedent title, claim or interest in the property or even a possible claim in the property acknowledged by the parties to the settlement. However, even if a party has no antecedent title, but the other party relinquishes its claim or title in favour of such party, and acknowledges such party to be the sole owner, then antecedent title should be assumed in such cases. Fair and equitable family arrangement, even in the absence of any legal claims, is final and binding on the parties to the settlement.

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