HUF And Tax Implications

Feb. 11, 2011 - PRLog -- Hindu Undivided Family is defined as consisting of a common ancestor and all his lineal male descendants together with their wives and unmarried daughters. Therefore, a HUF consists of all males & females in the family. Daughters born in the family are its members till their marriage and women married into the family are also members of the HUF.

In this context, “Hindu” mean 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 and it includes a Virashaiva, a Lingayat or a follower of Brahmo, Prathana or Arya Samaj, a Buddist, Jain or Sikh. In CWT In the case of Smt. Champa Kumari Singh (1972) 83 ITR 720, Supreme Court held that the HUF includes Jain Undivided Family. HUF is a separate entity for taxation under the provisions of sec. 2(31) of the I. T. Act. It means that the one person can be assessed as an individual and also as a Karta / Chief of his family.

HUF Formation – An HUF is automatically constituted with the marriage of a person. No formal action is required to create an HUF. The HUF being the result of birth, possession of joint property is only an appendage of the HUF and is not necessary for its constitution. So, one person cannot form an HUF. Family is a group of people related by blood or marriage. 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. This was held in the case of Prem Kumar v. CIT, 121 ITR 347 (All.)

It can be noted that, the technical status of an HUF continues even in the hands of females after the death of sole male member. Even after the death of the sole male member, the original property of the HUF remains in the hands of the widows of the members of the family and the same need not divided amongst them.

An HUF need not consist of two male members- even one male member is enough. The understanding that there must be at least two male members to form an HUF as a taxable entity is not applicable. – 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.)

Nucleus of HUF – With several rulings it is now established that, nucleus or ancestral joint family property is not required for the existence of the HUF.

Karta - He is the person who manages the affairs of the family. Generally, the senior most male member of the family acts as Karta. However, any other 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).

Property - The HUF property may consist of ancestral property, property allotted on partition, property acquired with the aid of joint family property, separate property of a co-parcener blended with or thrown into a common family pool. 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.

Female members cannot merge 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). Female members can also bequeath their property to the HUF, CIT v. G.D. Mukim, 118 ITR 930 (P & H).

Multiple Family Structures - An HUF can consist of several branches or sub-branches. For example, a person with his wife and sons constitutes an HUF. If the sons have wives and children, they also constitute smaller HUFs. If the grandsons also have wives and children, then they also constitute HUFs. It is irrelevant whether the smaller HUFs hold any property. Nucleus property can be acquired by partition of bigger HUF or by gifts from any member of the family or even by a stranger or by will with intention of the donor or the testator that the said gift or bequest will form the HUF property of the donee. 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).

Tax planning through HUF -
(i) Increase the number of assessable units through the device of partition of the HUF.
(ii) Create separate taxable units of HUF through will in favour of HUF or gift to HUF.
(iii) Enter into family settlement / arrangement.
(iv) Payment of remuneration to the Karta and also to other members.
(v) Providing loans to the members of the HUF.
(vi) Gift to members.

Partition of HUF - 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.

In case, where the HUF has only one business establishment, which can not be physically divided, it 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 is no more recognised by the Income Tax Act. The provisions of sec. 171 partial partitions 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.

Legal aspects and partition of HUF –
(i) Assets distribution in the course of partition would not attract any capital gains tax.
(ii) No gift tax liability.
(iii) No clubbing of incomes u/s. 64....................................

To read further please click on the following link:
http://www.tjaindia.com/articles/arrangement-211108.htm

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The Author, A. K. Jain is practicing Chartered Accountant at New Delhi since 1984 under the banner, “Tapuriah Jain & Associates” ( TJA ). He can be contacted at E-Mail: copindia@hotmail.com or Telephone Number – 98-100-46108.