HUF Formation is automatic with marriage– 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.
Property held by a single co-parcener does not lose its character of
Joint Family :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.)
Unmarried daughter and daughter in law is also member: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.
Brahmo, Prathana or Arya Samaj, a Buddist, Jain or Sikh etc also
covered in 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 continues even in the hands of females after the death of sole
male member: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).
HUF 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.
Create Separate Taxable Units - 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. What matters is the intention of
the donor that the property given is for the benefit of the family as
a whole. Suppose there is an HUF consisting of Karta, his wife, his
two sons, daughter-in-law and grand children. 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
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 respective wills.
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. Since
family arrangement does not involve transfer, it would not attract
gift tax, capital gains tax or clubbing. 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. 6, 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.100,000/- which would attract no tax & if the assessment year is
2007-08, then the tax liability would be reduced form Rs. 100,000/- to
nil.
Remuneration to the Karta & members - The other important measure of
tax planning for an HUF is to pay remuneration to the Karta and its
members for the 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. The payment must be for
service to the family for commercial or business expediency. Jitmal
Bhuramal v. CIT 44 ITR 887(SC).
Loan to the Members - 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
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.).
Gift of Assets to Members - Generally, the Karta of an HUF cannot gift
or alienate HUF property but he can make certain gifts to the female
members. Gift of immovable property within reasonable limits, can also
be made by a Karta to his wife, daughter, daughter-in-law or even to a
son out of natural love and affection. Gift of immovable property
within reasonable limits can be made only for dutiful purpose e.g.
marriage of a daughter etc.
If the HUF has surplus 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. 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. 1.10.2004 Gift received from
other than relatives exceeds Rs.25,000/- then that amount is liable to
Income Tax u/s. 57. It may be remembered that gift for marriage or
maintenance of daughter 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.
Other Tax Planning –
(i) Transfer of individual property to the family.
(ii) Family reunion after partition.
(iii) Inheritance by succession
Partnership Firm & HUF - An HUF cannot become a partner in a firm. The
Karta or a member of the HUF can represent the HUF in a firm. A female
member can also represent HUF in a partnership firm, CIT v. Banaik
Industries 119 ITR 282 (Pat.). 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).
Members of HUF can constitute Partnership without affecting 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 firm's tax, conversion of HUF business into partnership is not
advantageous.
BY CA ASHWANI NAGAR
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.
Property held by a single co-parcener does not lose its character of
Joint Family :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.)
Unmarried daughter and daughter in law is also member: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.
Brahmo, Prathana or Arya Samaj, a Buddist, Jain or Sikh etc also
covered in 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 continues even in the hands of females after the death of sole
male member: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).
HUF 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.
Create Separate Taxable Units - 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. What matters is the intention of
the donor that the property given is for the benefit of the family as
a whole. Suppose there is an HUF consisting of Karta, his wife, his
two sons, daughter-in-law and grand children. 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
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 respective wills.
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. Since
family arrangement does not involve transfer, it would not attract
gift tax, capital gains tax or clubbing. 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. 6, 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.100,000/- which would attract no tax & if the assessment year is
2007-08, then the tax liability would be reduced form Rs. 100,000/- to
nil.
Remuneration to the Karta & members - The other important measure of
tax planning for an HUF is to pay remuneration to the Karta and its
members for the 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. The payment must be for
service to the family for commercial or business expediency. Jitmal
Bhuramal v. CIT 44 ITR 887(SC).
Loan to the Members - 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
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.).
Gift of Assets to Members - Generally, the Karta of an HUF cannot gift
or alienate HUF property but he can make certain gifts to the female
members. Gift of immovable property within reasonable limits, can also
be made by a Karta to his wife, daughter, daughter-in-law or even to a
son out of natural love and affection. Gift of immovable property
within reasonable limits can be made only for dutiful purpose e.g.
marriage of a daughter etc.
If the HUF has surplus 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. 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. 1.10.2004 Gift received from
other than relatives exceeds Rs.25,000/- then that amount is liable to
Income Tax u/s. 57. It may be remembered that gift for marriage or
maintenance of daughter 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.
Other Tax Planning –
(i) Transfer of individual property to the family.
(ii) Family reunion after partition.
(iii) Inheritance by succession
Partnership Firm & HUF - An HUF cannot become a partner in a firm. The
Karta or a member of the HUF can represent the HUF in a firm. A female
member can also represent HUF in a partnership firm, CIT v. Banaik
Industries 119 ITR 282 (Pat.). 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).
Members of HUF can constitute Partnership without affecting 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 firm's tax, conversion of HUF business into partnership is not
advantageous.
BY CA ASHWANI NAGAR
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