Family arrangement: not a transfer, until it is

Two families divide a business that three generations built together. The documents are signed, the shares move, a cheque passes to even out the difference, and everyone goes home. Whether anything was taxed that day depends on a question nobody asked at the table: did each person receiving something already have a claim to it?

That question decides these cases. It is not a drafting question, and it cannot be fixed afterwards by calling the document a family settlement.

Key points

• A bona fide family arrangement is not a transfer, because it moves no title: the member is assumed to have held his share all along, so no conveyance is required and section 2(109) of the Income-tax Act, 2025 is never engaged. No transfer, no charge under section 67(1).
• The doctrine is entirely judge-made. Neither the 2025 Act nor the 1961 Act contains any provision on family arrangement or family settlement. It rests on Kale v. Deputy Director of Consolidation, AIR 1976 SC 807.
• Antecedent title is the master test. Kale is generous — a possible claim suffices, and title may even be assumed where the other side relinquishes and acknowledges sole ownership — but it must be a claim to the property actually being arranged.
• Cash paid to equalise an unequal division is owelty and, on the authority of a single High Court decision, does not attract capital gains — but only where it adjusts a real two-way division. Cash that is the whole of what one side receives is sale consideration wearing a settlement’s clothes.
• Assets held by a company are not family property. The exemption is personal to members with antecedent title, and the veil will not be lifted at the assessee’s request.
• Partition of a Hindu undivided family is statutory, not doctrinal: section 70(1)(a) and section 92(3)(g) deal with it expressly.

Which law governs a family arrangement made today?

The Income-tax Act, 2025 commenced on 1 April 2026 and governs tax years beginning on or after that date. Section 536(2)(c) preserves the Income-tax Act, 1961 for any proceeding — including assessment, reassessment, penalty, revision and appeal — in respect of a tax year beginning before 1 April 2026, whether the proceeding was pending at commencement or initiated afterwards.

So an arrangement executed in, say, 2024 and now under scrutiny is tested under sections 2(47), 45, 47 and 56(2)(x) of the 1961 Act, while one executed today is tested under sections 2(109), 67, 70 and 92 of the 2025 Act. The substance of the relevant provisions is carried forward; the numbering is not. The site’s note on which Act governs an appeal filed today sets out the transition in full.

The concordance, for the provisions that matter here:

Subject	Income-tax Act, 2025	Income-tax Act, 1961
Definition of transfer	s.2(109)	s.2(47)
Charge on capital gains	s.67(1)	s.45(1)
Distribution on total or partial partition of an HUF — not a transfer	s.70(1)(a)	s.47(i)
Receipt of money or property without, or for inadequate, consideration	s.92(2)(m)	s.56(2)(x)
Exclusion for receipt from a relative	s.92(3)(a)	Third proviso to s.56(2)(x)
Definition of relative, including any member of an HUF	s.92(5)(g)	Explanation to s.56(2)(vii), applied by cl. (x)
Exclusion for receipt under a will or by inheritance	s.92(3)(c)	Third proviso to s.56(2)(x)
Exclusion for a transaction not regarded as transfer, including partition	s.92(3)(g)	Third proviso to s.56(2)(x)
Assessment after partition of an HUF	s.315	s.171
Partial partition after 31 December 1978 not recognised	s.315(8)	s.171(9)

One caution on the 2025 Act. The general definition of “relative” in section 2(94) is narrower than the one in section 92(5)(g), and does not include the limb covering any member of a Hindu undivided family. For the receipt charge, section 92(5)(g) is the operative definition.

Why is a family arrangement not a transfer?

The reasoning is older than the Income-tax Act, 1961 and has nothing to do with tax. It is a proposition of property law, and its consequence for tax follows only incidentally.

A family arrangement, the Supreme Court held in Sahu Madho Das v. Mukand Ram, AIR 1955 SC 481, and again in Kale, proceeds on the assumption that there is an antecedent title of some sort in the parties, and the agreement acknowledges and defines what that title is. Each party relinquishes claims to property other than that falling to his share and recognises the rights of the others. From which the Court drew the conclusion that matters:

That explains why no conveyance is required in these cases to pass the title from the one in whom it resides to the person receiving it under the family arrangement.

If no conveyance is required, nothing has been conveyed. The member is assumed to have held his share all along; what the document does is record where the boundaries fall. Section 2(109) of the 2025 Act defines transfer in terms of sale, exchange, relinquishment, extinguishment of rights, and a series of further limbs. The limbs that could conceivably be in issue here — sale, exchange, relinquishment, extinguishment of rights — each presuppose something moving from one holder to another. A family arrangement, on this analysis, engages none of them, and the charge in section 67(1) — which bites on gains arising from the transfer of a capital asset — never arrives.

The courts have applied this consistently in tax matters. In CIT v. AL. Ramanathan [2000] 245 ITR 494, the Madras High Court held that a realignment of shareholdings and land among family members, accompanied by monetary adjustment, did not amount to a transfer and produced no chargeable capital gain. The same court reached the same conclusion in CIT v. Kay Arr Enterprises [2008] 299 ITR 348, where families rearranged cross-holdings across group companies to consolidate management and avoid litigation. The Karnataka High Court took the same view in CIT v. R. Nagaraja Rao (2013) 352 ITR 565, holding that every member has an anterior title to the property that is the subject of the arrangement, so what occurs is an adjustment of shares and a crystallisation of existing rights rather than a transfer. Tribunals have followed the same line: in Sujan Azad Parikh v. DCIT (2023) 198 ITD 83, a settlement of a control dispute recorded in consent orders of the Company Law Board was held not to be a transfer, and the assessee was allowed to resile from his own original return, which had offered the receipt as capital gain.

Two further propositions are worth having in mind, because they answer the arguments the Department usually makes.

On consideration: in Ram Charan Das v. Girjanandini Devi, AIR 1966 SC 323, the Supreme Court explained that the consideration for a family settlement is the expectation that it will establish amity and goodwill among persons related to one another. Inadequacy of value, measured commercially, is therefore beside the point — a family arrangement is not a bargain and is not tested as one.

On the need for a dispute: in Maturi Pullaiah v. Maturi Narasimham, AIR 1966 SC 1836, the Court held that bona fides is the essence of validity, and that while a conflict of legal claims, present or future, is generally a condition of a valid family arrangement, it is not necessarily so. Bona fide disputes, present or possible, which may not involve legal claims will suffice, and members of a joint Hindu family may enter into such an arrangement simply to maintain peace or bring about harmony in the family.

Does the Income-tax Act deal with family arrangement at all?

This is the point most often got wrong, and it matters for how an adviser should speak about it.

There is no provision in the Income-tax Act, 2025 dealing with family arrangement or family settlement. There was none in the 1961 Act either. The expressions do not appear in the statute. Everything above is judicial doctrine, which means it is applied by a court weighing facts, not by satisfying a checklist in a section.

Partition of a Hindu undivided family is the opposite. It is dealt with expressly, and twice over:

• Section 70(1)(a) provides that the capital gains charge does not apply to a transfer by way of distribution of capital assets on the total or partial partition of a Hindu undivided family.
• Section 92(3)(g) lists section 70(1)(a) among the transactions whose receipt is outside the charge in section 92(2)(m).

A coparcener taking his share on partition therefore has a statutory answer at both ends — no capital gain in the family’s hands, no receipt charge in his own — and does not need the doctrine at all.

The complication with partition lies elsewhere. Section 315(1) deems a family hitherto assessed as undivided to continue as a Hindu undivided family except where a finding of partition has been given, and section 315(3) requires the Assessing Officer, after inquiry, to record whether a total or partial partition has taken place and when. Section 315(8) then provides that where a partial partition has taken place after 31 December 1978, the claim shall not be inquired into, no finding shall be recorded, any finding recorded to that effect is null and void, the family continues to be assessed as if no partial partition had occurred, and the members and the family are jointly and severally liable for the family’s dues. The 1961 Act said the same in section 171(9), and the cut-off date has not moved.

The result is a mismatch worth stating plainly: section 70(1)(a) excludes distribution on a partial partition from the charge on capital gains, but section 315(8) refuses to recognise a partial partition effected after 31 December 1978 for the purpose of assessment status. A family that divides part of its property continues to be assessed as undivided.

When is a family settlement recharacterised as a transfer?

From the decided cases, five fault lines separate an arrangement that holds from one that is recharacterised.

Fault line	What decides it	Authority
Antecedent title in the receiving party	Whether that person had a claim, or even a possible claim, to the property being arranged — not merely membership of the family	Kale, proposition (5); Kusumben Kantilal Shah [1996] 56 ITD 476
Whether the arrangement runs both ways	Whether property moved in both directions, or one side only gave up assets and took money	Ashwani Chopra (2013) 352 ITR 620 contrasted with Soni Sonu Mirchandani (ITAT Delhi, 2020)
Who owns the asset	Whether the asset belongs to a family member or to a company the family controls	B.A. Mohota Textiles [2017] 82 taxmann.com 397
Whether the dispute concerns the property being moved	A genuine dispute about asset A does not sanctify the movement of asset B	Kusumben Kantilal Shah [1996] 56 ITD 476
Strangers to the family	Whether the parties are one family with a common enjoyment of property, or separate families striking a commercial bargain	Kusumben Kantilal Shah [1996] 56 ITD 476

Kusumben Kantilal Shah v. ITO [1996] 56 ITD 476 is worth reading in full, because it fails on three of the five at once. The assessee transferred shares and claimed a family arrangement following an arbitration. The Ahmedabad Bench applied the Kale criteria and found that the two groups belonged to altogether different families with nothing common between them in the enjoyment of property; that the receiving group had no antecedent title in the shares; and that the dispute before the arbitrator concerned the property of a company, not the property of the assessee. The transfer fell squarely within section 2(47).

Can cash be paid to equalise unequal shares?

Unequal division is normal. Land, shares and goodwill do not come in halves, and the party taking the larger parcel commonly pays the other to level it. That payment is owelty, and whether it is taxed is the question most often asked about family settlements.

Two decisions, read together, give the answer.

In CIT v. Ashwani Chopra (2013) 352 ITR 620, two shareholder groups of a newspaper company divided the business after litigation before the Company Law Board and the High Court. One group took the Delhi and Jaipur units; the other took Jalandhar and Ambala and paid Rs. 24 crore to equalise. The Assessing Officer taxed the assessee’s share of that sum as long-term capital gain. The Punjab and Haryana High Court held otherwise: owelty represents the difference arising out of an unequal partition and is in the nature of property, not a debt; partition is not a transfer; and where there is no transfer of an asset there is no capital gain.

In Soni Sonu Mirchandani v. ACIT (ITAT Delhi, ITA No. 1286/Del/2020, order dated 28 September 2020), the assessee received about Rs. 94 crore under a memorandum of family settlement and claimed it as owelty on the strength of Ashwani Chopra. The claim failed. The Tribunal found that she had no antecedent title to any family property; that whatever she held as owner had been sold for consideration; that she received no share from her husband’s family; and that there was no equitable partition or distribution at all.

The distinction is not about the size of the cheque or the label on the document. In Ashwani Chopra a common estate was genuinely divided and cash merely levelled the shares. In Mirchandani nothing came in and shares went out. One is a division with an adjustment; the other is a sale. AL. Ramanathan sits on the Ashwani Chopra side of the line — money moved there too, but so did assets, in both directions.

The practical test is simple to state and awkward to satisfy after the event: what did this person receive under the arrangement, other than money? If the honest answer is nothing, the arrangement is a sale however it is drafted.

What if the asset belongs to a company?

Promoter families hold their wealth through companies, and this is where the doctrine stops.

In B.A. Mohota Textiles Traders Pvt. Ltd. v. DCIT [2017] 82 taxmann.com 397, three family groups settled their disputes by an arbitral award which directed the appellant company to transfer shares in two companies to the other groups at stated prices. The company argued that it was merely implementing a family settlement and that no capital gain arose.

The Bombay High Court accepted the general principle — that a family arrangement is not a transfer because it recognises pre-existing rights — and held that it did not reach the company’s assets. The shares were held by the company, not by its members. The company is a juristic person, distinct from its shareholders, and it was not open to it to urge that its separate existence be ignored and the persons behind it looked at instead. Capital gains were chargeable.

The reasoning has a sting in it. The separate legal personality that the family relied on when it put the assets into the company is the same personality that denies the family the benefit of the doctrine when it takes them out. The exemption is personal to members with antecedent title, and a company has none.

Mohota is a single High Court decision and the point has not been considered by the Supreme Court, so it should not be described as settled national law. But for a promoter family it is the most consequential limit in this area, and no decision going the other way on corporate-owned assets was found. A settlement that divides shares held by the family is differently placed from one that divides assets held by companies the family controls, even where the two produce the same commercial outcome.

Is a receipt under a family arrangement taxable under section 92(2)(m)?

Everything above concerns the charge on capital gains. A second charge sits alongside it, and the position there is less comfortable.

Section 92(2)(m) of the 2025 Act — the successor to section 56(2)(x) of the 1961 Act — brings to tax money received without consideration where the total exceeds Rs. 50,000, in which case the whole sum is charged and not merely the excess, and immovable or other property received without consideration or for a consideration below stamp duty value or fair market value by more than the prescribed margin. Section 92(3) then lists the exclusions, of which four matter here: receipt from a relative, clause (a); receipt under a will or by way of inheritance, clause (c); receipt by way of a transaction not regarded as transfer under section 70(1)(a) and certain other clauses, clause (g); and receipt from an individual by a trust created solely for the benefit of that individual’s relatives, clause (h). “Relative” for this purpose is defined in section 92(5)(g), and includes, for a Hindu undivided family, any member of it.

There is no High Court or Supreme Court decision squarely on family arrangement and this charge, under either Act. Advisers should say so.

The argument against the charge is a good one, and it does not depend on the relative exclusion at all. Section 92(2)(m) taxes a receipt without consideration; Ram Charan Das holds that a family arrangement does have consideration, namely the expectation of amity and goodwill. And on Kale’s reasoning there is no receipt from another person in the first place — the member takes what the law assumes was always his, which is why no conveyance is needed. A charge on receipt presupposes a giver and a taker.

But two gaps are real, and both are worth putting in front of a client before a document is signed rather than after.

The first is the reach of the relative exclusion. Section 92(5)(g) is wide but finite. It covers spouse, siblings, siblings of the spouse, siblings of either parent, lineal ascendants and descendants of the individual and of the spouse, and the spouses of those persons. It does not cover cousins, and it does not cover every party to a genuine settlement across an extended family — which is precisely the kind of arrangement where several branches, related but not within those degrees, are brought to the same table. Where the doctrinal argument is weak on the facts, the statutory fallback may not be there.

The second is the corporate gap. On Mohota reasoning, a company receiving property under a family arrangement is not a member with antecedent title, so the “no receipt without consideration” argument is not available to it. Nor is the relative exclusion, since a company has no relatives. A settlement that routes assets into a family-held company therefore faces exposure at both ends: capital gains on the transferor, and a possible charge under section 92(2)(m) on the recipient company.

Anyone advising on this should be candid that the point is open rather than settled. Commentary that cites Tribunal decisions on section 56(2)(vii) or on deemed dividend as though they were authority on section 56(2)(x) should be treated with care; section 56(2)(x) applied only from 1 April 2017, and several of the decisions in circulation concern earlier years and different provisions.

What should the record show?

Because the doctrine turns on facts rather than on form, the file matters more than the deed. Four things tend to decide how the arrangement reads years later, when an Assessing Officer sees it for the first time.

The dispute. Maturi Pullaiah does not require a legal claim — bona fide differences suffice — but bona fides remains the essence, and a settlement with nothing to settle is hard to defend. Where the arrangement follows litigation, arbitration, or proceedings before a tribunal, that record exists on its own. Where it does not, the arrangement should record what was actually apprehended, in terms that would make sense to someone who does not know the family.

The antecedent claim of each party. Not a recital that everyone is a member of the family, but what each person claimed, in what property, and on what footing. This is the element that failed in Kusumben and in Mirchandani, and it cannot be supplied afterwards.

What each party received. In property, not only in money. An arrangement in which one participant’s entire entitlement is cash invites the Mirchandani analysis.

Whether the document creates or recites. Kale draws the line between a document containing the terms of an arrangement made under it, which requires registration where immovable property is involved, and a memorandum prepared after an arrangement has already been concluded for the record or for mutation, which creates and extinguishes nothing and is not compulsorily registrable. The same distinction does evidential work in a tax proceeding: a memorandum that recites a concluded oral arrangement is asserting that the arrangement preceded it, and the surrounding record should bear that out.

Stamp duty is a separate question and a state one. The duty on an instrument of partition or settlement, and the treatment of a memorandum, vary between states, and nothing in this note addresses that.

What does this mean in practice?

A family arrangement is one of the few places in direct tax where a substantial realignment of wealth can occur with no charge at all. That is not a loophole; it is the consequence of a property-law principle two centuries older than the statute. But the exemption belongs to the facts, not to the label, and the facts that matter are fixed at the time the arrangement is made.

Three propositions are worth carrying away. Antecedent title in the person receiving is the master test, and no amount of drafting substitutes for it. An arrangement in which one side only gives and takes money is a sale, whatever it is called. And assets held through companies sit outside the doctrine altogether, which is the limit most likely to be discovered late by exactly the families who have the most at stake.

The charge under section 92(2)(m) remains open. Until there is appellate authority, the honest advice is that the doctrinal argument is strong, the statutory exclusion is narrower than it looks, and neither should be represented to a client as settled.

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Sources. Income-tax Act, 2025: section 2, section 67, section 70, section 92, section 315, section 536. Income-tax Act, 1961: section 2; sections 45, 47, 56 and 171. Judgments: Kale v. Deputy Director of Consolidation, AIR 1976 SC 807; Sahu Madho Das v. Mukand Ram, AIR 1955 SC 481; Ram Charan Das v. Girjanandini Devi, AIR 1966 SC 323; Maturi Pullaiah v. Maturi Narasimham, AIR 1966 SC 1836; CIT v. AL. Ramanathan [2000] 245 ITR 494 (Mad); CIT v. Kay Arr Enterprises [2008] 299 ITR 348 (Mad); CIT v. R. Nagaraja Rao (2013) 352 ITR 565 (Kar); CIT v. Ashwani Chopra (2013) 352 ITR 620 (P&H); B.A. Mohota Textiles Traders Pvt. Ltd. v. DCIT [2017] 82 taxmann.com 397 (Bom); Kusumben Kantilal Shah v. ITO [1996] 56 ITD 476 (Ahd); Soni Sonu Mirchandani v. ACIT, ITA No. 1286/Del/2020 (ITAT Delhi); Sujan Azad Parikh v. DCIT (2023) 198 ITD 83 (Mum). This note states the general position and is not advice on any particular arrangement.

This note is general commentary on the law as at 12 September 2026 and is not advice on any matter. The position in a particular case depends on its own facts.