PRESENTATION ON HINDU UNDIVIDED FAMILY ORGANISED BY CA BRANCH DEHRADUN ON DECEMBER 19, 2014 AT DEHRADUN ICAI BRANCH Presented by: CA Verendra Kalra
THE HINDU LAW • Acts Codified o Hindu law is basically derived from Srutis, Smritis, and customs. In post independent India, the following Acts have codified some of these aspects of the Hindu Law: § Hindu Marriage Act, 1955 § Hindu Succession Act, 1956 [ significantly amended by The Hindu Succession (Amendment) Act, 2005] § Hindu Minority and Guardianship Act, 1956 § Hindu Adoptions and Maintenance Act, 1956 § The Hindu Women’s Rights to Property Act, 1937 HINDU UNDIVIDED FAMILY 2
AN HUF • The Meaning o o o A joint Hindu family is a group of relatives tied together by ties of kinship & marriage and descended from a common ancestor. HUF is automatically constituted on marriage It includes children, children's children down the line, spouses. HUF is formed by the status of person in a family and not through any contract All males lineally descended from common ancestor Their wives and daughters o Persons belonging to Jain, Sikh and Buddhist community can also constitute an HUF HINDU UNDIVIDED FAMILY 3
SCHOOL OF THOUGHT • Mitakshara School o o The Mitakshara School exists throughout India except in the State of Bengal and Assam. Mitakshara is applicable wherever Dayabhaga is silent. The Inheritance is based on the principle of propinquity i. e. the nearest in blood relationship will get the property. ‘Sa-pinda’ relationship is of blood. The right to Hindu joint family property is by birth. So, a son immediately after birth gets a right to the property. • Dayabhaga School o o It exists in Bengal and Assam only. Not being discussed being of lesser relevance. HINDU UNDIVIDED FAMILY 4
SCHOOL OF THOUGHT • Mitakshara School o o o The system of devolution of property is by survivorship ( subject to amendments in 2005 in Hindu Succession Act). The share of coparcener in the joint family property is not definite or ascertainable, as their shares are fluctuating with births and deaths of the coparceners. Coparcener has no absolute right to transfer his share in the family property, as his share is not definite. HINDU UNDIVIDED FAMILY 5
CORPUS OF AN HUF • Corpus Formation of an HUF o o Once a member of an HUF receives any ancestral property from any ancestor three generations above him, an HUF’s corpus is automatically created. Another way to form the corpus of an HUF is by receiving an asset or property by way of gift from a lineal ascendant/outsider with a specific instruction by the donor that the same is being gifted to the HUF. Existence of nucleus or joint family property is not necessary to recognize the claim of status of an HUF. This may have relevance only from Income Tax point of view. It has been established that since the HUF is a creature of Hindu Law, it can exist even without any nucleus or ancestral joint family property. HINDU UNDIVIDED FAMILY 6
KARTA • Who is a Karta o o o A joint family is headed by a Karta who is normally the eldest living male member of the family He is the head of the Joint family He acts on behalf of the joint family. Karta has some peculiar rights and obligations under traditional Hindu Law, he has the power and duty of superintendence of how the joint family is run The position of the Karta is "Sui generis". Sui generis in the sense that his position is not that of the Manager of a Commercial Firm and his relationship with the other members is not that of the Principal and Agent or Firm and Partners. HINDU UNDIVIDED FAMILY 7
KARTA • Who can be a Karta o o o If Karta passes away, the next heir in line can be Karta Wife cannot become the Karta until there is a surviving son in the family. In case all the sons are minors, then the wife can be a Karta in a representative and Guardian Capacity. After amendment in the Hindu Succession Act, daughter of a coparcener has equal right as of a son. Therefore, daughter being coparcener and can also be a “Karta”. A minor male(coparcener) may also act as a Karta through his legal guardian till he becomes a major. The right to be a Karta can be given up his right and the next son or daughter in line can take his place. The Karta can function in dual capacity and can claim remuneration and other benefits as Manager from the HUF HINDU UNDIVIDED FAMILY 8
KARTA • The Power of Alienation o "Alienation" means "Transfer of Property from one person to another by way of a Sale, Gift, Lease or Mortgage. o The Karta can alienate the joint family property with or without the consent of the other coparceners. No consent is required in the following cases: For the Purpose of Legal Necessity For the benefit of the Estate and For the performance of Indispensable Religious Duties § § § o However such an alienation can be challenged by the continuing coparceners as not being for legal necessity or benefit of estate within 12 years of knowledge of transfer. HINDU UNDIVIDED FAMILY 9
KARTA • Other Powers o o o o o Managing the affairs of HUF Control and become custodian of finances Can borrow money for & on behalf of HUF Spend money for the family & not accountable for it. Not liable to submit account to anyone. Can make partition of the family suo moto. He can enter into contracts on behalf of HUF and may allow others to represent HUF Can Gift away the movable properties of HUF for natural love & affection but within reasonable limit. Can transfer the immoveable property for pious purposes or the legal necessity or for benefit of the family. HINDU UNDIVIDED FAMILY 10
KARTA • Spending Powers o o o The Karta has no special interest therein. The right of a son or nephew in the income is not a right to an exact fraction of the income. The Karta may well spend more on a son whose family is large or who has special aptitude or necessity. [CIT v. Devan Krishna Kishore 9 ITR 695 (PC)] HINDU UNDIVIDED FAMILY 11
COPARCENERS • Coparceners o o o Within the joint family there is a narrower body called the Coparcenary is restricted to four levels of living order, i. e. consisting of four successive generations including the last male holder of the property. This includes the eldest male member + 3 generations. This special group of people are called coparceners and have a definitive right in ancestral property right since the moment of their conception. Hindu coparcenaries includes the sons-daughters, grandsonsgranddaughters and great-grandsons-great grand daughters of the holder of the joint family property. By virtue of their birth, they acquire an interest in the property. HINDU UNDIVIDED FAMILY 12
CONCEPT OF COPARCENERS • As long as A is alive, Coparcenary consists of A, B 1, B 2, B 3, C 1, C 2, C 3, C 4, D 1, D 2, D 3, D 4. The descendents in the fifth degree E 1, E 2, E 3 and E 4 are members but not coparceners in the HUF • On A’s Death, the Coparcenary will then include E 1, E 2, E 3 and E 4, now being in the fourth degree of descent from the Senior Coparcener • Even if B 1, B 2 or B 3 in the second degree, predecease A, E 1, E 2 and E 3 do not become coparceners, as they still constitute the Fifth Degree in lineage. A B B 2 B 3 C 1 C 2 C 3 C 4 D 1 D 2 D 3 D 4 E 1 E 2 E 3 E 4 HINDU UNDIVIDED FAMILY 13
FOUR DEGREES OF COPARCENERS • As observed in the Concept of Coparceners in the previous slide, on death of the common male ancestor, males of another generation will be added to the Coparcenary i. e. the Coparcenary after his death will consist of his sons, his grandsons and his great grandsons. • After the death of the common ancestor, the Coparcenary may consist of collateral brothers and their progeny in the male line up to descendants of the fourth degree including the brothers. • Coparcenary is not restricted to four degrees from the Common ancestor but to four degrees from the living holder of the HUF Property, i. e. the senior most living coparcener of the family. HINDU UNDIVIDED FAMILY 14
BIG & SMALL HUFs • The HUF consisting of all the persons in the Chart alongside namely, the coparceners A, B 1, B 2, B 3, C 1, C 2, C 3, C 4, D 1, D 2, D 3, D 4 and the members E 1, E 2, E 3 and E 4 constitutes the bigger HUF. • A smaller HUF would consist of B, C 1, C 2, D 1, D 2, E 1 and E 2. • Gift of property from Bigger HUF to Smaller HUF is feasible and will form property of smaller HUF and only distribution of property thus takes place and not partition. Section 64(2) is not applicable in this case. A B B 2 B 3 C 1 C 2 C 3 C 4 D 1 D 2 D 3 D 4 E 1 E 2 E 3 E 4 HINDU UNDIVIDED FAMILY 15
MEMBERS v. COPARCENERS • Who can be Coparcener o o § § § The system of Coparcenary is a narrower institution This group of persons, unlike the joint family, is related to each other only by blood or through a valid adoption. While there may be many members of an HUF, only a few of the members may be Coparceners of the HUF. All coparceners are members of HUF, all members are not coparceners. The following persons cannot be coparceners: The Husband’s wife Father’s wife and lineal descendant’s wives Illegitimate sons and daughters An insane member of the family Member who renounces his religion A minor coparcener, if given in adoption HINDU UNDIVIDED FAMILY 16
DAUGHTERS AS COPARCENERS On 9 th September 2005, the Hindu Succession Act, 1956 was amended to provide that a daughter too could be a coparcener i. e. joint heir, like her brother to the joint family's assets and she too could enforce the partition of the family property to claim her individual share. She continues to be the coparcener in her father's HUF even after she gets married and forms another HUF with her husband. Now, o Daughter of a coparcener shall by birth become coparcener in her own right in the same manner as son. o Daughter has the same rights in the coparcener property as she would have had if she had been a son. o Daughter is allotted the same share as to the son. o Married women have rights in two HUFs-their father's as coparcener and their husband's as member. HINDU UNDIVIDED FAMILY 17
INTEREST OF COPARCENERS • Extent & Transferability of Interest of Coparceners o o A Coparcener has a right over the property of the family in the case of Partition of the HUF A coparcener's interest is not fixed & it fluctuates by birth and deaths in the family A coparcener can sell or gift away his interest to another coparcener or even a third party, without the consent of other coparceners. A third parties’ right to take possession of property along with rest of Coparcenary is limited. The family can buy the third party out in order to maintain integrity of the house and to prevent a stranger from getting in with the family. This right is given by Transfer of Property Act as well as the Partition Act. HINDU UNDIVIDED FAMILY 18
RIGHTS OF COPARCENERS • Extensive Rights to Coparceners o o Any coparcener can at anytime seek a partition of his share. The continuing coparceners can seek to buy out the share of coparcener expressing his intention to move out by exercising the right of ‘pre-emption’. HINDU UNDIVIDED FAMILY 19
LIABILITY OF COPARCENERS • Privileges not without liability o o o It is generally presumed that money required for carrying on family business is a family necessity and that the business is carried on with the consent or acquiescence of all the members of the family. Thus, if debts are incurred by the Manager in the ordinary course of the family business, all the Coparceners become liable. However, their liability is limited to the extent of their interest in the family property and not beyond that. In case of an act contrary to the interest of the HUF is done by the Karta, the adult coparceners become personally liable if they themselves are actually contracting parties along with the Karta, or if they ratify the contract entered into by the Karta HINDU UNDIVIDED FAMILY 20
MINOR AS COPARCENERS • Can a Minor be a Coparcener? o o o Yes, a minor can be a Coparcener. The moment a male child takes birth in the joint Hindu family, he gets the birth right in the Coparcenary property. Hindu law makes no sort of distinction between major and minor coparceners in respect of their rights in the joint family estate – However, the same is a debatable issue in view of the demerits of a Minor Coparcener discussed later A minor coparcener is not a major coparcener until he attains the age of 18 years. A minor coparcener, who does not become personally liable for any debt or contract unless the same is ratified by him after attaining majority HINDU UNDIVIDED FAMILY 21
MINOR AS COPARCENERS • Minor Coparcener-Demerits o o o Whereas a major coparcener can effect a severance or partition at his will, the minor coparcener cannot of his own will cause himself to be separated nor can he authorize anyone on his behalf to separate him. He can institute a suit for partition through a next friend in a court of law. The court will take cognizance of the situation and would enforce partition only when it is satisfied that the partition would be beneficial to or promote the interests of the minor. A minor after becoming of age can reopen the partition if he can prove that the partition was not for his benefit or it was unfair with regard to him. HINDU UNDIVIDED FAMILY 22
MEMBERS • Rights of Members o o o The wife of a coparcener cannot force a claim for partition. The members of the HUF which include male and female members, daughters and children of the male members are entitled to maintenance. Maintenance includes food, shelter, clothing, education, medical aid and marriage. A members of the HUF is entitled to own and possess his separate property besides his interest in the HUF property. The widow and children of a deceased coparcener have the right to be maintained out of the HUF property. HINDU UNDIVIDED FAMILY 23
ANCESTRAL PROPERTY • As per Hindu law, ancestral property means property acquired by forefathers. Therefore, any property which is received by the coparcener on partition is always considered as ancestral property. • However, it is to be noted that if the coparcener is unmarried on the date of partition then income from such property would be assessed in his hands in individual capacity till he gets married, reason being that single person cannot constitute family. Till he gets married, he is the absolute owner and can dispose it in any manner he likes. Therefore, in the absence of family, the income from such property is liable to be assessed in individual capacity. (C Krishna Prasad-CIT 97 ITR 343 SC. ) HINDU UNDIVIDED FAMILY 24
COPARCENARY PROPERTY Coparcenary property is wider than the expression ‘ancestral Property’. It would include the following: • Ancestral property i. e. the property inherited from father, grandfather or great grandfather; share allotted on partition; • Property acquired by the coparceners with joint efforts. In Madanlal v. Yogabai AIR 2003 SC 1880, it has been held that property raised and developed by joint efforts of father and sons would be joint family property; • Property acquired with the aid of or on account of coparcenary property. • Property of the coparcener thrown into common hotchpots of family funds. • The property received by HUF having ancestral property as gift or under a will. Intention of the donor is relevant while considering the character of the gifted property. (M. P. Periakaruppan Chettiar-vs-CIT 99 ITR 1 SC. ) HINDU UNDIVIDED FAMILY 25
HUF PROPERTY Whether property inherited from father can be treated as HUF property? • As per the old Hindu law, the property inherited by a coparcener was considered as ancestral property. • But after the amendment in 2005 in Hindu Succession Act, the property of father devolves by testamentary or intestate succession and not by survivorship. The father has absolute right over the property acquired by him on account of personal efforts or through borrowed funds. He can dispose of such property as he wishes. Hence, property inherited from father cannot be treated as ancestral property. [CWT-vs-Chander Sen 161 ITR 370 SC)] HINDU UNDIVIDED FAMILY 26
PRPERTY INHERITED BY SON • The son inherits the individual property of his father as an individual under the Hindu Succession Act and not in the status of HUF • Property devolving under section 8 of the Hindu Succession Act on the legal heirs should be treated as individual property and the income arising from the said property should be assessed in the status of an individual. [CIT v. A. P. S. Parameshwaran Pillai(2000) 241 ITR 748 (Mad)] • In Prabhashchandra Jha v. CWT (2007) 291 ITR 335 (MP) it was held that since the property inherited by the assessee as an individual from his individual father was not thrown into the common stock of the family before 31 -12 -1969, it was taxable as a separate property and not as property of the HUF. HINDU UNDIVIDED FAMILY 27
SURVIVORSHIP • Post the recent amendment in Hindu succession Act in 2005, Under Section 6(3) and Explanation to section 6(3) on the death of a Hindu his interest in family property shall devolve by succession and not by survivorship. • The succession can be testamentary (by will) or intestate (without a will) • Therefore the coparcener may make a will bequeathing his interest in the HUF property to any person, a coparcener or a member. • If he does not leave a will, the intestate succession will be as per the rules of succession as laid does in section 8 for males and general rules of succession under section 15 for females • The Interest of a deceased which was there in the original explanation to Section 6 provides that shares would be allocated as if a notional partition had taken place before his death. • This would apply also to the death of a coparcener like wife who was not entitled to claim partition in her own right. HINDU UNDIVIDED FAMILY 28
HUF PROPERTY • The expression Joint family/HUF property is still wider–A property may not be either ancestral or Coparcenary property yet may be considered as HUF property in certain cases. • There may be a family with a single male member without having ancestral/Coparcenary property. Such family may receive gift from relatives or friends of members of family. • Further, the single male member of such family may blend his self acquired property into joint family property. Such property would neither be ancestral nor Coparcenary property but certainly be HUF property. • To buttress this view, reference may be made to the decision of the apex court in the case of Surjit Lal Chhabra 101 ITR 776 SC. However, in such case, it was held that income from such property would be assessable as personal income of the male person till the birth of a son. HINDU UNDIVIDED FAMILY 29
CREATION OF PROPERTY How an HUF can create property? • Properties of HUF can be acquired by joint labour. • Vesting of self acquired property in family hotchpotch can create family nucleus. Clubbing provision u/s 64(2) to be noted. • A newly created HUF as a unit may receive gifts from outsiders or from father or brother or sister of the karta who are not members of the donee HUF. All such gifts will result in accretion to the family fund without attracting the provisions of Section 64(2). • A father can gift his self acquired property to his sons’s newly created HUF. It is essential that the gift deed should specifically mention the gift to the HUF & not to individual son. • HUF through will: A new family nucleus can also be created by a will but the intention of the bequest being for the family has to be made absolutely clear in the will. HINDU UNDIVIDED FAMILY 30
CONSTITUENTS OF AN HUF • Can Single Unmarried Person form an HUF? o No, a single unmarried person cannot constitute an HUF • Can there be an all-Female HUF? o Yes, in view of the decided case laws, an all-female HUF has been given due recognition in the eyes of the law. • Can a female be a Karta? o Yes, after amendment in the Hindu Succession Act, daughter of a coparcener has equal right as of a son. Therefore, daughter being coparcener and can also be a “Karta”. HINDU UNDIVIDED FAMILY 31
CONSTITUENTS OF AN HUF Son is not necessary to constitute HUF under Mitakshara law - Gowali Buddanna v. CIT (1966) 60 ITR 293 (SC). HUF can be formed with one husband wife only - Prem Kumar v. CIT 121 ITR 347 (Allahabad H. C. ). Remuneration to Karta of HUF can be followed - J. K. Baldeo Sahai v. CIT 63 ITR 238 (SC). The term HUF is much wider than Hindu Coparcenary. The Direct Tax Laws deal with the HUF and not with the Hindu Coparcenary. It is not correct to say that no female can be a member of HUF and an HUF does not necessarily consist of only male members - Kalyani Vithaldas v. CIT 5 ITR 90 (PC) HINDU UNDIVIDED FAMILY 32
HUF BY A WIDOW Can the widow succeed to estate of husband? A Hindu widow by virtue of section 14 of the Hindu Succession Act, 1956 may become a fresh stock of descent, but as she has become full owner of her husband's properties, her children, if any, by her first husband, her adopted son if she cares to adopt and her children if she gets married again, will all be her heirs an in that sense, she and her children may form one joint family but non of them can have any right by birth in her property, and hence the Hindu joint family as ordinarily understood in Hindu Law cannot be brought into existence. [Rukmani Bai Rathor v. CWT 54 itr 430] HINDU UNDIVIDED FAMILY 33
HUF BY A WIDOW Can HUF continue by adoption by a widow? Held, yes. “The facts in the present case is brought out earlier go to show that the Karta had died leaving his widow and she had adopted the assessee and by virtue of the adoption by a Hindu, the adopted son is treated as adopted by the deceased father too and thereby he acquires the Coparcenary rights in the HUF property as if it existed all the time. The fact that at the time of adoption the spouse of the widow was not alive in accordance with the above decisions does not alter his rights as a coparcener” [ITO v. R. N. Dalichand Jain 2002 80 ITR 474 Bang] HINDU UNDIVIDED FAMILY 34
BUSINESS ASPECTS • Interest paid by HUF to Coparceners o The ruling came from the Hon’ble Supreme Court of India in the case of CIT v. Venugopal Inani (1999) wherein the Interest paid on amounts lent by them to the HUF was held not deductible as a business expenditure u/s 37(1) • Income earned with aid of HUF funds o The same is assessable in the hands of the HUF when funds of family have been invested in business HINDU UNDIVIDED FAMILY 35
BUSINESS ASPECTS • Loan from HUF Taking a loan from an HUF for personal use does not amount to use of family funds. o The income from utilization of such loan funds is assessable in the hands of the Individual Member of the HUF • Can there be a Partnership between the Karta and the Karta as representative of the HUF? o o o As a settled law, there cannot be a partnership between a coparcener as individual and the same coparcener in representative capacity for the HUF If there is at least one more partner, then in the partnership the same person can represent the HUF and also himself as the individual HINDU UNDIVIDED FAMILY 36
BUSINESS ASPECTS • HUF as Partner of Firm o o o Under sec. 2(31) of the IT Act, 1961, a HUF is a ‘person’ for the purpose of the Income-tax Act However, a HUF is not a juristic person for all purposes (viz. , for the purposes of other laws) including the partnership law. Accordingly, under the Indian Partnership Act, 1932, a HUF is not a juristic person and it cannot enter into a valid partnership with any other person. The Karta of the HUF may enter into partnership with outsiders on behalf and for the benefit of his joint family. It is competent to the manager or Karta acting on behalf of the HUF to enter into a valid partnership with a stranger or with the Karta of another family HINDU UNDIVIDED FAMILY 37
RESIDENTIAL STATUS OF AN HUF Control and Management Situated Wholly in India - RESIDENT A Karta has been Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year B Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year HINDU UNDIVIDED FAMILY Wholly outside India NON-RESIDENT If A & B Satisfied- OR If none satisfied - NOR 38
TAX BENEFITS OF AN HUF TAX SAVINGS – A DEMONSTRATION Income Divided with HUF Taxed as Individual HUF Gross Total Income 8, 00, 000 16, 000 Less Deductions : 80 C 1, 00, 000 1, 000 10, 000 Taxable Income 6, 90, 000 14, 90, 000 Basic Exemption 2, 00, 000 2, 000 - 2, 000 67, 980 70, 040 2, 85, 310 Less Deductions : 80 TTA Rebate u/s 87 A Tax Payable By setting up an HUF an individual can divide his taxable income between two separate income tax entities, this decreases his net taxable income as HUF gets 80 C, 80 CCF, 80 D deduction separately and the basic exemption and cuts his annual tax payment by Rs. 1, 47, 290/HINDU UNDIVIDED FAMILY 39
ASPECTS OF TAXATION • Remuneration paid to Karta o o o The admissibility or otherwise of the remuneration paid to the Karta/member of the family for running the affairs of the HUF depends on the facts of the case. The amount paid would be a justified deduction if it is for specific services rendered It should be bona fide and in the interest of the business of the family. Further, the payment should be genuine. The courts have held that before a Karta is paid remuneration, there should be a valid agreement. It is to be noted, that where salary is allowed as a deduction in the hands of the HUF, it would become individual income of the Karta. Recourse to section 10(2) is unavailable in this regard. HINDU UNDIVIDED FAMILY 40
ASPECTS OF TAXATION • However, the income of a joint Hindu family can be assessed as the income of a HUF, only if the following two conditions are satisfied: o There should be a Coparcenary. o There should be joint family ancestral property. • Five basic heads of income -Salary, House Property, Capital Gains, Profit from business, and Income from other sources. Except for salary, HUF can earn from all of these sources. HINDU UNDIVIDED FAMILY 41
TAX BENEFITS OF AN HUF ASPECTS OF TAXATION • A Karta can file three Types of Returns o In his individual capacity; o In the capacity of Karta of the HUF which had come into existence after partition of his father’s HUF. o In the capacity of Karta of his own HUF. • Though the HUF is taxed as separate entity, the tax slab which is applicable to an individual is applicable here too. • Provisions of section 56(2)(vi) applicable even to HUF if any sum of money is received by the HUF exceeding Rs. 50, 000 p. a. from non members. • Items received in kind subjected to the provisions of sec. 56(2)(vi). HINDU UNDIVIDED FAMILY 42
TAX BENEFITS OF AN HUF STOCK MARKET AND MUTUAL FUNDS • HUF can have a separate Demat Account. • It can invest in the shares of the Companies in: (a) The Primary Market (b) The Secondary Market • Enjoy Tax Free Income for Long-term Capital Gains by holding shares for more than one year (STT Paid). • HUF has 2 benefits in investing in IPOs’ i. e. the 2 lakhs limit for the investment to be categorized as retail is not breached and there is a greater probability of more shares being allotted. • Enjoy lower tax rate of 15% on Short-term Capital Gains(STT Paid). HINDU UNDIVIDED FAMILY 43
TAX BENEFITS OF AN HUF TAX STRATEGIES • Distribution of Income to Coparceners : Karta can gift money to the coparceners from the income earned by the HUF. This income is tax-free in the hands of the coparceners u/s 10(2). This way, person with a high income will be able to get tax-free income. • Funding for Loans : HUF can give loans to the Karta or coparceners for setting up business & can charge interest on the loan. Interest paid on any business loan is fully deductible. HINDU UNDIVIDED FAMILY 44
TAX BENEFITS OF AN HUF TAX STRATEGIES • Helps in tax planning for service tax : If business turnover is split by setting up HUF, the service provider can avoid the hassle of charging service tax and become small scale service provider. • Salary to Karta is deductible : This salary is taxed as income in hands of the Karta and will be fully deductible from the HUF income. • Use of income from HUF for expenses : The income earned by the HUF can be used for the household expenses of the family. HINDU UNDIVIDED FAMILY 45
INCOMES EXEMPT • Section 10(2) – Sums received by members exempt o This section provides that no liability to Income Tax shall be attracted or imposed on any member of an HUF in respect of any sum received by him as member and paid out of the income of the family. 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— …. . (1) …. . (2) any sum received by an individual as a member of a Hindu undivided family, where such sum has been paid out of the income of the family, or, in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family; HINDU UNDIVIDED FAMILY 46
GIFT TO AN HUF BY MEMBER • The provisions of Section 56 of the Income Tax Act are reproduced as under: “ 56 (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1 st day of October, 2009, — (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; (b) any immovable property …. . (c) any property, other than immovable property …. . … Provided that this clause shall not apply to any sum of money received— (a) from any relative; … Explanation. —For the purposes of this clause, — (e) “relative” means, — … (ii) in case of a Hindu undivided family, any member thereof; ” • Therefore, gift to an HUF by member is exempt HINDU UNDIVIDED FAMILY 47
GIFT TO AN HUF BY OTHERS • As per the applicability of provisions of section 56 of the Income Tax Act, 1961, the gift received by an HUF from a stranger is taxable. • As per the provisions of Section 56 of the Income Tax Act, 1961, if aggregate amount received during the year is more than Rs. 50, 000/- the same will be chargeable to tax • There is no restriction for a HUF to accept gifts from any source. • However, the intention of the donor should be clear and the gift should be genuine. • Gift declaration detailing complete information relating to the donor should be drawn and recorded. • Gift by cheque should go in a bank account in the name of the donee HUF for realization and subsequent realization. HINDU UNDIVIDED FAMILY 48
IMPLICATIONS IN INCOME TAX On the combined reading of Section 56(2) and Section 10(2) and literally interpreting the provisions of the Act and specific amendments thereto, following scenario emerges: • Any sum given by HUF to its members, subject to the conditions prescribed under Section 10(2) is exempt from tax in the hands of recipients. • Gift received by HUF from its members would be excluded from taxable income HINDU UNDIVIDED FAMILY 49
GIFTS-ISSUES • Can an HUF give away its property by way of gift? o Although children acquire by birth rights equal to those of a father (Karta) in an ancestral property, both movable and immovable, the father has the power of making, within reasonable limits, gifts of ancestral movable property without the consent of coparceners. o Combined reading of the Hindu Law and various judicial precedents show that whereas, the Karta has the power to gift ancestral movables within reasonable limits, he has restricted power with regard to ancestral immovable property. o He can however, make a gift within reasonable limits of ancestral immovable property for “pious purpose”. However, the alienation must be by an act inter vivos, and not by will. [Kuppayee vs. Raja Gounder (265 ITR 551 at 559) SC] HINDU UNDIVIDED FAMILY 50
GIFTS-ISSUES • Gift in Violation of Provisions? o The alienation by a Karta of joint Hindu Family is not necessarily void but is only voidable if objections are taken to it by the other members of joint Hindu Family. o The Lahore High Court in Imperial Bank of India vs. Maya Devi, AIR 1935 Lahore 367 observed, “Where, however, the gift is not for religious purposes, or consists of the whole or large portion of the joint family property (i. e. , above reasonable limit or disproportionate distribution), the transaction is voidable, but only at the instance of the other coparceners…. . ” HINDU UNDIVIDED FAMILY 51
GIFTS-CASE LAWS • The assessee in the capacity of HUF, received a sum of Rs 7 lakh as gift from his uncle. Whether the same was exempt? Held, Yes. Harshadbhai D. Vaidhya (HUF) vs. ITO [2013] • Whereas, the decision of the Hon’ble ITAT in Harshadbhai D. Vaidhya-HUF (supra), by adopting a purposive interpretation, went a step further and held that gift received by HUF from relative of Karta (or member of HUF) is also exempt within the meaning of Section 56(2)(v)/(vii) • In our opinion, the term 'relative' in case of HUF cannot be stretched so as to include within its ambit, relatives of members of HUF, in view of clear and unambiguous wordings of amended clause (e) of the explanation to Section 56(2)(vii). HINDU UNDIVIDED FAMILY 52
CLUBBING PROVISIONS-HUF BLENDING INDIVIDUAL PROPERTY WITH HUF • A Coparcener can blend his self acquired property with that of the HUF by merging it with the family properties or by impressing such property with the character of HUF property. • Such act of blending does not require consent of other members of family. The act is a unilateral act and is a matter of individual volition. • Once blending is done, it is not revocable. There is no provision for retransfer, directly or indirectly. • A Coparcener can have two HUF. The blending is at his option. He may blend his property in either of the HUFs. HINDU UNDIVIDED FAMILY 53
CLUBBING PROVISIONS-HUF TAX IMPLICATIONS OF BLENDING OF PROPERTY • Clubbing provisions under section 64(2) of the Income Tax Act, 1961 as well as section 4(1 A) of the Wealth tax Act are specifically introduced to tax income and wealth arising from such blending. • The income arising from such converted property will be deemed to be the income of the transferor individual and clubbed with the income of the Individual (donor). • The property is assessable as individual property of assessee even though is subsequent partition of HUF such property is treated as HUF property. [CIT v. CG. Venkatasubben (1999) 150 Taxman 352 (Mad) ] • Section 4(1 A) of Wealth Tax Act, 1957 assets so converted shall be deemed to be the assets of the Individual transferor. HINDU UNDIVIDED FAMILY 54
CLUBBING PROVISIONS-HUF BLENDING OF PROPERTY-ADVANCE ISSUES • If an individual transfers a sum of Rs. 50, 000 to his smaller HUF and the same is deposited on interest, then section 64(2) would be invoked to include the interest income on Rs. 50, 000/- say Rs. 10, 000/- in the assessment of the individual who gifted or threw the amount into the common hotchpot • However, the section does not apply to the income subsequently generated by the utilization of the income of Rs. 10, 000. If thus amount is utilized for setting up a business, the income yielded would belong to the HUF and also be assessable as such. HINDU UNDIVIDED FAMILY 55
PARTITION OF AN HUF WHAT IS A PARTITION? • Partition of an HUF is governed under section 171 of the Act • Under the Hindu law, an HUF may be ended by portioning the property or assets of the HUF • There is effected a change in ownership of the property as a result of partition but does not involve a transfer of property. • The following have shares in assets of HUF: o All coparceners o Mother(in case of death of father), which is equal to the share of the son. o Child in womb of mother at time of partition HINDU UNDIVIDED FAMILY 56
PARTITION OF AN HUF DUTIES & POWERS OF AO IN PARTITION • At the time of making assessment u/s 143 or 144, if it is claimed by any member that any partition has taken place AO shall make an enquiry after giving notice to all members. • After inquiry AO shall record finding as to whethere has been a partition, the effective date of such partition. • By the use of words ‘total or partial’ in section 171 the duty has been cast on an assessee to claim before the ITO that a partition has taken place • Then the ITO shall proceed and make an enquiry to pass an order under section 171 if he is satisfied HINDU UNDIVIDED FAMILY 57
SHARE OF ALLOTMENT ON PARTITION • Joint family with brothers-Equal Share for each brother • HUF which includes father, mother and sons-Share will go to each except that the mother cannot force the partition. • Partition between father & sons (mother not living)- Each son will receive share equal to the father’s share • Before 09 -09 -2005, none of the Unmarried Daughters had any right to partition. The only right available was against providing for their education, maintenance till marriage & marriage expenses. • However, from 09. 2005, the situation has been altered and now both married and unmarried daughter have equal shares like a son. HINDU UNDIVIDED FAMILY 58
PARTITION OF AN HUF TAX IMPLICATIONS OF PARTIAL PARTITION • As per section 171(9) of the Income-tax Act, 1961 the Partial Partition after 31 -12 -1978 is not recognized. • The Income Tax Officer will not take any notice of such a partial partition, no assessment is required. • No order under section 171(1) will be passed • Thus the Income or Wealth excluded as a result of the partial partition will continue to belong to HUF and tax recovery will be made from the persons receiving it • For recovery of tax, section 171(9)(c) becomes applicable. Each member shall be jointly and severally liable for tax • As per section 171(9)(d), separate liability of any member shall be computed as per the portion of property allotted. HINDU UNDIVIDED FAMILY 59
TAX BENEFITS OF AN HUF TAX IMPLICATIONS OF FULL PARTITION • As per explanation to section 171 of the Income Tax Act, a full partition occurs when assets of an HUF are physically divided by metes and bounds. • A member gets his/her share whenever there is full partition of HUF or on request for partition made by one or more coparceners • After the Partition, the assessment of HUF shall be made as per the provisions of Section 171 of the Income Tax Act and order to be passed by the Assessing Officer. HINDU UNDIVIDED FAMILY 60
PARTITION OF AN HUF TAX PLANNING IN PARTITION In certain cases, tax liability can be reduced by the partition of an HUF. • Members have no other source of income o In this case partition can be done by giving one business establishment to each coparcener and dividing other sources in a manner so as to make the partition equitable. o Such a partition will reduce the tax liability considerably • Where Members have High Individual Incomes o In such case, it is not advisable to break or partition o It should be allowed to continue as a separate taxable unit to alleviate the tax burden HINDU UNDIVIDED FAMILY 61
PARTITION OF AN HUF TAX PLANNING IN PARTITION • Partial Partition for Tax Planning o Partial Partition is recognized in Hindu Law o Any HUF not yet assessed to Tax can be partitioned partially and thereafter assessed to tax HINDU UNDIVIDED FAMILY 62
PARTITION OF AN HUF TAX PLANNING IN PARTITION • Following legal aspects should be kept in mind while considering the partition of an HUF o 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 o On the basis of the same reasoning, distribution of assets in the course of partition would not attract any gift tax liability, and, o There would be no clubbing of incomes under section 64 as it would not involve any direct or indirect transfer HINDU UNDIVIDED FAMILY 63
PARTITION OF AN HUF 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 recognized in view of s. 171(9) – ITO v. P. Shankaraiah Yadav 91 ITD 228. HINDU UNDIVIDED FAMILY 64
WEALTH TAX & HUF • Separate exemption of Wealth-tax for HUF’s up to Rs. 30 lakhs Wealth. • One House- Wealth Tax Free The taxpayer can claim one house in the name of the HUF as a wealth tax free asset. • Productive assets of HUF are fully exempt from Wealth-tax HINDU UNDIVIDED FAMILY 65
PRACTICAL ASPECTS Documents required for PAN Application • Proof of Identity of Karta • Proof of Address of Karta • Marriage certificate issued by Registrar of Marriages or an Affidavit sworn before a magistrate stating the date of marriage or proof of date of birth of Karta • An affidavit made by the Karta of Hindu Undivided Family stating name, father’s name and address of all the coparceners on the date of application. • Date of Creation of HUF and for ancestral HUF date can be 01 -01 -0001 where the date of creation is not available. HINDU UNDIVIDED FAMILY 66
PRACTICAL ASPECTS Documents required for Bank Account • • • Bank account should be in the name of HUF Photograph of Karta Proof of identity, address of Karta Pan number in HUF's name HUF Declaration : A declaration form in which every member signs stating the name of Karta declares o They are the only members of HUF. o Karta to have sole authority over HUF account o Every transaction on behalf of HUF account, made by each member of the family is governed by karta HINDU UNDIVIDED FAMILY 67
OTHER ISSUES Whether property purchased with aid of Joint Family Funds can be assessed as Income of the Individual? Property purchased with the aid of joint family funds, howsoever small that may be, still the property would be HUF income and cannot be income of the individual with major portion of purchase price. [S. Periannan v. CIT 191 ITR 278. ] HINDU UNDIVIDED FAMILY 68
OTHER ISSUES Whether deduction is available to partnership firm u/s 40(b) in respect of salary or commission paid to a partner who was a partner in representative capacity of HUF? Salary paid to working partner even though as Karta of HUF, is received as individual and as working partner, hence allowable as deduction while computing income of firm. [CIT vs. Jugal Kishor & Sons [2011] 10 taxmann. com 82 (All. )] Whether the Salary income of wife of Karta is clubbed in the Income of HUF? Where a person is a partner in a partnership firm not in his individual capacity but as the karta of the Hindu undivided family, the income accruing to his wife on account of her being a partner in the same partnership firm cannot be included in the total income of such person in an individual assessment or in the assessment of the Hindu undivided family. [CIT v. Om Prakash [1996] 217 ITR 785 (SC) HINDU UNDIVIDED FAMILY 69
OTHER ISSUES Whether relief can be claimed on occupancy of one residential house Properties? The benefit of relief in respect of a self occupied property under section 23(2) is available to the owner who can reside in his own house. AN HUF is nothing but a group of individuals related to each other by blood or in a certain manner. The family can reside in the house which belongs to the HUF. A family cannot consist of artificial persons. There is nothing in the words used in section 23(2) which excludes its application to an HUF which is a group of individuals related to each other [CIT v. Hriprasad Bhojnagrawala (2012) 342 ITR 69(Guj)] HINDU UNDIVIDED FAMILY 70
OTHER ISSUES Whether the benefit u/s 54 can be available on purchase of more than one residential house Properties? The expression ‘a residential house’ should be understood in a sense that building should be residential in nature and ‘a’ should not be understood to indicate a singular number. That when an HUF’s residential house is sold, the capital gain should be invested for the purchase of only one residential house, is an incorrect proposition. After all, the property of the HUF is held by the members as joint tenants. If the members, keeping in view the future needs in event of separation, purchase more than one residential building, it cannot be said that the benefit of exemption is to be denied u/s 54(1) [CIT v. D. Ananda Basappa 180 Taxman 4 (Kar. ) [2009] ] Whether the exemption u/s 54 B of the IT Act is available to HUF? Exemption under Section 54 B is also available to HUF subject to the following condition: If HUF transfer a land which is used for agricultural purposes by a HUF, the rollover relief u/s 54 B is available to the HUF. The amendment is applicable on transfers made after 0104 -2013 HINDU UNDIVIDED FAMILY 71
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