HUF- HINDU UNDIVIDED FAMILY-BASIC REQUIREMENTS

1. INTRODUCTION :  I. The Hindu Undivided Family (HUF) is a special feature of Hindu society. Hindu Undivided ...

1. INTRODUCTION : 

I. 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. 

II. 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. 

III. 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. 

IV. 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. 

B. 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. 

C. BASIC REQUIREMENTS FOR THE EXISTENCE OF AN HUF ARE AS FOLLOWS : 

1.  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 Supreme 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.) 
2. 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) 
3. 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. 

D. 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.

E. 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). 

F 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- 

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 & bounds, 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:METHODS OR DEVICES MAY PROVE USEFUL IN REDUCING THE TAX INCIDENCE IN THE CASE OF HUF (READ HERE)

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.

LIKELY QUERIES:

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.

3) CASE: 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.

By CA VIMAL PUNMIYA

READ MORE ON HUF- HINDU UNDIVIDED FAMILY