Family arrangement outside HUF wealth tax scope where settled assets cease to belong to the family unit.

A family arrangement allocating assets to minor daughters can operate as a distinct legal settlement and, once accepted, the settled amount ceases to form part of the Hindu undivided family's wealth. Section 171 applies only where partition of an HUF is claimed and examined under the Income-tax Act, so it does not control every family settlement. Income arising from fixed deposits created out of the settled amount could not be assessed in the hands of the HUF because the amount had already moved out of HUF ownership. Observations based on matters beyond the income-tax issue were not sustainable.

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Issues: Whether the family arrangement settling Rs. 1,25,000 each in favour of the six minor daughters of the karta continued to remain the wealth or assets of the Hindu undivided family and whether the income from the fixed deposit receipts could be assessed in the hands of the HUF.

Analysis: A family arrangement is a distinct legal device recognised by special equity and its legal consequences cannot be ignored merely because it does not amount to a partition under the Income-tax Act. Section 171 deals with assessment after partition of a Hindu undivided family and its mechanism is attracted when a partition is claimed and inquired into under the statute. Here, the amount settled in favour of the minor daughters was accepted as having been allotted under the family arrangement, and once such settlement was made, the corresponding amount ceased to be part of the wealth of the HUF. The fact that the recipients were members of the family did not keep the settled amount within the HUF for tax purposes. The Tribunal's additional observations based on matters outside the scope of the income-tax adjudication were not sustainable.

Conclusion: The settled amount could not be treated as the wealth or income of the HUF, and the assessee was entitled to succeed.

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