Bona fide family settlement and surrender of property rights not treated as deemed gift under gift-tax law.

A bona fide family settlement re-arranging co-owned property rights to prevent future disputes and preserve family peace is a recognised mode of resolving actual or potential family conflict, and the surrender of rights under such settlement does not, by itself, constitute a deemed gift. Where affidavits, witness support and the settlement memorandum show genuineness, and the tax authority produces no contrary evidence, the apparent state of affairs is accepted. On those facts, section 4(1)(c) of the Gift-tax Act was not attracted and the deemed-gift addition could not stand.

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Issues: Whether the surrender of the assessee's rights in the co-owned properties pursuant to a family settlement attracted section 4(1)(c) of the Gift-tax Act as a deemed gift.

Analysis: The record contained affidavits of the co-owners and independent witnesses supporting the family settlement, and the memorandum of agreement recorded the re-arrangement of shares. The materials showed that the arrangement was entered into to avoid future disputes and maintain family peace, and there was nothing to discredit the genuineness of the settlement. In the absence of contrary evidence from the Gift-tax authorities, the apparent state of affairs had to be accepted. A bona fide family settlement is recognised as a valid mode of resolving actual or potential family disputes, and the surrender of rights in such a settlement does not by itself amount to a taxable deemed gift.

Conclusion: Section 4(1)(c) was not attracted, and the addition based on deemed gift was unsustainable.

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