Family settlement and share reallocation were not a deemed gift where mutual adjustment of pre-existing rights provided sufficient consideration.

A bona fide family settlement made to resolve disputes, avoid litigation and preserve family peace was treated as an adjustment of pre-existing rights, not a gratuitous transfer. Reallocation or relinquishment of shares among family members was supported by sufficient consideration through mutual adjustment of interests, and each party derived benefit from the independent title recognised by the others. On that basis, the foregone shares did not amount to a deemed gift under section 4(1) of the Gift-tax Act, 1958, the gift-tax assessments were cancelled, and the departmental appeals failed.

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Issues: Whether the relinquishment or reallocation of shares under a bona fide family settlement executed to resolve disputes among family members constituted a deemed gift under section 4(1) of the Gift-tax Act, 1958.

Analysis: The family arrangement was entered into to end existing differences, avoid litigation, and preserve family peace. The parties were members of the same family with possible claims in the properties, and the reallocation of shares was treated as an adjustment of pre-existing rights rather than a gratuitous transfer. In such a bona fide family settlement, each party takes benefit by virtue of the independent title recognised by the others, and the arrangement is supported by sufficient consideration in the form of mutual adjustment of shares.

Conclusion: The foregone shares did not constitute a deemed gift under section 4(1); the gift-tax assessments were rightly cancelled, and the departmental appeals failed.

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