Bona fide family arrangement upheld as binding where acted upon and used to settle family rights and income allocation

A bona fide family arrangement made to preserve harmony, avoid future disputes and fairly adjust family claims is valid even without a formal transfer, if the parties acknowledge their rights and act on the settlement. Here, the registered arrangement of 21-3-1980 was treated as effective because it was executed among family members, reflected a settled division of interests, and was acted upon through mutation and tax compliance. The assessee was therefore assessable only on the income from the property allotted to her under that settlement, and the revenue's challenge failed.

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Issues: Whether the registered family arrangement dated 21-3-1980 was valid and acted upon, so as to confine the assessee's assessable income only to the property allotted to her under that settlement.

Analysis: A family arrangement is upheld where it is entered into to preserve family peace, avoid future disputes and effect a fair adjustment of claims among members of the family. The arrangement need not necessarily involve a formal transfer if the parties acknowledge and define their respective rights and act on the settlement. On the facts, the Will created only a limited life interest in the assessee, but the family arrangement was between the mother, sons and their respective families, was registered on the same day, and was subsequently acted upon through mutation and tax compliance. The arrangement was designed to convert uncertain future expectations into settled shares and to prevent discord arising from the testamentary dispositions.

Conclusion: The family arrangement was held to be valid and effective; the assessee was assessable only on the income from the property allotted to her under that settlement.

Final Conclusion: The revenue's challenge failed, and the assessment was to proceed on the basis of the family settlement as acted upon by the parties.

Ratio Decidendi: A bona fide family arrangement, made to preserve family harmony and avoid litigation, and thereafter acted upon, is valid and binding even where it adjusts future or contingent rights among members of the family.

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