HINDU UNDIVIDED FAMILY
Introduction:
The Hindu Undivided Family (HUF) is a special feature of Hindu society. Hindu Undivided Family is defined as consisting of a common ancestor and all his lineal male descendants together with their wives and unmarried daughters. Therefore a Hindu Undivided Family consists of males and females. Daughters born in the family are its members till their marriage and women married into the family are equally members of the undivided family. On the other hand at any given point of time a coparcenary is limited to only members in the four degrees of the common male ancestor.
Hindu: In this term are included all the persons who are Hindus by religion. Section 2 of the Hindu Succession Act, 1956, elaborately declares that it applies to any person, who is a Hindu by religion in any of its forms or developments, including a Virashaiva, a Lingayat or a follower of Brahmo, Prathana or Arya Samaj, a Buddist, Jain or Sikh. In CWT. Smt. Champa Kumari Singh (1972) 83 ITR 720, the Supreme Court held that the HUF includes Jain Undivided Family.
Hindu Undivided Family (HUF)is a legal expression which has been employed in taxation laws as a separate taxable entity. It is the same thing as “Joint Hindu Family”. It has not been defined under the Income Tax Act, as it has a well defined connotation under Hindu Law.
A Hindu Undivided Family (HUF) is a separate entity for taxation under the provisions of sec. 2(31) of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity , it means that the same person can be assessed in two different capacities viz. as an individual and as Karta of his HUF. Dotax planning with HUF.
How HUF comes into existence :
A Hindu male with his wife and children automatically constitutes the HUF. The HUF is a creature of Hindu Law. It cannot be created by acts of any party save in so far as by adoption or marriage, a stranger may be affiliated as a member thereof. An Undivided Family which is a normal condition of the Hindu society is ordinarily joint not only in estate but in food and worship. The joint family being the result of birth, possession of joint property is only an adjunct of the Joint Family and is not necessary for its constitution.
Basic requirements for the existence of an HUF are as follows :
(i) Only one co-parcener or member cannot form an HUF Family is a group of people related by blood or marriage. A single person, male or female, does not constitute a family.
However the property held by a single co-parcener does not lose its character of Joint Family property solely for the reason that there is no other male or female member at a particular point of time. Once the co-parcener marries, an HUF comes into existence as he alongwith his wife constitutes a Joint Hindu Family . as held in the case of Prem Kumar v. CIT , 121 ITR 347 (All.)
(ii) Joint Family continues even in the hands of females after the death of sole male member :
Even after the death of the sole male member so long as the original property of the Joint Family remains in the hands of the widows of the members of the family and the same is not divided amongst them; the Joint Hindu Family continues to exist. CIT v. Veerapa Chettiar, 76 ITR 467(SC)
(iii) An HUF need not consist of two male members- evenone male member is enough :
The plea that there must be at least two male members to form an HUF as a taxable entity, has no force. – Gauli Buddanna v. CIT, 60 ITR 347 (SC); C. Krishna Prasad v. CIT 97 ITR 493 (SC) and Surjit Lal Chhabda v. CIT, 101 ITR 776 (SC)
A father and his unmarried daughters can also form an HUF, CIT v. Harshavadan Mangladas, 194 ITR 136 (Guj.)
Further on partition of an HUF a family consisting of a co-parcener and female members is to be assessed in the status of an HUF.
Nucleus of HUF :
It is many times argued that existence of nucleus or joint family property is necessary to recognize the claim of HUF status in respect of any property or income of an HUF. It has been established now that since the HUF is a creature of Hindu Law, it can exist even without any nucleus or ancestral joint family property.
Manager of HUF or Karta :
The person who manages the affairs of the family is known as Karta. Normally the senior most male member of the family acts as Karta. However a junior male member can also act as Karta with the consent of the other member. Narendrakumar J. Modi v. Seth Govindram Sugar Mills 57 ITR 510 (SC). However in view of the present social mores and needs of the modern progressive society this decision of the Supreme Court needs to be revised / reviewed.
Besides the same person can be taxed as both individual and Karta of an HUF . The individual and the HUF are two different units of taxation i.e. two different assesses CIT v. Rameshwarlal Sanwarmal 82 ITR 628 (SC).
Joint Family Property :
The following types of properties are generally accepted as joint family property :
(i) Ancestral property;
(ii) Property allotted on partition;
(iii) Property acquired with the aid of joint family property;
(iv) Separate property of a co-parcener blended with or thrown into a common family hotchpot. The provisions of sec. 64 (2) of the Income Tax Act, 1961 have superseded the principles of Hindu Law, in a case where a co-parcener impresses his property with the character of joint family property.
A female member cannot blend her separate property with joint family property but she can make a gift of it to the HUF. Pushpadevi v. CIT 109 ITR 730 (SC). A female member can also bequeath her property to the HUF, CIT v. G.D. Mukim, 118 ITR 930 ( P & H ).
Branches of HUF :
An HUF can have several branches or sub-branches . For example, if a person has his wife and sons, they constitute an HUF. If the sons have wives and children, they also constitute smaller HUFs. If the grandsons also have wives and children, then even they will also constitute still smaller or sub-branch HUFs. As stated above, the HUF is a creature of Hindu Law and these entities are HUFs alongwith the bigger HUF of the father or the grandfather. It is immaterial whether these smaller HUFs possess any property or not. Property can be acquired by any mode; by partition of bigger HUF or by gifts from any member of the family or even by a stranger or by will with unequivocal intention of the donor or the testator that the said gift or bequest will form the joint family property of the donee or the testatee.
An HUF can be composed of a large number of branch families, each of the branch itself being an HUF and so also the sub-branches of more branches. CIT v. M.M.Khanna 49 ITR 232 (Bom).
Partition of HUF :
Section 171 of the Income Tax Act, 1961 deals with assessment of an HUF, after partition. Clauses (a) of the explanation to sec.171 defines “Partition” of an HUF. Where the property admits of a physical division, then a physical division of the property thereof, but, where the property does not admit of a physical division then such division as the property admits of, will be deemed to be a “partition”.
`Partition need not be by Metes & bountes, if separate enjoyment can, otherwise the secured and such division is effective so as to bind the members. Cherandas Waridas, 39 ITR 202 (SC).
However the members of an HUF can live separately and such an act would not automatically amount to partition of the HUF. Shiv Narain Choudhary v. CWT 108 ITR 104 (All.)
A finding of partition by the assessing officer u/s. 171 of the Income Tax Act, 1961 is necessary.
Partial partition of an HUF has been derecognised by the provisions of sec. 171(9) & moreover, according to sec. 171(9), any partial partition effected after 31.12.78, is not recognized.
Motive or need for partition cannot be questioned by the Income Tax Department. T. G. Sulakhe v. CIT, 39 ITR 394 (AP).
I. Following methods or devices may prove useful in reducing the tax incidence in the case of HUF :
(i) By increasing the number of assessable units through the device of partition of the HUF;
(ii) By creation of separate taxable units of HUF through will in favour of HUF or gift to HUF;
(iii) Through family settlement / arrangement;
(iv) By payment of remuneration to the Karta and other members of the HUF;
(v) By use of loan from HUF to the members of the HUF;
(vi) Through gift by HUF to its members specially to the female members;
(vii) Through other methods / devices;
The aforesaid methods / devices are discussed in detail below as follows :
Partition of HUF
In the case of certain HUFs, the tax liability can be reduced by partition of the HUF. This can be easily done in a case where the partition results in separate independent taxable units. Suppose an HUF consists of father and two sons and there are two business establishments, a house property and other sources of income with the HUF. If the members of the HUF have no other sources of income then partition of the HUF can be done by giving one business establishment to each of the sons, house property to the father and dividing the other sources in such a manner so as to make the partition equitable. Such a partition of HUF will reduce the tax liability considerably.
The position may, however, be different in a case where the members of the HUF have got high individual incomes. In such a case it is not advisable to break or partition the HUF. The HUF should be allowed to continue as a separate taxable unit.
Then there may be a case where the HUF has got only one business establishment which does not admit of a physical division. For the sake of partition the business may be converted into a partnership firm or a company. At present, rate of firm’s tax and the rate of tax in case of a company, is 30% flat, therefore conversion of HUF business into a partnership or a company is not advantageous. The incidence of , in such a case, can be better reduced by payment of remuneration to the members of the HUF.
Partial partition of HUF is also a very effective device for reducing its tax liability. Partial partition is recognized under the Hindu Law. However partial partition of an HUF has been de-recognised by the provisions of sec. 171(9) of the Income Tax Act, 1961 according to which any partial partition effected after 31.12.78, will not be recognized.
The provisions of sec. 171(9) have been declared ultra-vires by the Madras H.C. in the case of M.V.Valliappan v. ITO, 170 ITR 238. The Supreme Court has granted S.L.P. and stayed the operation of the above decision of Madras H.C. as reported in 171 ITR (St.) 52. The Gujrat H.C. has, however, held the ITAT justified in following the aforesaid decision of Madras H.C., CIT v. M. M. Panchal HUF, 210 ITR 580 (Guj.)
Notwithstanding the provisions of sec. 171(9) partial partition, can still be used as a device for tax planning in certain cases. An HUF not hitherto assessed as undivided family can still be subjected to partial partition because it is recognized under the Hindu Law and such partial partition does not require recognition u/s. 171 of the Income Tax Act,1961. Thus a bigger HUF already assessed as such, can be partitioned into smaller HUFs and such smaller HUFs may further be partitioned partially before being assessed as HUFs. Besides any HUF not yet assessed to tax can be partitioned partially and thereafter assessed to tax.
The following legal aspects in respect of partition of HUF, should also be kept in mind while the partition of HUF which are as under :-
(i) Distribution of the assets of an HUF in the course of partition, would not attract any capital gains taxliability as it does not involve a transfer.
(ii) On the basis of the same reasoning distribution of assets in the course of partition would not attract any gift tax liability, and
(iii) There would be no clubbing of incomes u/s. 64 as it would not involve any direct or indirect transfer.
(II) Creation of HUFs as separate taxable units by will in favour of or gift to HUF :
It is now well settled law that there can be a gift or will for the benefit of a Joint Hindu Family . It is immaterial whether the giver is male or female, whether he or she is a member of the family or an outsider. What matters is the intention of the donor or testator that the property given is for the benefit of the family as a whole.
Suppose there is an HUF consisting of Karta, his wife, his two sons, daughter-in-law and grand children. A gift or will can be made for the benefit of the two smaller HUFs of the sons. The bigger HUF will continue as a separate taxable unit evenafter the death of the Karta.
There may also be a case where the father or mother has got self acquired properties. They have a son and his family but there is no ancestral property as a corpus of their family. Then, father & mother or both can leave their property for the benefit of their son’s family, through their will (s).
Similar result can be obtained by means of a gift for the benefit of a joint family. It may be pointed out here that an HUF cannot be created by act of parties but a corpus can be created for an already existing HUF through the medium of a gift or will etc.
(III) Through Family Settlement / Arrangement :
Family settlements / arrangements are also effective devices for the distribution of ancestral property. The object of the family settlement should be broadly to settle existing or future disputes regarding property, amongst the members of the family. The consideration for a family settlement is the expectation that such settlement will result in establishing or ensuring amity and goodwill amongst the members of the family. Ram Charan Das v. G.N.Devi, AIR 1966 SC 323 and Krishna Beharilal v. Gulabchand, AIR 197 SC 1041. Such an agreement is intended to avoid future disputes and to bring about harmony amongst the members of the family . Sahu Madho Das v. Mukand Ram, AIR 1955 SC 481. Briefly stated though conflict of legal claims, present or future is generally a condition for the validity of family arrangement, it is not necessarily so. Even bonafide disputes, present or possible in future, which may not involve legal claims, will also suffice to effect a family arrangement.
As family arrangement does not involve a transfer, there would be no gift and capital gains taxliability or clubbing u/s. 64.
By a family arrangement tax incidence is considerably reduced or it may even be nil. Suppose a family consists of Karta, his wife, two sons and their wives and children and its income is Rs. 6,00,000/-. The tax burden on the family will be quite heavy. If by family arrangement, income yielding property is settled on the Karta, his wife, his two sons and two daughter-in-law, then the income of each one of them would be Rs. 100,000/- which would attract no tax & if the assessment year is 2007-08, then the tax liability would be reduced form Rs. 100,000/- to nil.
(IV) By payment of remuneration to the Karta and / or other members of the family :
The other important measure of tax planning for an HUF is to pay remuneration to the Karta and / or other members of the HUF for services rendered by them to the family business. The remuneration so paid would be allowed as a deduction from the income of the HUF and thereby tax liability of the HUF would be reduced, provided the remuneration is reasonable and its payment is bonafide. There is no legal bar against payment of remuneration to the Karta or other members of HUF for services rendered to the family in carrying on the business of the family or looking after the interests of the family in a partnership business. Jugal Kishore Baldeo Sahai v. CIT 63 ITR 238 (SC). The payment must be for service to the family for commercial or business expediency. Jitmal Bhuramal v. CIT 44 ITR 887(SC). Remuneration paid to the Karta or other members of the HUF should be under a valid agreement. The agreement must be valid, bonafide, on behalf of all the members of the HUF and in the interest of and expedient for the family business. Further the payment must be genuine and not excessive. J. K. B. Sahai v. CIT, 63 ITR 238 (SC).
Agreement with whom to be entered :
The agreement should be between the Karta and other members of the family. The agreement need not always be in writing . An agreement to pay salary / remuneration can also be inferred from the conduct of the parties. CIT v. Raghunandan Saran, 108 ITR 818 (All.). However, it would be better if the agreement to pay remuneration is reduced in writing.
For A.Y. 2007-08, if the total income of an HUF is Rs. 5,00,000/- then income tax on HUF would be Rs. 1,00,000/-. If salary is paid to four members @ Rs. 1,00,000/- net income of HUF would be Rs. 5,00,000 - Rs. 4,00,000 ( 4 x 1,00,000 ) = Rs. 1,00,000/-, tax on it would be Rs. NIL. The income of each member would be Rs. 1,00,000/-. Therefore tax on members would be NIL. Thus the tax saving would be of Rs. 1,00,000/-.
The distinction between ordinary and specified HUF’s has been done away w.e.f. 1.4.1997 i.e. A.Y. 1997-98. For Assessment Year 2007-08 the rate of tax on all HUF’s would be the same as in the case of an individual. This change in the rates of tax has brought a lot of relief to specified HUF’s i.e. the HUF’s with one or more members having taxable income. After the aforesaid amendment whereby the concept of specified HUF’s has been done away with, w.e.f. A.Y. 1997-98 this method of tax planning will be much easier and it will bring more tax relief to the HUF’s.
(V) By loan to the members from the HUF :
If the business, capital or investment of the HUF is expanding then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.
Where property was purchased by members of HUF with loan from the HUF, which was later on repaid the income from such property would be assessable as individual income of the members
L. Bansidhar and Sons v. CIT 123 ITR 58 (Delhi ).
Where after partition of an HUF, two members became partners in three firms on behalf of their respective HUFs and they also became partners in a fourth firm, the funds were obtained by means of loans from other three firms, the share incomes of the members from the fourth firm was assessable as their individual income only.
CIT v. Champaklal Dalsukhbhai, 81 ITR 293 (Bom.).
(VI) By gift of movable assets of the HUF to its female members:
The Karta of an HUF cannot gift or alienate HUF property but for legal necessity, for pious purposes or in favour of female members
of the family. Gift of immovable property within reasonable limits, can be made by a Karta to his wife, daughter, daughter-in-law or even to a son out of natural love and affection. Gift of immovable property within reasonable limits can be made only for pious purpose e.g. marriage of a daughter.
Therefore, if the HUF has excess funds or property, then, the Karta can make gift of movable assets to his wife, daughter or daughter-in-law at one go or over a period of time. However, it may be noted that with effect from 1.10.98, the applicability of Gift Tax is no more in force. Therefore, no Gift Tax will be payable by a person making the gift from on or after 1.10.98. However, w.e.f. 1.10.2004 Gift received from other than relatives exceeds
Rs. 25,000/- then that amount is liable to Income Tax u/s. 57 of Income Tax Act, 1961. It may be remembered that gift for marriage or maintenance of daughter(s) is not liable to Gift Tax. Further clubbing provisions of sec. 64 would not be applicable if the gift in validly made in accordance with the rules of Hindu Law. Besides, if a gift made to the minor daughter of the Karta is valid then the provisions of sec. 60 of the Income Tax Act would not be attracted. CIT v. G. N. Rao, 173 ITR 593 (AP). Whereby, section 60 relates to transfer of income where there is no transfer of assets.
(VII) Through other Methods / Devices :
There are other methods / devices which may be used to reduce the incidence of taxation in the case of an HUF, e.g. :
(i) Vesting of individual or self-acquired property in a family hotchpots.
(ii) Family reunion after partition.
(iii) Through inheritance by succession – Bequests by Will, now recognized by sec. 30 of Hindu Succession Act, can also be utilized for tax-planning.
J. Properties received under a Will :
The status of the property would be the same as is analysed in the case of properties received by way of gifts as discussed above, that is to say, that the properties will be regarded as the properties of the Hindu Undivided Family only, if the recipient has a son.
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K. Properties inherited from an ancestor on the ancestor dying
intestate :
As held by the Supreme Court in the case of CWT v. Chander Sen (161 ITR 370 ) the person inheriting the property from his ancestor, even if he has a wife and son would receive the property absolutely in his own right and his son would not have any interest in that property.
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L. Unequal Distribution on partition :
The Supreme Court in the case of Commissioner of Gift-Tax v. N. S. Getti Chettiar, 82 ITR 599 held that there is no liability to Gift Tax if there is an unequal distribution of assets amongst members of the family on partition.
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M. Reunion : The conditions for a valid reunion are brought
out in the case of CIT v. A. M. Vaiyapuri Chettiar and another 215 ITR 836
The condition precedent for a valid reunion under the Hindu Law are : (1) There must have been a previous state of union. Reunion is possible only among the persons who were on an earlier date members of a Hindu Undivided family ; (2) There must have been a partition in fact ; (3) The Reunion must be effected by the parties or some of them who had made the partition; and (4) There must be a junction of estate and reunion of property because, reunion is not merely an agreement to live together as tenants in common. Reunion is intended to bring about a fusion in the interest and in the estate among the divided member of an erstwhile Hindu Undivided Family, so as to restore to them the status of an HUF once again and therefore, reunion creates a right in all the reuniting coparcener, in the joint family properties which was the subject matter of partition among them, to the extent they were not dissipated before the reunion.
The reunion effected by the assessee under the deed of reunion was valid. The entire properties of the erstwhile joint family prior to the partition would be the properties of the reunited joint family. The Income Tax Officer might have the option to assess the income arising from the entire properties belonging to the erstwhile joint family prior to the partition in the hands of the reunited, Hindu Undivided Family.
Representative of HUF in a Partnership Firm :
An HUF cannot become a partner in a firm. The Karta or a member of the HUF can represent the HUF in a firm. A female member can also represent HUF in a partnership firm, CIT v. Banaik Industries 119 ITR 282 (Pat.)
Remuneration to Karta or Member from Firm :
Where remuneration was received by a member of HUF from a firm, where he was partner on behalf of HUF for managing firms business such remuneration was his individual income, CIT v. G. V. Dhakappa 72 ITR 192 (SC); Premnath v. CIT 78 ITR 319 (SC).
However, income received by a member of HUF from a firm or company is taxable as the income of the HUF, if it is earned detriment to or with the aid of family funds, otherwise it is taxable as the separate income of the member, P.N. Krishna v. CIT 73 ITR 539 (SC).
HUF and Firm :
Members of HUF can constitute Partnership without effecting a partition or without disturbing the status of joint family. Ratanchand Darbarilal v. CIT 15 ITR 720 (SC). However , on viewing at the present rate of firms tax, conversion of HUF business into partnership is not advantageous.
The Landmark decisions on the subject of HUF are as follows:
(i) Krishna Prasad v. CIT, 97 ITR 493 (SC)
On partition between father and sons, the shares which sons obtained on partition of the HUF with their father, is the ancestral property. As regards his male issues who take interest in the said property on birth. Therefore one of the sons who was not married at the time of partition will receive the property as his HUF property, however income therefrom will be taxed as the HUF income from the date of his marriage.
(ii) A.G. v. A.R. Arunachalam Chettiar, 34 ITR 421 (PC)
A Mitakshara joint family consisted of father and son. On death of a son the father and the widow of the son constitute the HUF.
(iii) Gowli Buddanna v. CIT, 60 ITR 293 (SC)
A Joint family may consist of a single male member with his wife and daughter/ s and it is not necessary that there should be two male members to constitute a joint family.
(iv) N.V. Narendranath v. CWT, 74 ITR 190 (SC)
The property received by a coparcener on partition of the HUF is the HUF property in his hands vis-à-vis the members of his branch i.e. with his wife and a daughter.
(v) L. Hirday Narain v. ITO, 78 ITR 26 (SC)
After the partition between the father and his sons, the father and his wife constitute a Hindu Undivided Family which gets enlarged on the birth of a son.
(vi) CIT v. Veerappa Chettiar, 76 ITR 467 (SC)
Even when a joint family is reduced to female members only it continues to be a HUF.
(vii) CIT v. Sandhya Rani Dutta, 248 ITR 201 (SC)
Female members cannot create or form an HUF by their acts even under the Dayabhaga School of Hindu Law.
(viii) Pushpa Devi v. CIT, 109 ITR 730 (SC)
The right to blend the self-acquired property with HUF property is restricted to a coparcener ( male member of HUF ) and not available to a female member. However, there is no restriction on a female member gifting her property to the HUF of her son.
(ix) Surjit Lal Chhabda v. CIT, 101 ITR 776 (SC)
The property which was thrown into the common hotchpot was not an asset of a pre-existing joint family of which the assessee was a member. It became an item of joint family property for the first time when the assessee threw what was his separate property into the common family hotchpot. Therefore, the property may change its legal incidence on the birth of the son, but until that event happens, the property, in the eye of Hindu Law, is really the property of the assessee.
Compiled By: AKSHAY JOSHI
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