HUF: Easy to Make, Difficult to Break

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HUF: Easy to Make, Difficult to Break

Hindu law recognizes the concept family unit & the practice of pooling together the efforts, skills & resources of the family members for the benefit of all the members in the family. It is recognized as a separate tax entity u/s 2(31) of the Income-tax Act, 1961. There are a lot of confusions & ambiguities amongst readers with regard to HUF & its taxation. Here is a compilation of the few common issues over HUF:

Can HUF receive gift from non members?
There is no restriction on receiving the gift by HUF from any person who is not a member of HUF. However, it may be noted that any gift received by HUF from any person will be taxable if the aggregate value exceeds Rs. 50,000/-. Exception is provided if the gift is received (a) from the Relatives or (b) Under a will or by way of inheritance or (c) in contemplation of death of the payer. The meaning of “Relatives” in case of HUF has been restricted to “any member of the family” only. So, if the gift is received by HUF from anyone other than a member then it shall be treated as “Income” if the aggregate amount exceeds Rs. 50,000/-. In short, a gift from any person who may be the “Relative of the Member” is not considered as the “Relative of the HUF”.

2.Whether a member can divert the income to the HUF by gifting the amount to HUF or by throwing his individual property in the common Hotchpotch?

Yes, the amount can be gifted or thrown in the common hotchpotch by the member. However, income from such an amount will not be taxable in the hands of the HUF. In such case, any income arising in the hands of the HUF will be taxable in the hands of the member only and not in the hands of the HUF as a result of clubbing provision contained in section 64(2).

  1. Whether HUF can continue without any male member?

Once any asset has become part of the corpus of HUF, it continues to be so even if there is no other surviving male member in the family. So long as the property is not partitioned, the assets will continue to be that of the HUF, even after the death of the sole surviving male member –CIT Vs. RM.AR.AR Veerappa Chettiar (1970) 76 ITR 467. There need not be more than one male member for recognition of the HUF – Gowli Buddanna Vs. CIT (1966) 60 ITR 293(SC). A person with a wife and daughter can also have an HUF.

  1. Whether a single member can constitute HUF?

This issue could arise if there remains a single member as a result of death of other members or as a result of full partition of parent HUF whereby assets are devolved to an individual. Expressions “HUF” in section 2(31) treats HUF as an entity distinct from an individual & word “family” connotes a group of people related by blood or marriage to each other. It refers to Plurality of persons & it is an essential attribute of a family. In short, a single person whether male or female can not constitute a family -C. Krishna Prasad Vs. CIT (1974) 97 ITR 0493.

  1. Deduction towards Salary / Remuneration paid to Karta or other member:
    If any salary or remuneration is paid by the HUF to any of its members or its karta, then the amount is allowable as deduction in the hands of the HUF – CIT Vs. Prakash Chand Agarwal (1982) 11 Taxman 55 (MP).

                                                                                                                           6.Can ladies be the karta of the family?

The right to be the karta devolves on the coparceners of the joint family. After Hindu Succession (Amendment) Act – 2005, daughters are also given coparcenary status and so they can become karta of the HUF – Sujata Sharma Vs. Manu Gupta (2016) 66 Taxmann 28. Further, a widow can act as a manager of the HUF if all other coparceners are minors.

  1. How to dissolve the HUF?

Formation of HUF is easier as compared to its dissolution.
a) HUF can be dissolved only after its partition. There is a difference between partitions under Hindu Law vis a vis partition as recognized under the Income-tax Act.

b) Under Hindu Law: partition could be total partition or partial partition.  In total or full partition, all the members cease to be members of the HUF and all the properties also cease to be properties belonging to the HUF. Partial partition may be partial vis-a-vis properties or vis -a-vis members or both. In partial partition vis-a-vis members, some of the members go out on partition whereas other members may continue to remain the members of the family. In partial Partition vis-a-vis properties, some of the properties may be divided among the members whereas other properties may continue to remain as HUF properties.

c) Under Income Tax Law: Though partial partition is recognized under the Hindu Law, it is not so under the Income Tax Act-1961. In order to recognize the partition under the Income Tax Act, it has to be a total or full partition only & same need to be confirmed by the Assessing Officer. Under the Income Tax Act – 1961, claim for full partition has to be made before the Assessing Officer who after making due verification & enquiry, may record the partition. In view of section 171(9), partial partition is not considered as partition for tax purposes.
d) It may be noted that there is express provision under the I T Act which says that the distribution of capital asset on partition of HUF is not liable for capital gain tax as it is not regarded as “Transfer”.

For ease of reference, section 179 of the Income Tax Act – 1961 which deals with the assessment of HUF as a taxable entity is reproduced as under:

 

Assessment after partition of a Hindu undivided family.

 

  1. (1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family.

(2)  Where, at the time of making an assessment under section 143 or section 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the Assessing Officer shall make an inquiry thereinto after giving notice of the inquiry to all the members of the family.

(3)  On the completion of the inquiry, the Assessing Officer shall record a finding as to whether there has been a total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has taken place.

(4)  Where a finding of total or partial partition has been recorded by the Assessing Officer under this section, and the partition took place during the previous year,—

(a) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place; and

(b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed.

(5)  Where a finding of total or partial partition has been recorded by the Assessing Officer under this section, and the partition took place after the expiry of the previous year, the total income of the previous year of the joint family shall be assessed as if no partition had taken place; and the provisions of clause (b) of sub-section (4) shall, so far as may be, apply to the case.

(6)  Notwithstanding anything contained in this section, if the Assessing Officer finds after completion of the assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial, the Assessing Officer shall proceed to recover the tax from every person who was a member of the family before the partition, and every such person shall be jointly and severally liable for the tax on the income so assessed.

(7)  For the purposes of this section, the several liability of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial.

(8)  The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period up to date of the partition, whether total or partial, of a Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such period.

(9)  Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place after the 31st day of December, 1978, among the members of a Hindu undivided family hitherto assessed as undivided,—

(a) no claim that such partial partition has taken place shall be inquired into under sub-section (2) and no finding shall be recorded under sub-section (3) that such partial partition had taken place and any finding recorded under sub-section (3) to that effect whether before or after the 18th day of June, 1980, being the date of introduction of the Finance (No. 2) Bill, 1980, shall be null and void;

(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place;

(c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family in respect of any period, whether before or after such partial partition;

(d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition, and the provisions of this Act shall apply accordingly.

Explanation.—In this section,—

(a) “partition” means—

 (i) where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or

(ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition;

(b) “partial partition” means a partition which is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both.

 

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