By CA Vimal Punmiya
- 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 daughters. Therefore a Hindu Undivided Family consists of males and females. Daughters born in the family are coparcener 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 and daughter.
- 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.
- 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.
The Hon’ble Supereme Court held in C. Krishna Prashad V/s CIT (1974) 97 ITR 493 (SC) that the word “Family” always signifies a group. Plurality of persons is an essential attribute of a Family. A Single person, male or female, doesn’t 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- even one 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).
A Wife cannot become KARTA in normal circumstances. However, in Sushila Devi Rampuria V/s ITO (1960) 38 ITR 316 (Cal), it was held that if Co-parceners are incapable, wife can act as KARTA.
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 ).
- G. 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 testate or Re-union of HUF.
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).
- H. RIGHT OF MEMBERS :
HUF is not a natural body. It does not have physical existence as such. It is composed of members. Those members are classified in two categories, viz (i) Coparceners, and (ii) Non-Coparceners.
Coparcener means a member who has a right to demand partition. Non-Coparcener means a member who doesn’t have a right to demand partition. AS per Current scenario RIGHT TO DEMAND PARTITION is vested in male member and daughter only.
Every Co-parcener is Member, but every Member is not Co-parcener. Rights of Members are-
|Before Partition of HUF|| Right of Maintenance
Right to demand partition
|Right of Maintenance
|On partition of HUF||Right to receive equal share|| Right to receive reasonable assets
However, (i) Wife of KARTA or (ii) Widowed mother has right to receive share equal to one Co-parcener
- I. PARTITION OF HUF :
“Partition” Means a process of separation of assets/ members. Partitions can be of two types’ viz. (1) total partition, and (2) partial partition. In total partition, all members get separated and all assets are divided. In partial partition, some of the members get separation, or some of assets are separated.
The rights/entitlements of the members on partition of HUF are governed by Hindu Law. The tax laws do not have any otherwise provision.
Although the partition must be fair, yet the law does not require that the partition must be equal. The Hon’ble Supreme court in the case of N.S. Getti Chettiar (1971) 82 ITR 599 (SC) held that an unequal partition is also possible and it is very common in the country.
Member may accept a smaller/larger share on partition or he may renounce his right fully. But Income Tax Department has no right to avoid partition on the ground of inequality. M.S.M. Meyappa Chettiar V/s CIT 18 ITR 586 (Madras)
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.
Under Hindu law both types of partitions, i.e. total or partial, are valied however, under income tax act, partial partition of an HUF’s “hitherto assessed” is prohibited/derecognized by the provisions of sec. 171(9) & moreover, according to sec. 171(9), any partial partition effected after 31.12.1978, is not recognized. Same is the position in Wealth-tax act, 1957. It may be noted that the use of words “hitherto assessed” in the language of section 171(9) has persuaded the Hon’ble Gujrat High Court in the case of CIT V/s Kanti lal Amba Lal HUF (1991) 59 Taxman 232 (Guj.) to conclude that the section 171(9) is not applicable to a HUF which has never been assessed under Income Tax Act,1961.
Motive or need for partition cannot be questioned by the Income Tax Department. T. G. Sulakhe v. CIT, 39 ITR 394 (AP).
- J. 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 :
- a. 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 31.12.1978, 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 tax liability 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.
- b. 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.
The HUF can receive gifts from anybody i.e. from a coparcener, non-coparcener and even stranger. CIT V/s K Satyendra Kumar (1998) 232 ITR 360 (SC)
What matters is the intention of the donor or testator that the property given is for the benefit of the family as a whole. “Doner should clearly indicate that he is donating to the HUF. CIT V/s Maharaja Bahadur Singh & others (1986) 162 ITR 343 (SC).
Suppose there is an HUF consisting of Karta, his wife, his two sons, daughter-in-law and grandchildren. 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 even after 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.
- c. 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 tax liability 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. 12,00,000/-. 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.200,000/- which would attract no tax & if the assessment year is 2013-14, then the tax liability would be reduced form Rs. 1,95,700/- to nil.
- d. 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. 2013-14, if the total income of an HUF is Rs. 10,00,000/- then income tax on HUF would be Rs.1,33,900/-. If salary is paid to four members @ Rs.2,00,000/- net income of HUF would be Rs. 10,00,000 – Rs.8,00,000 ( 4 x 2,00,000 ) = Rs.2,00,000/-, tax on it would be Rs. NIL. The income of each member would be Rs.2,00,000/-. Therefore tax on members would be NIL. Thus the tax saving would be of Rs.1,33,900/-.
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 2013-14 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.
- e. 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.).
- f. 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.
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.
HUF CAN GIVE GIFT
|TO A MEMBER (REASONABLE AMOUNT/ ASSET)||VALID IN LAW|
|TO A MEMBER (UNREASONABLE AMOUNT/ ASSET)||VOIDABLE IN LAW|
|TO A STRANGER||INVALID IN LAW|
COMMISSIONER OF INCOME TAX VS. BANSHILAL NARSIDAS [2004 137 TAXMAN 358] MP HC
Section 5(1)(viii) of the Gift-tax Act, 1958 – Exemptions – Whether ‘karta’ of HUF can make out a gift within reasonable limits even without consent of other coparceners – Held, yes – Whether, therefore, gift made by a karta to his wife out of HUF’s assets is entitled to exemption under section 5(1)(viii) – Held, yes
JANA VEERA BHADRAYYA V. CGT  59 ITR 176 (AP HC)
CGT V. HARI CHAND  95 ITR 308 (P&H HC)
‘Karta’ of a Hindu undivided family can make a gift of certain joint family property to his wife and that there is no obstacle or impediment in the way of applicability of section 5(1)(viii) of the Act.
M.S.P.RAJAH V. CGT  134 ITR 1 1 (MAD. HC)
“It may be seen from the facts as found by the Tribunal that the jewellery, which were the subject-matter of gift, were owned by the HUF of which M.S.P. Rajah, the father, was the karta and he gifted them to his wife. The AAC held that having regard to the total wealth of the HUF, the value of the jewels gifted to the wife of the karta who was a member of the family was within reasonable limits and within the powers of the father-karta of an HUF. On these facts, therefore, the question for consideration is, whether the donor can be considered to be undivided Hindu family and not the father-coparcener in favour of his wife in his individual capacity.
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. 1.10.2009 Gift received from other than relatives exceeds Rs.50,000/- 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.
HUF can give gift to his member within reasonable limit. Even though HUF is not covered under the meaning of ‘relative’ in definition of relative given in explanation (e) to Section 56(2)(vii) but also judicial authority considered that HUF is a plural form of relative and thus, the amount is not taxable in the hands of members in individual capacity.
Vineetkumar Raghavjibhai Bhalodia VS. ITO [2011 11 TAXMANN.COM 384]
“From a plain reading of Sec. 56(2)(vi) along with the application to that section and on understanding the intention of the legislature from the section, it could be seen that a gift received from “relative” irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax under the provisions of section 56(2)(vi) as a group of relatives also falls within the Explanation to section 56(2)(vi). It is not expressly defined in the Explanation that the word “relative” represents a single person. And it is not always necessary that singular remains singular. Sometimes a singular can mean more than one, as in the case on hand. In the instant case the assessee received gift from his HUF. The word “Hindu Undivided Family” though sounds singular unit in its form and assessed as such for income tax purposes. Finally at the end a “Hindu Undivided Family” is made up of “a group of relatives” Thus, a singular word/words could be read as plural also according to the circumstance/situation.
Therefore, the “relative” explained in Explanation to section 56(2)(vi) includes “relatives” and as the assessee received the gift from his “HUF” which is a “group of relatives”, the gift received by the assessee from the HUF should be interpreted to mean that the gift was received from the “relatives”, therefore the same was not taxable under section 56(2)(vi).
- g. 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. :
- Vesting of individual or self-acquired property in family hotchpots. But take care the provision of section 64.
- Family reunion after partition.
- Through inheritance by succession – Bequests by Will, now recognized by sec. 30 of Hindu Succession Act, can also be utilized for tax-planning.
- K. Properties received under a Will :
The status of the property would be the same as is analyzed 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 child.
- L. 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.
- M. 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.
- N. 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 affected 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.
AMENDMENT IN THE HINDU SUCCESSION ACT, 2005
WHETHER ANY OF THE MARRIED DAUGHTERS HAVE ANY RIGHT OR CAN CLAIM ANY RIGHT IN FUTURE IN HUF OF FATHER?
The Hindu Succession Act, 1956 has now been amended w.e.f. 06.09.2005. The effect of this amendment is that all daughters (whether married or unmarried) before or after 06.09.2005) and male members of the HUF are co-parceners of the HUF. Thus, the married daughter is a co-parcener of the HUF of father while she is a member of her husband’s HUF but not co-parcener.
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 were 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.
- It is arrangement between member of a family descending from a common ancestor or near relation trying to sink their differences and disputes, settle and solve their conflicting claims once and for all to buy peace of mind and bring about harmony and goodwill in the family by an equitable distribution or allotment of assets and properties amongst member of the family.
FAMILY IN A FAMILY ARRANGEMENT HAS A WIDER MEANING
- The Supreme Court in Ram Charan Das v. Girja Nandini Devi (AIR 1996 SC 323, 329 ) held that : “ Court give effect to a family settlement upon the broad and general ground that it’s object is to settle existing or future disputes regarding property amongst members of a family. The word ‘family’ in this context is not to be understood in the narrow sense of being a group of person who are recongnised in law as having a right of succession or having a claim to a share in the property in dispute.” While it is necessary that there should be some common tie between the parties to such family arrangement, it need not be between persons who are commonly understood as constituting a Hindu Family or for that matter, a family in any restricted sense. It is not necessary that there should be a strictly legal claim as member of the same family. It is enough if there is a possible claim or if they are related, a semblance of a claim (Krishna Beharilal v. Gulabchand AIR 1971 SC 1041, 1045 ).
A family arrangement wherein an adopted son was a party was held to be valid though he turned out to be a stranger as the adoption was subsequently held to be invalid in the case of Shivamurteppa Gurappa Ganiger v. Fakirapaa Basangauda Channappagaudar (AIR 1954 Bom. 430) C.G.T. v. Smt. Gollapude Saritammn (116 ITR 930, 936 AP.)
It is possible that married daughters or sisters who are not treated as members of the family of a parent/ brother on their marriage may still be considered as members of the family for purposes of a family arrangement.
ESSENTIALS OF A FAMILY ARRANGEMENT
(i) The family arrangement should be for the benefit of the family in general.
(ii) The family arrangement must be bonafide, honest, voluntary and it should not be induced by fraud, coercion or undue influence.
(iii) The purpose of the family arrangement should be to resolve present or possible family dispute and rival claims not necessarily legal claims by a fair and equitable division of the property amongst various members.
(iv) The parties to the family arrangement must have antecedent title, claim or interest. Even if a possible claim in the property which is acknowledged by the parties to the settlement will be sufficient.
(v) The consideration for entering into family arrangement should be preservation of family property, preservation of peace and honour of the family and avoidance of litigation. Kale v. Deputy Director of Consolidation (AIR 1976 SC 807)
(vi) Family peace is sufficient consideration
A question arises as to what is the consideration for allotment of property under a family settlement. It is said that a family settlement is arrived at between the members of the family with a view to compromise doubtful and disputed right. It, therefore, follows that the allotment of shares under a family settlement is not what a person is legally entitled to since some of the members can be allotted a much lesser share of asset than what they are entitled to under the law, while others a much larger share than what they are entitled to , yet some others may get a share to which are not legally entitled to since the main consideration is surely and certainly purchase of peace and amity amongst the family members and such a consideration cannot be deemed as being without consideration.
Antecedent title, claim or interest or even a possible claim :
The members who may be parties to the family arrangement must have some antecedent title, claim or interest or even a possible claim in the
property which is acknowledged by the parties to the settlement. Even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all its claims or titles in favour of such a person and acknowledges him to be the sole owner, then the antecedent title must be assumed and the family arrangement will be upheld and the Court will find no difficulty in giving assent to the same. Kale v. Deputy Director of Consolidation (AIR 1976 SC 807).
But where the person, in whose favour certain properties have been transferred under the guise of a family arrangement, has no and cannot have any claim or possible claim against the transferor, & therefore, the same cannot be regarded as a family arrangement.
l CED v. Chandra Kala Garg 148 ITR 737 ( All.)
l CIT v. R.Ponnammal 164 ITR 706 (Mad.)
In the case of Roshan Singh v. Zile Singh (AIR 1988 SC 881) the Supreme Court held that the parties to family arrangement set up competing to the properties and there was an adjustment of the rights of the parties. By family arrangement it was intended to set at rest competing claims amongst various members of the family to secure peace and amity. The compromise was on the footing that there was an antecedent title of the parties to the properties and the settlement acknowledged and defined title of each of the parties.
- A family settlement is considered as a pious arrangement by all those who are concerned and also by those who administer law. A family settlement is not within the exclusive domain of the Hindu Law but equality applies to all families governed by other religions as well. Thus, it shall apply to Muslims, Christians, Jews, Parsees and other faiths equally.
- The concept of family arrangement is an age old one. It is not only applicable to Hindus but also to other communities in which there is a common unit, common mess and joint living. In the case of Bibijan Begum v. Income Tax Officer (34 TTJ 557), the Gauhati Bench of the Appellate Tribunal in a very elaborate judgement held that there is no bar for Mohammedans to effect a family arrangement. In that case the assessee had an absolute right over her Mehr property and in exchange of that land the assessee received another land over which a multi-storeyed building was to be constructed. The assessee’s two daughters and two sons had antecedent right to the properties in the capacity as her heirs though their shares were not specified. The Tribunal held that by a family arrangement the rights of those children had been specified. The family arrangement by which the assessee and her four children received 1/5th share each in the multi-storeyed building was, therefore, valid. The Tribunal therefore, held that the assessee lady could not be assessed in respect of that share of house property which was given to her children pursuant to the family arrangement.
- Three parties to the settlement of a dispute concerning the property of a deceased person comprised his widow, her brother and her son-in-law. The latter two could not under the Hindu Law be regarded as the heirs of the deceased, yet, bearing in mind their near relationship to the widow, the settlement of the dispute was very properly regarded as a settlement of a family dispute – Ram Charan Das v. Girija Nandini Devi AIR 1996 SC 323 at page 329.
- A family arrangement differs from partition in as much as in a family settlement there can be a division of income without the distribution of assets and there is no bar to a partial partition. The provision of section 271 of the Act, which places restriction on a partial positions do not apply to a family settlement.
- The Gauhati High Court in the case of Ziauddin Ahmed v. CGT, 102 ITR 253 held that the family arrangement amongst the members of Mohammedan family is valid and therefore, the shares given by a father to his sons at less than market value in order to preserve the family peace is not liable to gift tax.
WHETHER REGISTRATION OF DOCUMENT IS REQUIRED FOR EFFECTING FAMILY ARRANGEMENT
- Family arrangement as such can be arrived orally or may be recorded in writing as memorandum of what had been agreed upon between the parties. The memorandum need not be prepared for the purpose of being used as a document on which future title of the parties be founded. It is usually prepared as a record of what had been agreed upon so that there be no hazy notions about it in future. It is only when the parties reduce the family arrangement in writing with the purpose of using that writing as proof of what they had arranged and, where the arrangement is brought about by the document as such, that the document would require registration as it would amount to a document of title declaring for future what rights in what properties the parties possess. Tek Bhadur Bhuji v. Debi Singh AIR 1966 SC 292 . Also see Awadh Narain Singh v. Narian Mishra, AIR 1962 pat. 400; Mythili Nalini v. Kowmari, AIR 1991 Ker 266; Klae v. Dy Director of Consolidation AIR 1976 SC 807.
2. Another aspect that attracts our attention is whether family arrangement, if recorded in a document, requires registration as per the provisions of section 17(1)(b) of the Indian Registration Act, 1908. Section 17(1)(b) lays down that a document for which registration is compulsory should, by its own force, operate or purport to create declare, assign, limit or extinguish either in present or in future any right, title or interest in immovable property. Thus if an instrument of family arrangement is recorded in writing and operates or purports to create or extinguish rights, it has to be compulsorily registered. But where a document, merely records the terms and recital of the family arrangement after the family arrangement had already been made which per se does not create or extinguish any right in immovable properties, such document does not fall within the ambit of section 17(1)(b) of the Act and so it does not require registration.
3. According to the Supreme Court in Roshan Singh v. Zile Singh AIR 1988 SC 881, the true principle that emerges can be stated thus ‘If the arrangement, of compromise is one under which a person having an absolute title to the property transfers his title in some of the items thereof to others, the formalities prescribed by law have to be complied with, since the transferees derive their respective title through the transferor. If, on the other hand, the parties set up competing titles and the differences are resolved by the compromise, then, there is no question of one deriving title from the other and therefore, the arrangement does not fall within the mischief of section 17 (1) (b) it read with section 49 of the Registration Act as no interest in property is created or declared by the document for the first time.
4. Family Arrangement does not amount to transfer : The transaction of a family settlement entered into by the parties bonafide for the purpose of putting an end to the dispute among family members, does not amount to a transfer Hiran Bibi v. Sohan Bibi, AIR 1914 PC 44, approving, Khunni Lal v. Govind Krishna Narain, (1911) ILR 33 All 356 (PC). It is not also the creation of an interest. For, as pointed out by the Privy Council in Hiran Bibi’s case AIR 1914 PC 44, in a family settlement each party takes a share in the property by virtue of the independent title which is admitted to that extent by the other party. It is not necessary, as would appear from the decision in Rangaswami Gounden v. Nachiappa Gounden AIR 1918 PC 196, that every party taking benefit under a family settlement must necessarily be shown to have, under the law, a claim to a share in the property. All that is necessary is that the parties must be related to one another in some way and have a possible claim to the property or a claim or even a resemblance of a claim on some other ground as say, affection. Ram Charan Das v. Girija Nandini Devi, AIR 1966 SC 323.
5. It is well settled that registration would be necessary only if the terms of the family arrangement are reduced into writing. Here also, a distinction should be made between a document containing the terms and recitals of a family arrangement made under the document and a mere memorandum prepared after the family arrangement had already been made either for the purpose of the record or for information of the court for making necessary mutation. In such a case memorandum itself does not create or extinguish any rights in immovable properties and therefore does not fall within the mischief of section 17 of the Registration Act and is, therefore not compulsorily registrable –Kale v. Dy. Director AIR 1976 SC 807.
6. The family arrangement will need registration only if it creates any interest in immoveable property in present in favour of the party mentioned therein. In case however no such interest is created, the document will be valid despite its non-registration and will not be hit by section 17 of the Indian Registration Act, 1908. Maturi Pullaih v. Maturi Narasimhan AIR 1966 SC 1836.
7. Even a family arrangement, which was registrable but not registered, can be used for a collateral purpose, namely, for the purpose of showing the nature and character of possession of the parties .In pursuance of the family settlement. Kale v. Director of Consolidation AIR 1976 SC 807, (1976) 3 SCC 119.
- To record a family arrangement arrived at orally, a memorandum of family arrangement-cum-compromise is required to be drawn up wherein the properties and assets belonging to the parties to the family arrangement are required to be specified. Thereafter the fact of arriving at family arrangement sometime in the past with the help of well-wishers and family friends is required to be mentioned. In the operative portion of the Memorandum of Family Arrangement-cum-Compromise the properties and business which have been allotted to different parties are required to be specified.
In addition to the Memorandum of Family Arrangement –cum-Compromise, other documents like affidavits of each of the parties to the Family Arrangement are required to be obtained wherein each of the parties confirms on oath that he has received a particular asset and the family arrangement is arrived to his total satisfaction and it is binding on him. In such an affidavit the party giving up his right in other properties which are allotted to other parties to the Family Arrangement states that the said other properties may be transferred in the records of the registering authorities without notice to him. On the basis of the affidavit which is required to be executed before a Notary Public; mutation entries can be made by the concerned authorities.
In order to enable the member of the family to whom a particular property is allotted on arriving at a family arrangement, a power of attorney is required to be given by a member in whose name the said property was standing prior to the family arrangement to enable the party receiving the property to deal with the property as his own. Depending on the facts of each case, various other documents may be required to be drawn up to effect a proper and binding family arrangement.
- Family arrangement is arrived at for a consideration namely, to resolve the dispute amongst the parties, to preserve the family peace and harmony and to avoid litigation and therefore, the provisions of Gift Tax Act are not attracted.
G.T.O. v. Bhupati Veerbhsadra Rao ( 9 ITD 618 )
C.G. T. v. Pappathi Anni ( 123 ITR 655, Mad )
Ziauddin Ahmed v. CGT ( 102 ITR 253 Gau. )
In the case of N. Durgaiah v. C.G.T. 99 ITR 477 (AP), the assessee executed a registered deed of settlement on March 26, 1962, conveying certain immovable properties to his five sons and two daughters out of whom one of the sons was a minor in whose favour a house worth Rs. 64,800/- was settled. The assessee contended before the G.T.O. that the transaction was in the nature of a family arrangement which does not amount to a taxable gift under the G.T.Act. The G.T.O. A.A.C. and the Tribunal rejected the contention of the Assessee.
When the matter reached the High Court, the Andhra Pradesh High Court held that in order to constitute a family arrangement, there must be an agreement or arrangement amongst the members of the joint family who wish to avoid any plausible or possible disputes and secure peace and harmony amongst the members. Where one of the parties executes a document styled as settlement deed where under some of the properties exclusively belonging to him as his self-acquired properties are settled in favour of the other members of the family, the terms of such document do not amount to a family arrangement. There is no family arrangement as the same is only a unilateral act.
Hence a purely voluntary act of giving up one’s right in property without compelling circumstances indicating an existing or a possible dispute resulting in a compromise may well constitute a conveyance by way of gift and not valid family arrangement. It is, therefore, necessary that the preamble to the family arrangement should advert to the existence of difference which are likely to escalate to possible litigation and cause lack of peace and harmony in the family and likely to bring dishonor to the family name and prestige.
In the case of Ram Charan Das v. Girja Nandini Devi (Supra), the Supreme Court held that a compromise by way of family settlement is in no sense an alienation by a limited owner of the family property and since it is not an alienation it cannot amount to a creation of interest.
The definition of the term “transfer” contained in section 2(47) of the Income Tax Act, 1961 prior to its amendment by the Finance Act, 1987 with effect from 1.4.1988 has been considered by the Supreme Court in the case of Dewas Cine Corporation ( 68 ITR 240), Bankey Lal Vaidya ( 79 ITR 594 ) & Malbar Fisheries Co. ( 120 ITR 49) wherein the High Court, was called upon to consider whether on dissolution of a firm there is a transfer of assets amongst the partners. The Supreme Court in all the decisions unequivocally held that on dissolution of a firm there is a mutual adjustment of rights amongst the partners and therefore, there is no transfer of assets by sale, exchange, relinquishment of the asset or extinguishments of any rights therein.
Their Lordships of the Supreme Court in the case of Sunil Siddharthabhi v. CIT (156 ITR 509) after considering the decisions of their Court in the case of Dewas Cine Corporations, Bankey Lal Vaidya & Malbar Fisheries Co. and the Gujarat High Court decision in the case of Mohanbhai Pamabhai ( 91 ITR 393 ) held, that when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realized by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realization of a pre-existing right.
With effect from 1.4.1988 sub-clause (v) is added to the definition of the term “transfer” in section 2(47) of the Income Tax Act which provides that any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract amounts to a transfer. Sub-clause (vi) which is added to the definition of the term transfer provides that transaction which has the effect of transferring or enabling the enjoyment of any immovable property amounts to a transfer for the purpose of Income Tax Act.
Whether distribution of assets amongst the members of the family amounts to transfer pursuant to the amended definition of the term transfer ?
In the case of Ramgowda Annagowda Patil v. Bhausaheb ( AIR 1927 PC 227), the family settlement was between parties which included the brother and son-in-law of a widow of the deceased. Though the widow was a necessary party, her brother and son-in-law were not, but they had been allotted shares in the properties which formed the subject-matter of the family arrangement. It was held that in view of the closeness of the relationship between the persons who were disputing the right over the property with one another, the arrangement between them was legal and enforceable ( Mehdi Hasan v. Ram Ker AIR 1982 All. 92).
1) WHETHER HUF CAN RECEIVE GIFTS?
HUF can receive gifts from member as well as outsiders. However, gifts from outsiders above the limit is taxable as per Section 56(2)(vii) and gift from member can be covered under the clubbing provisions of Section 64(2).
2) WHETHER HUF CAN GIVE GIFTS?
HUF can give gifts to his members within reasonable limits.
Property was in the name of the HUF. By Court order (Probate), it was transferred in the name of Wife. HUF is filing the return showing Income from House property till AY 2012-2013. The property was sold in 2013-2014 and consideration was received by Wife by executing documents in her name.
Who is liable to pay capital gains tax?
Section 6 of the Hindu Succession Act, 1956, as amended by the Hindu Succession (Amendment) Act, 2005, states that a coparcener is entitled to bequeath his share in a joint Hindu family property by testamentary disposition (by executing a will) or intestate succession. Thus, a coparcener can bequeath only his share in the joint Hindu family property and not the entire property of the HUF, as the entire property doesn’t belong to him and he is entitled to only a particular share in the said property.
He can bequeath his share in the joint Hindu family property to any person of his choice by executing a will. In the event that he does not execute any will, the property will devolve as per the rules of intestate succession applicable to Hindus under the Hindu Succession Act, 1956—his share in the joint Hindu family property shall devolve upon his Class I heirs (being his wife and all his children, including his daughters).
Legally, a probate is given by the Court only after the Will is made by a person before his death and the same executed by the Executor. An HUF cannot make a Will. Hence, the question of probate transferring the property in the name of the wife does not arise. Hence, the capital gains tax shall arise to the HUF.