ORDER
R.D. Agrawala, Judicial Member
1. This is an appeal preferred by the assessee under Gift-tax Act, 1958 (referred as ‘Act’ for brief hereinafter) wherein the following two substantial grounds have been taken :
(1) The learned Commissioner of Income-tax (Appeals) Vijayawada erred in confirming the order of the Gift-tax Officer holding that the purported partition of the properties on 25-9-1981 between the assessee and her adopted son amounted to gift by the former to the latter.
(2) The learned Commissioner ought to have held in the light of the various judicial decisions cited before him that the document of 25-9-1981 was in the nature of a family settlement and therefore there was no gift by the assessee to her adopted son in respect of the properties allotted to him by the said deed.
2. We have heard the learned representatives on both sides, considered their submissions and perused the relevant records.
3. On facts, the assessee in response to a notice issued by the Gift-tax Officer Under Section 16(1) of the Act, filed her return in the status of HUF admitting taxable gift at ‘nil’. Certain properties devolved on the appellant on the death of her husband Under Section 14 of the Hindu Succession Act whereby she became their absolute owner. The Gift-tax Officer, therefore, took her status as ‘Individual’. While filing nil return of gift, a note was appended claiming that the properties mentioned therein were transferred by the appellant to Shri Ch. Nagendra Rao, her adopted son, by a partition deed dated 25-9-1981. It has been claimed that the adoption by the appellant will relate back to her deceased husband. On these premises, the plea of the appellant is that the partition effected was valid, without bringing any element of gift therein. This plea was rejected by the Gift-tax Officer placing reliance on a decision of the Andhra Pradesh High Court in CWT v. Smt. T. Yasodamma [1984] 146 ITR 445 wherein it was held that wherein a female adopted a child after coming into force of the Hindu Succession Act, the adoption does not result in divesting her of the property which is already vested in her and that the adopted child does not get any right in such property by virtue of adoption. The Gift-tax Officer, therefore, took the view that the adopted child of the appellant devoid of any legal right, the partition was not valid and the property transferred by the deed would be treated as gift attracting the provisions of Section 4(1) of the Act.
4. On first appeal, the learned Commissioner of Income-tax (Appeals) Vijayawada found the assessment to be in order. Hence the present appeal before us.
5. The learned counsel for the appellant, inter alia, contended that the assessee was throughout under the bona fide impression that the property in question was joint family property in which her adopted son had a right compelling her to agree for the partition; that there was no voluntariness in the action of the assessee which was sine qua non for a gift transaction and that the transaction was in the nature of a family settlement and cannot fall within the category of a transfer without consideration. In support of his contention reliance was placed on the decision of the Madras High Court in CGT v. Pappathi Anni [1981] 127 ITR 655 and on a decision of Hyderabad Bench ‘A’ of the Tribunal in the case of ITO v. Smt. Sonabai [1989] 31 ITD 31 to which one of us is a party. Apart from this reference was also made to the written submissions filed before the learned first appellate authority. As against this, the learned departmental representative contended that the appellant’s husband died during 1964 intestate and adoption took place during 1969; that there was no question of “relating back” and that the adopted son was a stranger to the properties which in terms of the decision of the jurisdictional High Court in Smt. T. Yasodamma’s case (supra) had vested in the appellant immediately on her husband’s demise. As per the revenue Pappathy Anni’s case (supra) was distinguishable. Submission was also made before us to the effect on behalf of the revenue that no dispute had arisen warranting recourse to a family settlement. Smt. Sonabai’s case (supra) has also been tried to be distinguished. In support of these submissions, reliance was placed on two decisions viz., N. Durgaiah v. CGT [1975] 99 ITR 477 (AP) and T. Ram Dulari v. CIT [1984] 150 ITR 569/17 Taxman 315 (Delhi).
6. There can be no dispute that once the property had vested in the appellant on the death of her husband, despite an adoption made by her and the legal position that such adoption shall make the adopted child the son of the appellant as well her deceased husband, she will not stand divested of such properties as clearly held by the jurisdictional High Court in Smt. T. Yasodamma’s case (supra) in view of the fact that the appellant had already become the absolute owner of such property. However, there seems to be some force in the submission made on behalf of the lade that she remained under a bona fide impression that it was a joint family property in which her adopted son had a right and hence the partition. Notwithstanding this, let us now proceed to examine as to how far such an arrangement as were adverted to by the parties fell within the ambit of a family settlement. Before we do so, let us see as to what precisely a family settlement means.
7. ‘A’ Bench of the Income-tax Appellate Tribunal, Hyderabad Benches in Smt. Sonabai’s case (supra) had the occasion to consider this question in great detail.
8. In Sahu Madho Das v. Mukand Ram AIR 1955 SC 481 their Lordships of the Supreme Court while considering the ingredients of a family arrangement held as under:
It is well settled that a compromise or family arrangement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges and defines what that title is, each party relinquishing all claims to property other than that falling to his share and recognising the right of the others, as they had previously asserted it, to the portions allotted to them respectively. That explains why no conveyance is required in these cases to pass the title from the one in whom it resides to the person receiving it under the family arrangement. It is assumed that the title claimed by the person receiving the property under the arrangement had always resided in him or her so far as the property falling to his or her share is concerned and therefore no conveyance is necessary. But, the principle can be carried further and so strongly do the Courts lean in favour of family arrangements that brings about harmony in a family and do justice to its various members and avoid, in anticipation, future disputes which might ruin them all, that they have no hesitation in taking the next step (fraud apart) and upholding an arrangement under which one set of members abandons all claim to all title and interest in all the properties in dispute and acknowledges that the sole and absolute title to all the properties resides in only one of their number (provided he or she had claimed the whole and made such an assertion of title) and are content to take such properties as are assigned to their shares as gifts pure and simple from him or her, or as a conveyance for consideration when consideration is present.
9. In another decision in M.N. Aryamurthi v. M.L. Subbaraya Setty AIR 1972 SC 1279 dealing with the essential requisites of a family arrangement, their Lordships of the Apex Court held as under :
These are : (i) there must be an agreement amongst the various members of the family intended to be generally and reasonably for the benefit of the family, (ii) the agreement should be with the object either of compromising doubtful or disputed rights or for preserving the family property, or the peace and security of the family by avoiding litigation, or for saving its honour, (iii) being an agreement, there is consideration for the same, the consideration being the expectation that such an agreement or settlement will result in establishing or ensuring amity and goodwill amongst the relations.
10. In Ram Charan Das v. Mst. Girjanandani Devi AIR 1959 All. 473, describing a family arrangement and its nature, the Allahabad High Court held as under :
A family arrangement is a transaction between members of the same family which is for the benefit of the family generally, as for example, one which tends to the preservation of the family property, to the peace and security of the family and the avoiding of family disputes and litigation or to the saving of the honour of the family.
A family arrangement to be good need not necessarily be a compromise of doubtful rights : AIR 1980 All. 687 and AIR 1943 All. 101 (FB) followed. AIR 1926 All. 194 Not followed. AIR 1938 Oudh 97, Doubted.
Where in order to preserve the peace of the family and the avoidance of disputes and litigation and to save the honour of the family a deed of settlement between the members of a family was entered into, the family settlement would be binding on the parties, even though the title of one of the parties to the litigation was not in dispute.
The Court further held as under :
The true nature of a family settlement is that it does not involve any sort of transfer. The converting of an expectancy to a certainty and avoiding chance of litigation in future is good consideration for a family arrangement: AIR 1930 All. 687 and AIR 1939 All. 689 (FB) Relied on. Hence a family arrangement to which reversioners under Hindu law are parties is not prohibited by Section 6(a) T.P. Act.
11. As would be seen a family settlement is in the nature of a transaction which is for the benefit of the family with a view to preserve a family property, to keep peace and security of the family and avoid rancour and disharmony.
12. In the case in hand though there cannot be any divesting of the property from the appellant on her adopting a male child years after the death of her husband, yet, could it be justifiably said that the appellant would be socially and morally fair and entitled to arrogate to herself claiming the entire property for herself to the exclusion of the adopted son and behaving in a fashion to say that she being the absolute owner of such property will not part with even a fraction of it in favour of the adopted son and will be free to dispose it of in any manner including through a testamentary disposition? We cannot overlook the social conditions prevailing in a society. When a child is given in adoption more particularly to a widow is it that the natural parents will leave their son to live like a destitute entirely at the mercy of the adoptive mother, without wresting promises to the benefit of the child? May be that the expectations of the child and his natural parents have not come to black and white but the circumstances are so strong that a presumption, we are sanguine will have to be raised in favour of the plea raised by the assessee before us. As to the description of the document which is described as partition deed, we have to go through its substance rather than the form and interpret it accordingly. Found as it is, at page 6 of the paper book after giving preliminaries that the adoption took place with a view to maintain the family line of the late husband of the appellant, a recital is made that the property in question is the ancestral property of the appellant’s husband. The relevant clause of the deed reads as under :
Until now, we are living together as joint family. On the advice of the elders that it is desirable to partition the joint family properties between us, we have effected the partition as per the present document.
From the aforesaid, the only inference which can be drawn is that the appellant considered it as her religious, moral as well legal duty to effect a partition of the properties between the adopted child and herself on the death of her husband. A dispute is rather inherent in such a situation in which the appellant was placed. It is also manifest from the narration in the deed that such arrangement was arrived at on the advice of elders.
13. In Pappathy Anni’ s case (supra) after the death of the father, the widow and the son proceeded on the assumption that the son had half share in the property left behind by his father. Although the Madras High Court found that the son had no right and the mother was entitled to the entire property left by the father, yet, it was held that the agreement for division amounted to a family arrangement and the properties allotted to son are not liable to gift-tax in the hands of mother. We are unable to agree with the learned Departmental Representative that this authority is distinguishable as it was a case of ancestral property. Firstly we do not know as to what is the status of the properties in the hands of the appellant’s son and secondly even if they were not ancestral, we are unable to appreciate as to what difference will this make, as in Pappathy Anni’s case (supra) also the parties before us was under a bona fide impression that the son had a right to share excluding the transaction from the purview of gift.
14. Smt. Sonabai’s case (supra) also cannot be distinguished on the plea of testamentary disposition and on the premises that the case related to that of natural son. In our considered opinion, the distinction sought is rather on flimsy grounds. Whether the arrangement made is with a natural son or adopted son a distinction does not stand to any reason. Adopted son, as is well known, is as good as a natural son for inheritance, succession and other allied as well social and moral rights and obligations. Similarly whether the property is disposed of or acquired by testamentary disposition shall also not make any difference whatsoever as stated above.
15. Lastly we take up the two authorities relied on by the learned departmental representative. N. Durgaiah’s case (supra) does not apply here as therein a settlement was found to be unilateral in favour of a minor son.
16. T. Ram Dulari’s case (supra) is also distinguishable as there was no claim of a family settlement therein. In this case, the adoption by the widow was also held to be void ab initio and there was no material found on record to show that the properties in question were HUF properties. Even at the cost of repetition, it may be stated that, although the properties already vested in the appellant did not stand divested on the adoption of a son by her, yet, in the facts and circumstances of the case as also taking into account the uncontroverted plea that the lady was throughout under an impression that the son had a legal right to share the properties, we have no option than to hold that the document in question though perhaps wrong by described as a document of partition is impressed with all the characters of a family settlement. Needless to say that a family settlement need not necessarily be a compromise of doubtful rights.
17. In the result, the assessee succeeds. Appeal is allowed.