A Bird’s Eye View of HUF Taxation in India

 

 

A Bird’s Eye View of HUF Taxation in India

 

Executive Summary

 

Considering the unique social, cultural and economic dynamics of Indian joint family, the Income Tax Act has given the status of separate legal entity to Hindu Undivided Family(HUF) under section of 2(31) of the IT Act. This article discusses various aspects of HUF taxation, touching upon recent judicial decisions which help to understand the HUF holistically.

 

Hindu Joint family is a unique characteristic of Indian society. It is a group of relatives, tied together by kinship, marriage and descend from common ancestor. It comprises of children, children’s children and spouses.

 

The joint families are the most important institutions that hold the social and cultural fabric of the society. Even from the economic perspective, it plays a very crucial role in jointly handling the economic resources of the family. Hence, a pioneering Indian Sociologist I P Desai rightly said “We call that household a joint family which has greater generation depth than individual family and the members of which are related to one another by property, income and mutual rights and obligations.”

 

The Mitakshara and Dayabhaga systems are the two schools of law that governs the Hindu Undivided Family in India. The Mitakshara School is observed throughout India except Bengal and Assam, which follows Dayabhaga system. The difference between two schools with respect to the property is, in Mitakshara ownership of property vests in the family and not with any member of the family, whereas under Dayabhaga system ownership of property vests with the father and not with any member of the family.

 

Holding the property jointly and generating income out of it is one of the major activity of the joint family in India apart from fulfilling other socio-cultural obligations like marriage, kinship etc. This dual characteristic of the Hindu Undivided family is very much important to keep the members of the family intact.

 

This unique economic aspect of the Hindu Undivided Family is duly recognized by the Indian Taxation system and sanction of separate legal entity is given to HUF right from the inception of the Income Tax Act 1922.

 

The Income Tax Act uses the term Hindu Undivided Family instead of Hindu Joint family which is used in common parlance. Though both seems to be one and the same and frequently used interchangeably, in reality there are differences between the two. From the taxation angle, it is very pertinent to understand the difference between the two.

  1. First and foremost, Hindu joint family derives its roots from Hindu law, whereas the HUF is created for the purpose of taxation
  2. As per Hindu law, every Hindu family is assumed to be Hindu joint family unless contrary is proved. Whereas no such assumptions are made in taxation laws. Until and unless the HUF is explicitly created, the income cannot be offered under the HUF
  3. Under Hindu law, owning the joint family property is not a precondition for the existence of Hindu joint family. Whereas the HUF without any joint property is meaningless from the taxation point of view
  4. According to Hindu law, the son in the womb in many aspects is treated as son in existence. But, no such privileges are given under taxation
  5. The creation of the joint family is automatic and continuous where as HUF requires to be explicitly created

 

In this context, the question that arises is when HUF is a group of individuals coming together and doing business, why can’t they be subsumed under the entity “Body of Individual” (BOI) instead of giving it separate recognition under the Income Tax Act.

 

The distinction between BOI and HUF is that, in the former, group of unrelated individuals come together with an intention of earning income. Whereas in the later, individuals come together due to the rights and obligations they have towards their other family members. Hence, the economic, social and cultural obligations are intertwined in HUF, unlike BOI whose main focus is to earn profit.

 

It is very pertinent to note that, even the Income Tax law of Pakistan recognizes the HUF as a business entity. However, it does not declare it as separate legal entity like in India but it is subsumed under the category “Association of Persons”. Both India and Pakistan recognizing the economic importance of HUF and giving its right due in Income Tax law, dates back to 19th century colonial rule who recognized Indian customary laws in administration.

 

Coming to the structure of HUF, Karta manages the affairs of the undivided family, who is usually the eldest living male member of the family. He has maximum power and obligations towards the welfare of the joint family.

 

Say for example, there is a family, who are into the hereditary business of weaving clothes. All the members of the family contribute towards this business on daily basos. In such a scenario it becomes difficult to assign income and expenses to individual members of the family. Hence, it becomes very essential to assess the whole family as one unit. In such a scenario the concept of the HUF gains relevance in taxation.

From the above discussion it is clearly that, creation of HUF cannot be just seen as attempt to save taxes by the taxpayer but should be viewed in a wider horizon keeping in mind the social and cultural diversity of the country.

 

(A) HUF from Income Tax Angle

 

  • (A) HUF from Income Tax Angle
  • (B) Partition of HUF
    • Partial Partition of the Assets
    • Total Partition of the Assets
  • (C) Treatment of Income of Members Received from HUF
  • (D) Will any Clubbing Provision Apply in Case of Transfer of Asset to Hindu Undivided Family (HUF) by its Member?
  • (E) Taxation of Money Received by HUF without Consideration – Applicability of 56(2)(vii) of the IT Act.
  • (F) Point to Ponder: Whether Women can be Karta of HUF

 

Presently, there are around 10 lacs of Income Tax returns that are filed by HUF, declaring nearly Rs 40,000 crore as gross total income. In such a scenario, it becomes very much important to understand HUF from the taxation angle. Here is a discussion which gives basic understanding of various provisions related to HUF.

  1. Single person cannot form HUF. Also, HUF cannot be formed by a group of people who do not constitute a family. Lineal descendants with a common ancestor are a must for the creation of HUF
  2. HUF is a separate entity under section 2(31) of the Income Tax Act. HUF deed gives clear insight into the working of HUF like the initial capital invested into HUF, members of HUF, Karta details, nature of assets held by HUF, business carried out by them etc
  3. Jain, Sikh and Buddhist families despite being not governed by the Hindu Law, are treated as HUF under the Income Tax Act
  4. Income under the following heads is accepted as the HUF income, if it is earned and declared by HUF
  5. Profits from business or profession
  6. Income from house property
  7. Capital gains
  8. Income from other sources. is pertinent to note that, HUF cannot declare any income from salary, because salary is earned in individual capacity and should be offered in individual hands.
  9. HUF cannot be created for the first time by a gift from a stranger. However, gift can be made by a stranger if HUF already exists.
  10. Residential status of HUF (Section6(2) of the IT Act)
  11. HUF is considered to be resident in India if the control and management of its affairs are wholly or partly situated in India.
  12. A resident HUF is treated as Resident and ordinarily resident in India if the Karta (inclusive successive Karta) satisfies both of the following conditions-
  13. He has been resident in India in at least 2 out of 10 years immediately preceding the relevant year
  14. He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant year.

If Karta doesn’t satisfies any of the above conditions then HUF is considered as Resident but not ordinarily resident.

  1. If HUF’s control and management is situated wholly outside India during the previous year then it is treated as non resident

 

Residential status of HUF is an important factor in determining whether the global income of HUF is taxable or not.

 

(B) Partition of HUF

 

Section 171 of the IT Act elaborates on the partition of HUF and the responsibilities of the assessing officer (AO) in such circumstances. Whenever, HUF makes a claim that HUF is partitioned in the year under assessment, the onus to verify whether such a partition was partial or total lies on the AO. AO should call all the members of HUF and make necessary investigation and establish that the facts narrated are correct.

 

There are two types of partition in HUF

  1. Partial partition of the assets
  2. Total partition of the assets

 

Partial Partition of the Assets

 

As per section 171(9) of the Income-tax Act, 1961 the partial partition after 31-12-1978 is not recognized. Hence, even after partial partition the income of HUF, shall be assessed as if no partial partition had taken place.

 

Total Partition of the Assets

 

The only partition recognized under the Income Tax Act is total partition. In order to be recognizable partition under section 171 of the IT Act, the partition should be complete with respect to all members of HUF and in respect of all properties of HUF and there should be actual division of property as per specified shares allotted to each member.

In the case of P. Shankaraiah Yadav 91 ITD 228, Honorable ITAT held that, setting apart certain assets of HUF in favor of certain coparceners on the condition that no further claim in properties will be made by them is nothing but a partial partition and cannot be construed as total partition u/s 171(9) of the Income Tax Act.

 

(C) Treatment of Income of Members Received from HUF

 

Section 10(2) of the IT Act 1961 states “In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

 

Any sum received by an individual as a member of HUF, where such sum has been paid out of the income of the family or in the case of any impartiable estate, where such sum has been paid out of the income of the estate belongling to the family”

 

Hence, as per section 10(2) of the IT Act, amount received out of HUF income, or in case of impartible estate, amount received out of income of family estate by any member of such HUF, it is exempt from tax.

 

For example, HUF earned Rs 20, 00,000 /- during the previous year and paid tax on its income. Mr Ram, member of HUF and also salaried employee with an MNC, earns a salary of Rs. 20,00,000/- per year. During the previous year, Mr Ram also receives Rs. 1, 50,000/- from HUF. Mr Ram will pay tax on his salary income but any sum received from his HUF is exempt in Mr Ram’s hand.

 

It is pertinent to note that, members of the joint family living apart do not affect their right to claim exemption u/s 10(2) of the IT Act.

 

(D) Will any Clubbing Provision Apply in Case of Transfer of Asset to Hindu Undivided Family (HUF) by its Member?

 

As per section 64(2) of the IT Act, when an individual, being a member of HUF, transfers his property to HUF otherwise than for adequate consideration or converts his property into the property belonging to HUF (it is done by impressing such property with the character of joint family property or throwing such property into the common stock of the family), then clubbing provisions will apply as follows:

  • before partition of HUF, entire income from such property will be clubbed with the income of transfer or.
  • After partition of HUF, such property is distributed amongst the members of the family. In such a case income derived from such property by the spouse of the transferor will be clubbed with the income of the individual and will be charged to tax in his hands.

 

(E) Taxation of Money Received by HUF without Consideration – Applicability of 56(2)(vii) of the IT Act.

 

Where HUF receives from any person after 01/10/2009, without any consideration then it will be treated as “Income from Other Sources”

  1. Any amount exceeding Rs. 50000, the whole of such amount.
  2. Any immovable property, the stamp duty value of which exceeds Rs. 50,000/-, the stamp duty value of such property.
  3. Any property, the FMV of which exceeds Rs. 50,000/-, the whole of FMV of such property.
  4. Or for a consideration which is less than FMV of such property by an amount exceeding Rs. 50,000/-, the aggregate FMV of such property as exceeding such consideration.

 

However, provision of section 56(2)(vii) of the IT Act, shall not apply to any sum of money or any property received by HUF

  1. From any relative
  2. On the occasion of the marriage of the Individual.
  3. Under a will or by way of inheritance; or
  4. In contemplation of death of the payer or donor, as the case may be, or
  5. From any local authority as defined in explanation to clause (20) of Section 10; or
  6. From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10.

 

This section covers only those transactions, wherein members of HUF are donors and gift to HUF, whereas HUF giving gift to the members of HUF is not covered under this section. Hence, any individual receiving gift from HUF, is fully taxable.

 

This was clearly brought out in the judgment of Ahmedabad bench of ITAT in the case of Shri Gyanchand M Bardia V/s ITO. In this case, appellant Shri Gyanchand M Bardia had received gift of Rs. 1, 02, 00, 000/- from his own HUF i.e Gyanchand M Bardia(HUF) in which he was karta. The Assessing Officer rejected the assessee’s plea that it is exempt from tax since it is received from relative and brought to tax under “Income from Other Sources” of the appellant.

 

Assessment made by the Assessing Officer was upheld by the tribunal which opined that HUF receiving gift from its members is acceptable but not vice versa. Karta gifting the corpus of HUF to himself is the grave injustice committed towards other members of HUF, who do not have any control in managing the affairs of the HUF.

 

(F) Point to Ponder: Whether Women can be Karta of HUF

 

India being a patriarchal society, Karta is the senior-most male coparcener of the HUF. Junior male member of the family can become Karta if all members of the family agree. If the family is survived by women, and her minor son and daughters, then son would be Karta acting through his natural guardian i.e minor’s mother. However, women did not have any right to become Karta of the HUF when there were male members in the family.

This disparity of denying the right of becoming Karta to women was removed in the year 2016, by the landmark judgment of Honorable Delhi High Court in the case of Mrs Sujata Sharma V/s Shri Manu Gupta and others.

 

Brief background of the case:

 

Prior to Hindu Succession (Amendment Act) 2005, coparcenary property of a Hindu male dying interstate devolve upon his sons, as they were the coparceners and not upon daughters. With the amendment to the said Act, this discrimination against daughters was removed, and held that, daughter of coparcener (i.e Father) shall by birth become a coparcener in the same manner as a son and entitled to the coparcenary property in the same manner as a son.

 

In the instant case, the karta of HUF D.R. Gupta & Sons (HUF) was D.R. Gupta, who had five sons. After his death, eldest son Mr Kishan Mohan Gupta becomes Karta of the HUF. After, the death of Mr Kishan Mohan Gupta and his four brothers, Mr Manu Gupta, the son of deceased youngest brother becomes Karta. This act of Mr Manu Gupta was challenged by Mrs Sujata Sharma, eldest daughter of Mr Kishan Mohan Gupta, on the ground that, she is the senior most member of the family after the death of her father and uncles.

 

She argued that she is entitled to be Karta of the HUF being the eldest member of the family. Her contention was, since daughter is coparcener in the HUF consequent to amendment to section 6 of Hindu Succession Act 2005, all rights of a coparcener including the right to act as Karta of the HUF should be bestowed on the daughter too.

 

However, defendant Mr Manu Gupta objected to this line of argument, stating amendment to Hindu Succession Act 2005 is restricted only for daughter to become coparcener and does not extend to granting her right to manage HUF property. He also contended that, since Mrs Sujata Sharma has been married, she cannot be integral part of HUF.

 

In this case, Honorable High Court passed landmark judgement stating, after the amendment of Hindu Succession Act 1956 in the year 2005, women have equal right to the HUF property. Accordingly, they should also have right to manage that property in the capacity of Karta. Hence, there should not be any restrictions in making female member of the family as Karta provided she is the eldest member in the family.

 

Now the legal position is after the death of father who is Karta of the HUF, even daughter can become Karta having mother and siblings (younger sisters and brothers) as members of the HUF. Also, there is no restriction on married daughters from becoming the Karta of their parents HUF.

 

This judgement has ushered in equal economic and legal right to women by rightly entitling her to manage the affairs of HUF. This should enable more and more women to come forward and take up the responsibility of Karta and handling the affairs of HUF.

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