Taxability of property received under family settlement: formal gift not a transfer, deemed income provisions not attracted

Taxability of property received under a family settlement was examined: the legal characterization turned on whether the registered gift deed amounted to a 'transfer' and whether receipt attracted deemed income on gratuitous receipt. The article explains that where the members constituted a Hindu Undivided Family and the gift deed merely formalised an antecedent family settlement, the deed did not constitute a transfer for the purpose of transfer law, and the proviso excluding transfers from relatives/HUF members prevents application of deemed income provisions. The assessing officer did not contest the pleaded familysettlement facts, which the tribunal accepted, so taxability under deemed income was not imposed.

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Issues: Whether the immovable property received by the assessee by way of registered gift deed is includible as deemed income under Section 56(2)(vii)(b) of the Income-tax Act, 1961 or is excluded by reason of a prior family settlement among members constituting a Hindu Undivided Family, and whether such gift amounts to a 'transfer' under Section 2(47) of the Income-tax Act, 1961.

Analysis: The facts, as pleaded and not disputed by the Assessing Officer, describe the property as having been distributed pursuant to a family settlement among persons who constituted an HUF, with the registered gift deed serving as a formal vesting of title. The proviso to clause (vii) of subsection (2) of Section 56 exempts gifts from relatives and Explanation (e)(ii) treats members of an HUF as relatives for this purpose. The claim of family settlement was admitted in the assessment proceedings and was examined and accepted by the First Appellate Authority. The First Appellate Authority's admission of the revised claim was not challenged by the revenue in this appeal. On the legal matrix, a transfer that merely formalises a family settlement among HUF members does not attract the definition of 'transfer' under Section 2(47) nor does it fall within the deeming provision of Section 56(2)(vii)(b) when the donor is a member of the HUF covered by the explanation and proviso.

Conclusion: The gift was a formal consequence of a genuine family settlement among members constituting an HUF and therefore does not constitute a 'transfer' under Section 2(47) nor deemed income under Section 56(2)(vii)(b); the appeal by the revenue is dismissed and the result is in favour of the assessee.

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