Godrej family settlement agreement: Lessons to learn to save disputes and taxes

Fair and equitable family arrangement, even in the absence of any legal claims, is final and binding on the parties to the settlement.
Fair and equitable family arrangement, even in the absence of any legal claims, is final and binding on the parties to the settlement.

Summary

  • For a ‘family arrangement’ to have a legal binding effect on the parties to the settlement, it should be bonafide, voluntary and aimed at resolving family disputes and rival claims.

Seeding and nurturing a business with one’s entrepreneurial acumen, skills, hard work, perseverance and capital to grow it into a big fruit-bearing tree is the hallmark of a successful businessman. But equally important is ensuring that the said tree (business) continues to grow and bear fruits for the future generations to come, without there being any feuds and disputes among the different branches.

A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour.

For a ‘family arrangement’ to have a legal binding effect on the parties to the settlement, it should be bonafide, voluntary and aimed at resolving family disputes and rival claims. It may be oral, and registration is not required even if the terms and recitals of the family arrangement are spelled out in a memorandum prepared for the purpose of record or mutation in court, after the oral family arrangement had already been effected. The members of the family arrangement should ideally have some antecedent title, claim or interest in the property or even a possible claim in the property acknowledged by the parties to the settlement. Fair and equitable family arrangement, even in the absence of any legal claims, is final and binding on the parties to the settlement.
 

Read more: Godrej Properties places building blocks for FY25, but may stumble

 

The very recent Family Settlement Agreement (FSA) entered into on April 30, by members of the extended ‘Godrej’ family is one of the finest examples of a meticulously planned and effectively executed family arrangement, aimed at ownership realignment of the respective shareholdings of the family members in the Godrej companies, to maintain harmony and to better align ownership in acknowledgement of the differing visions of the Godrej family members.

According to the FSA, the first branch of the family tree, represented by Adi Godrej and Nadir Godrej, will gain complete ownership over the Godrej Industries Group, which includes the five listed companies.

The second branch of the family tree, represented by Jamshyd Godrej and his sister Smita Crishna, will gain complete ownership over the Godrej Enterprises Group of companies- including the unlisted entity Godrej & Boyce Manufacturing Company, along with the prime land bank of 3,000 acres in Mumbai.

The two groups have held shares and Board’s representation, across the group. But now after the FSA, Adi Godrej and Nadir Godrej will divest their respective shareholdings in the Godrej & Boyce Manufacturing Company to Jamshyd Godrej and Smita Crishna. Similarly, Jamshyd Godrej and Smita Crishna will divest their respective shareholdings in Godrej Consumer Products and Godrej Properties to Adi Godrej and Nadir Godrej.

Tax Implications: The divestment of any property, movable (say shares) or immovable (say land and building), by the individual parties to the family arrangement, in favour of the other parties to the said settlement, as per the terms of a bonafide family arrangement is not considered as ‘transfer’ in the Income Tax Act, and so, is not assessable to tax as capital gain.

Read more: The Godrej family saga: Business succession should be led by a common vision

 

The regular exemption from capital gains in the case of gifts, is applicable only in the hands of blood relatives. However, the parties to a family arrangement can be the members of the extended family also including cousins. Thus, exemption from capital gains tax liability, will equally apply to all the members of the family arrangement, and not just lineal ascendants and descendants.

For academic demonstration, in the above Godrej group FSA, the divesture of their respective shareholdings by Adi Godrej and Nadir Godrej in the Godrej & Boyce Manufacturing Company in favour of Jamshyd Godrej and Smita Crishna, and vice-versa will not to be considered as ‘transfer’, and as such no capital gain will arise in their hands, out of such divesture.

However, the divestment of any movable or immovable property by corporate parties to the family arrangement, in favour of other parties to the settlement, is considered as “transfer" and is assessable to tax as capital gains. The fair market valuation/ circle rate provisions of sections 50C/ 50CA/56(2)(x), are also not applicable in the hands of individuals parties to the family arrangement.

Thus, a carefully planned and meticulously drafted family settlement agreement, just like the recent Godrej Group FSA, can go a very long way in ensuring the fair, equitable and dispute-free distribution of the family business legacy, property and succession, and simultaneously, it can also save some big-big taxes.

Mayank Mohanka is the founder of TaxAaram India and a partner at S.M. Mohanka & Associates.

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