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Hindu Undivided Family FCA. A. K. Jalan & Associates Chartered Accountants Info@jalanca. com 9312279229 Hindu Undivided Family FCA. A. K. Jalan & Associates Chartered Accountants [email protected] com 9312279229 A. k. Jalan & Associates

What is HUF? Sec. 2(31) of the IT Act, 1961 defines the word ‘person’, What is HUF? Sec. 2(31) of the IT Act, 1961 defines the word ‘person’, which includes HUF. Therefore, an HUF is a separate assessable entity under the Income Tax Act, 1961 and Wealth Tax Act, 1957. However, HUF is not defined in the IT Act, 1961. It is because, the expression has a well-known connotation under the Hindu Law. Therefore, HUF must be construed in the sense in which it is understood under the Hindu Law. (Dulari Devi Ors. Vs. CED (1995) 211 ITR 524 (Orissa). The institution of Joint Hindu Family is peculiar to Hindu jurisprudence and finds its origin in ancient orthodox texts and writings of Smritikars. A. k. Jalan & Associates

Fundamental Principle The fundamental principle of the Joint Hindu Family is the Sapindaship, without Fundamental Principle The fundamental principle of the Joint Hindu Family is the Sapindaship, without which no Joint Hindu Family can be in existence. Therefore, Joint Hindu Family status is ordinarily the result of blood relation by birth or affiliation by adoption or marriage (Rukmini Bai Rathor v. CWT (1964) 54 ITR 430 (Orissa). Joint Hindu Family is a creature of law and can not be created by act of parties, except the affiliation by adoption and marriage. However, it is also true that absence of an antecedent history of jointness between a Hindu male and his ancestors is no impediment in starting his own family and having Sapinda relationship with his wife and progeny. A. k. Jalan & Associates

 A Hindu male can constitute an undivided Hindu family even with the wife A Hindu male can constitute an undivided Hindu family even with the wife and daughter. Therefore, in nature a sole-surviving coparcener is capable of procreating and the family has the potentiality to add a coparcener. A Joint Hindu Family normally joint in food, worship and estate. The property of a Joint Hindu Family may consist of ancestral property, joint acquisitions and self acquisitions thrown into the common stock. However, even in the absence of any property, the Joint Hindu Family may still be in existence as a Joint Hindu Family (Damodar Krishnaji Nirgude v. CIT (1962) 46 ITR 1252 (Bombay). Joint and undivided family is the normal condition of Hindu Society and members are living in a state of union (Hira Chand Vastaram v. CIT (1965)58 ITR 533(Cal). However, branches of family, wife-wise, is not recognized as separate Joint Hindu Family (Kalyani v. Narayanan AIR 1980 SC 1173). There are TWO principal schools of Hindu Law, namely, the Mitakshara law , which is prevalent throughout India except Bengal and the Dayabhaga law which is applicable in Bengal. The Mitakshara school is further sub-divided into four minor schools, namely, Benaras School, Mithila School, Bombay School and Madras School. A. k. Jalan & Associates

 In certain parts of Southern India, “Matriarchy system” is prevalent, which is in In certain parts of Southern India, “Matriarchy system” is prevalent, which is in contradistinction to the rest of India, where “Patriarchal System”, which represent the family having the common male ancestor as the founder. The Patriarchal System is well established and judicially recognized in whole of the country. Hindu laws are also applicable on Jains and Sikhs families alike and this position has not been altered by recent amendment and earlier codification of major branches of Hindu Law by the four statutes , viz. , The Hindu Marriage Act, 1955, The Hindu Succession Act, 1956, the Hindu Minority and Guardianship Act, 1956 and the Hindu Adoption and maintenance Act, 1956. (CWT v. Champa Kumari Singhi & Ors. (1972) 83 ITR 720 (SC); CWT v. Sardar Surjit Singh (1982) 138 ITR 186 (Cal). Persons following other religions are not constituting Hindu Families, even though in certain parts of the country converts from Hinduism to Christianity are governed through force of customs by the Hindu laws of succession, but their families are not Hindu Joint Families (P. F. Pinto v. CWT (1967)65 ITR 123 (Mysore). A. k. Jalan & Associates

What if marriages outside Hindu Community? A Hindu declares for Special Marriage Act that What if marriages outside Hindu Community? A Hindu declares for Special Marriage Act that he is not profess the Hindu religion, does not cease to be a Hindu. Such a person along with his son can constitute HUF in respect of his ancestral properties. In all such cases a declaration would be sufficient to establish that such a son was brought up as a Hindu member of the family (CWT v. R. Sridharan (1976) 104 ITR 436 (SC); (1983) 141 ITR 634 (All). However, a person married to a Christian lady and his daughter is also a Christian , he alone can not constitute an HUF. A. k. Jalan & Associates

HUF is a distinct legal entity? HUF is not a distinct legal entity for HUF is a distinct legal entity? HUF is not a distinct legal entity for all purposes from those who constitute it. A Mitakshara coparcenery Is a creature of law and can be disrupted at will by any coparcener demanding partition. The Hindu coparcenery represents a natural relationship constituted primarily by birth or affiliation by adoption and marriage(N. V. Subramanian v. WTO (1960) 40 ITR 567 (AP). Joint Family is therefore, is such every coparcener has a vested joint interest and joint possession. Therefore, a Joint Family is not entitled to sue nor can it be sued as a legal person in respect of any joint family property (Rajah Sir M. A. Muthiah Chettiar V. WTO (1964) 53 ITR 504 (Mad). However, HUF is treated separately for taxing unit distinct from members/coparceners constituting it under the specific provisions of the IT Act, 1961. Earlier higher taxation was also not considered violative of Article-14 of the Constitution (ACED v. Devaki Ammal (1995) 212 ITR 395 (SC). A. k. Jalan & Associates

Differences of Schools of Hindu Law A Joint Hindu Family under Mitakshara and Dayabhaga Differences of Schools of Hindu Law A Joint Hindu Family under Mitakshara and Dayabhaga laws are alike normally joint in food, worship and estate and the nature of properties are also same i. e ancestral properties, joint acquisitions and self acquisitions thrown into common stock. Also the basic concept of who can be members of HUF are also same in both the laws. Still there are vital difference between the two. Coparcenery is the feature of Mitakshara school and each son acquires on birth an equal interest with his father in all ancestral property held by the father and on death of father the son takes the property not as his heir but by survivorship. The essence of Coparcenery is Community of Interest and Unity of Possession. Here “Aggregate Ownership” is in existence and on partition In Dayabhaga school , the sons do not acquire by birth any interest in the ancestral property of their father, their rights arise for the first time on death of the father. Here on death sons take the property as heirs and not as survivors. Therefore, there is no coparcenery during the lifetime of the father and sons can not demand partition under Dayabhaga school during father’s life. A. k. Jalan & Associates

HUF & Coparcenacy The essence of family is the “Unity of Possession” only. Here, HUF & Coparcenacy The essence of family is the “Unity of Possession” only. Here, “Fractional Ownership” is recognized. On death of father each son takes “definite share in the property”, which does not fluctuate with births and deaths in the family. On partition, “Splitting up of Joint Possession” and “assigning a specific portion of the property” to the coparcener is taking place. Under Mitakshara school, the Karta has limited power of disposal over the family properties. Under Dayabhaga school, the father has absolute rights of alienation regarding the ancestral property. The difference in characteristics of two schools of Hindu Law do not affect the income assessment in the hands of the HUF. However, income from house property in case of HUF governed under Dayabhaga school will be treated u/s 26 of the I. T. Act, 1961 as if the same belong to joint owners, if HUF consists of brothers only. A. k. Jalan & Associates

 HUF consists of persons lineally descended from a common ancestor, including wives and HUF consists of persons lineally descended from a common ancestor, including wives and unmarried daughters, who are united by the tie of Sapindaship arising by birth, marriage or adoption. Hindu Coparcenery comprises only Hindu Male and those persons who acquire by birth an interest in the joint or coparcenery property( N. V. Narendranath v. CWT (1969) 74 ITR 190(SC). Both above terms are creature of law and can not be created by act of parties. The concept of coparcenery involves “community of interest, unity of possession and common enjoyment”. As such until partition taking place, the possession and enjoyment is common and extending to whole property. However, after recent amendment in 2005 in Hindu Succession Act, 1956, the difference between the two terms have virtually been removed. A. k. Jalan & Associates

Karta of HUF Karta acts for the HUF is normally the eldest male member. Karta of HUF Karta acts for the HUF is normally the eldest male member. A coparcener can only be Karta. A person can act Karta for bigger HUF and smaller HUF as well. Karta has defined rights and by actions Karta binds every member of the family HUF comes into existence on marriage itself ? Yes; It is true that upon partition, a single divided coparcener in the absence of other members in his branch, does not constitute an HUF (C. Krishna Prasad v CIT). But the inherited property does not loose its character of joint family property. Once such person marries, a Joint Hindu Family comes in to existence (Prem Kumar v. CIT). It is more so because, under Sec. 18 of the Hindu Adoptions and Maintenance Act, 1956, a Hindu wife can enforce her right from the moment of marriage by creating a charge on husband’s property, either self acquired or ancestral. Therefore, the status of the family is of HUF (Ashok Kumar Ratanchand v. CIT ; Also see L. Hriday Narain v. ITO (1970) 78 ITR 26 (SC). A. k. Jalan & Associates

Persons to whom Hindu Law applies? To Hindus by birth and by religion alike Persons to whom Hindu Law applies? To Hindus by birth and by religion alike (Converts to Hinduism) To illegitimate child where both parents are Hindus To illegitimate child where father is Christian and mother is Hindu and child is brought up as Hindu To Jains, Buddhists in India, Sikhs and Nambudri Brahmins To a Hindu re-converts To sons of Hindu dancing girl converted to Ishlam, where sons are brought up as Hindu by Grand Parents To Brahmos, to Aryasamaji and to Santhal To Hindus who have declared otherwise for Special Marriages Act, 1872 Hindu Law does not apply : - to illegitimate child of Hindu father from Christian mother to Hindu converts to Christianity to Hindu converts to Ishlam A. k. Jalan & Associates

Migration In case of migration of a Hindu from one place to other, his/her Migration In case of migration of a Hindu from one place to other, his/her original status will remain until under local customs and law he /she changes his basic customs. What constitute Customs? A custom is a rule, which obtain the force of law from long usage in a particular family or a class or community or in a particular area and district of the State. Hindu customs recognized by courts are as follows: -Local customs -Class customs -Family Customs A. k. Jalan & Associates

HUF – law Can Male member with wife & unmarried daughter form HUF ? HUF – law Can Male member with wife & unmarried daughter form HUF ? Yes [Surjit Lal Chhabda v. CIT (1975) 101 ITR 776 (SC)] Can a single male member, after his marriage form a HUF? Yes [CIT v. RM. AR. Veerappa Chettiar (1970) 76 ITR 467 SC)] 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 A. k. Jalan & Associates

HUF – law Can a person be a member of more than one HUF? HUF – law Can a person be a member of more than one HUF? Can the wife severe from membership of HUF by unilateral declaration, yet retain the marital tie? No, CWT v. M. A. R. Rajkumar (1997) 226 ITR 804 (AP) (FB) A Hindu male having two wives and sons from each would have one HUF or two? One, Kalyani v. Narayanan AIR 1980 SC 1173 HUF is not a distinct entity for all purposes. A. k. Jalan & Associates

Female is coparcener in HUF On and from the commencement of the Hindu Succession Female is coparcener in HUF On and from the commencement of the Hindu Succession (Amendment) Act, 2005 in a Joint Hindu Family governed by the Mitakshara law, the daughter of a coparcener shall : by birth become a coparcener in her own right in the same manner as the son; have the same rights in the coparcenary property as she would have had if she had been a son; be subject to the same liabilities in respect of the said coparcenary property as that of a son. A. k. Jalan & Associates

Partnership and HUF An HUF cannot become a partner in a firm. The Karta Partnership and HUF 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 received by a member of HUF from a firm, where he was partner on behalf of HUF for managing firms business was his individual income - CIT v. G. V. Dhakappa 72 ITR 192 (SC); Premnath v. CIT 78 ITR 319(SC). Partnership between HUF and coparcener as working partner is valid A. k. Jalan & Associates

Tax advantages of HUF is a separate entity for taxation under the provisions of Tax advantages of HUF is a separate entity for taxation under the provisions of sec. 2(31) Separate exemption limit under Income-tax Law of Rs. 1, 60, 000 Separate deduction u/s 80 G, etc. Separate deduction u/s 80 C. Separate partnership share. Separate Income-tax Deduction on Interest for self occupied House Property A. k. Jalan & Associates

 Capital Gain Exemptions for HUF Cost Inflation Index benefit available to Calculate Cost Capital Gain Exemptions for HUF Cost Inflation Index benefit available to Calculate Cost of the Asset. Tax benefit of 20% Tax on Long-term Capital Gains Saving Tax on Long-term Capital Gain possible by investing in Capital Gains Bonds of NHAI / REC Long-term Capital Gains Saving by investing in Residential Property A. k. Jalan & Associates

Investment in shares & MFs HUF can have a separate Demat Account. Can invest Investment in shares & MFs HUF can have a separate Demat Account. Can invest in shares of companies : (a) Primary Market (b) Secondary Market Enjoy Tax Free Income for Long-term Capital Gains by holding shares for more than one year Enjoy lower tax rate of 15% on Short-term Capital Gains. Can also invest in Mutual Fund A. k. Jalan & Associates

Wealth Tax on HUF Separate exemption of Wealth-tax for HUF’s upto Rs. 30 lacs Wealth Tax on HUF Separate exemption of Wealth-tax for HUF’s upto Rs. 30 lacs Wealth. One House Wealth Tax Free Productive assets of HUF fully exempt for Wealth-tax A. k. Jalan & Associates

Real Estate in name of HUF Self occupied one Residential House & the tax Real Estate in name of HUF Self occupied one Residential House & the tax gain specially by way of Interest on Loan & Repayment of Loan Special 30% deduction on Rental Income also to HUF. Exemption from Wealth-tax the real estate of HUF (Commercial / Rented Residential) A. k. Jalan & Associates

HUF can run a business HUF can be a Proprietor of one or more HUF can run a business HUF can be a Proprietor of one or more than one Business concerns. Separate name can be kept of HUF business entity. No tax Audit of HUF business if Turnover within Rs. 60 lakhs. Presumptive taxation u/s 44 AD A. k. Jalan & Associates

Member’s Income As per section 10(2) of the Income-tax Act, 1961 any sum received Member’s Income As per section 10(2) of the Income-tax Act, 1961 any sum received by an individual from Hindu Undivided Family of which he is member is exempt from tax. Amount received not as a member of Joint Family but in pursuance of some statutory provision, etc. would not be exempted in this clause. Member of joint family living apart from the other members does not effect his/her position in law to claim the right as per section 10(2). A. k. Jalan & Associates

Remuneration to Karta or members Remuneration to the Karta or other members of HUF Remuneration to Karta or members Remuneration to the Karta or other members of HUF can be paid 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 Bhuramalv. CIT 44 ITR 887(SC). Remuneration paid to the Karta or other members of the HUF should be under a valid agreement. The payment must be genuine and not excessive. J. K. B. Sahai v. CIT, 63 ITR 238 (SC). A. k. Jalan & Associates

Judicial decisions HUF Where members of HUF become the partners in a firm by Judicial decisions HUF Where members of HUF become the partners in a firm by investment of family funds & not because of any Special Services rendered by them - income will belong to HUF – D. N. Bhandarkar v. CIT 158 ITR 724. Where property was purchased by members of HUF with loan from the HUF, which was later on repaid, income from such property would be assessable as individual income of the members – -L. Bansidhar and. Sons v. CIT 123 ITR 58 (Delhi ) A. k. Jalan & Associates

Chapter VI deductions Deduction available to HUF as per section 80 C. [Insurance Premium, Chapter VI deductions Deduction available to HUF as per section 80 C. [Insurance Premium, PPF can be paid on the life of any member] Section 80 D deduction available on Mediclaim Policy on the health of any member of the family. Section 80 DD deduction for maintenance including medical treatment of a dependant who is a HUF member. Section 80 DDB in respect of Medical treatment for any member of the HUF. Section 80 G Donation to recognised Charity Trust. Sections 80 IA / 80 IB for New Industrial undertaking. A. k. Jalan & Associates

Partition of HUF The Partition of HUF can be: - Partial Partition - Full Partition of HUF The Partition of HUF can be: - Partial Partition - Full Partition A. k. Jalan & Associates

Partial Partition of HUF As per section 171(9) of the Income-tax Act, 1961 the Partial Partition of HUF As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31 -12 -1978 is not recognised. Even after Partial Partition the income of the HUF shall be liable to be assessed under the Income-tax Act as if no Partial Partition had taken place. A. k. Jalan & Associates

Full partition of HUF As per Explanation (a) to s. 171(9) of the Income-tax Full partition of HUF As per Explanation (a) to s. 171(9) of the Income-tax Act, 1961 partition means: where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition; Assessment after Partition as per s. 171 & order to be passed by the Assessing Officer. A. k. Jalan & Associates

Partition of HUF Partition need not be by Metes & bountes, if separate enjoyment Partition of HUF 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). 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. ) Motive or need for partition cannot be questioned by the Income Tax D. T. G. Sulakhe v. CIT, 39 ITR 394 (AP). A. k. Jalan & Associates

Judicial decisions – Partition In order to be acceptable or recognizable partition under section Judicial decisions – Partition In order to be acceptable or recognizable partition under section 171 the partition should be complete with respect to all members of HUF and in respect of all properties of HUF and there should be actual division of property as per specified shares allotted to each member. – Mohanlal K. Shah (HUF) v. ITO 1 SOT 316. Setting apart certain assets of HUF in favour of certain coparceners on the condition that no further claim in properties will be made by them is nothing but a partial partition and not a family arrangement not recognised in view of s. 171(9) – ITO v. P. Shankaraiah Yadav 91 ITD 228 A. k. Jalan & Associates

Legal aspects of Partition Distribution of the assets of an HUF in the course Legal aspects of Partition Distribution of the assets of an HUF in the course of partition, would not attract any capital gains tax liability as it does not involve a transfer – S. 47(i) On the basis of the same reasoning distribution of assets in the course of partition would not attract any gift tax liability, and There would be no clubbing of incomes u/s 64 as it would not involve any direct or indirect transfer. A. k. Jalan & Associates

Money received without consideration Provisions of section 56(2)(vii) applicable even to HUF if any Money received without consideration Provisions of section 56(2)(vii) applicable even to HUF if any sum of money or property is received by the HUF exceeding Rs. 50, 000 p. a. without consideration. There is no relative of HUF Gift by will or inheritance exempt. Amount or property received in contemplation of death of payer or donor exempt. A. k. Jalan & Associates

Gift of HUF Property Elementary proposition that Karta of HUF cannot gift or alienate Gift of HUF Property Elementary proposition that Karta of HUF cannot gift or alienate property except to the extent recognised under the Hindu Law, namely necessity etc – CGT v. P. Hanumanthappa 68 ITR 363, K. P. Gupta v. CIT 233 ITR 456 Reasonable limits depends upon facts - CGT v. B. V. Narasimharaju 101 ITR 74 Karta can make reasonable gifts to daughters – Sushil Kumar & Sons v. ITO 234 ITR 98 Gift on Marriage Occasion is valid – S. Lakshmamma v. Kotayya AIR 1936 Mad. 825. Gift of immovable property should be for pious purpose – CIT v Ram Gopal Rajgharia 123 ITR 693 A. k. Jalan & Associates

Gift by member to HUF As per section 64(2) a gift by a member Gift by member to HUF As per section 64(2) a gift by a member to his HUF after 31 -12 -1969 would attract Clubbing of Income in the hands of the member and as such the income from the converted property shall be deemed to arise to the individual & not to the family. And where the converted property is the subject matter of partition, any income derived from such property by the spouse would be clubbed in the hands of the individual. A. k. Jalan & Associates

Accounts and Audit Accounts - Normal I. T. Provisions Accounting Standards applicable TDS provisions Accounts and Audit Accounts - Normal I. T. Provisions Accounting Standards applicable TDS provisions after achieving Tax Audit Turnover Audit – Tax Audit u/s 44 AB Audit for claiming deductions under chapter IVA - 80 HHBA, 80 HHC, 80 HHD, 80 HHE, 80 HHF - 80 I, 80 IA, 80 IB A. k. Jalan & Associates

Computation of Income Aggregate of : - Income under the head House Property Profits Computation of Income Aggregate of : - Income under the head House Property Profits and gains from business & profession Income from capital gains Income from other sources Less: deduction under chapter VIA i. e. , 80 C, 80 DD, 80 DDB, 80 GGA, 80 HHBA, 80 HHC, 80 HHD, 80 HHE, 80 HHF, 80 IA, 80 IB, 80 L & 80 O. A. k. Jalan & Associates

Computation of Income Calculate Tax on Total Income Less: relief u/s 86, 90 & Computation of Income Calculate Tax on Total Income Less: relief u/s 86, 90 & 91 • Add: Interest u/s 234 A, B & C • Less: TDS & Advance Tax • Less: Self Assessment Tax • Balance Tax payable / Refund due A. k. Jalan & Associates

Tax planning through HUF By increasing the number of assessable units through the device Tax planning through HUF By increasing the number of assessable units through the device of partition of the HUF; By creation of separate taxable units of HUF through will in favour of HUF or gift to HUF; Through family settlement / arrangement; By payment of remuneration to the Karta and other members of the HUF; By use of loan from HUF to the members of the HUF; Through gift by HUF to its members specially to the A. k. Jalan & Associates

Thank You CA A. K. Jalan Chartered Accountants info@jalanca. com 9312279229 Thank You CA A. K. Jalan Chartered Accountants [email protected] com 9312279229