HUF - A boon for all Hindu households!

Since generations, India had a prevailing tradition of the Joint Hindu Family (JHF).

The system is an extended family arrangement prevalent throughout the Indian subcontinent, consisting of many generations living in the same home, all bound by the common relationship.

A joint family consists of a husband and wife; their sons; their daughters, and so on up-to generations.

In the case of Surjit Lal Chhabra (101 ITR 776 SC), a joint family and undivided family were considered synonymous.

In this article we shall discuss what is a Hindu Undivided Family (HUF) or Joint Hindu Family (JHF) as per various laws. We shall trace the history and evolution of HUF/JHF and also discover how HUFs can help you save taxes! We shall also discuss on how to form an HUF and what are the various benefits/advantages of forming an HUF.

This article has been prepared after thorough research from various legal and allied sources available till date. Various court judgments have also been incorporated in this article.

Our effort is to create a detailed write-up which could be used effectively by our readers for generations as the law relating to HUFs is consistent since ages.

We assure everyone that this article is just like an epic which never grows old and that can be referred anytime in the coming future as well.

For better understanding of our reader we have divided this article into 3 sections:

Let's start with the section A and trace the history and evolution of the Joint Hindu Family.

SECTION A:

THE HISTORY & EVOLUTION OF JOINT HINDU FAMILY

[Sources: The “Mitakshara Hindu Law*”, the “Hindu Succession Act, 1956”, the “Hindu Succession (Amendment) Act, 2005” and the “Hindu Marriage Act, 1955”]

*{Hindu Law has 2 main schools - the Mitakshara School (a concise work) and Dayabagha School (a digest of all codes). Mitakshara is the orthodox school whereas Dayabagha is a reformist school. Mitakshara is the authority for whole of India except for some parts of Bengal and Punjab and therefore, we have considered it as our primary source}

A Joint Hindu Family (JHF) is the fundamental aspect of the life of Hindus. A Joint Hindu Family, according to Mitakshara Law, consists of the common ancestor and all the linear male descendants' upto any generation together with the wife(s) or widows and unmarried daughters of the common ancestor and of the lineal male descendants.

It is interesting to note that even an illegitimate son and windowed daughter(s) may lay claim on the bounty of the joint family.

A child in the womb is also deemed to be a member of joint family for limited purpose.

It has to be clearly understood that the existence of common ancestor is necessary for bringing a joint family into existence but not necessary for its continuance.

Further, a joint family is not an artificial but a natural association. It is a larger body consisting of a group of persons who are united by “Sapinda” relationship i.e. by birth, marriage or adoption.

The chief characteristics of Joint Hindu Family are:

• It is a creation of law. In other words, it is a legally recognized unit which can neither be created by the act of members nor by agreement between the parties. A stranger cannot be admitted into it except by marriage or adoption.

• It has no legal entity distinct and separate from the members who constitute it. It is neither a juristic person not a corporation.

• It is a unit and all its affairs are represented by its Karta (head of the family or manager)

• Status can be acquired into it only by birth, marriage to a male member and adoption.

• The status can be lost by conversion to a non-Hindu faith, marriage to non-Hindu under the Special Marriage Act, 1954 or being given invalid adoption and on partition.

• It is different from a composite family where two or more families agree to line and work together to pool their resources and throw their gains and labour into joint stock and shoulder the common risk. The primary objective of composite family is convenience and efficient management only.

• The general rule is that a single male or female cannot make a joint family. There must be atleast two members to constitute it.

A male member, his wife and daughter or a single male member and a widow of coparcener or even two widows can constitute JHF. The rule is that even on the death of sole surviving coparcener the JHF does not come to an end so long as it is possible in nature of law to add a male member to it (i.e. by adoption).

• The members of JHF may reside separately, thus, it is not necessary that all members of joint family live or work at the same peace.

The strength of the presumption of jointness varies with the degree of generation. The presumption is stronger among the nearer relations namely father and his sons or his real brothers than as among an uncle, nephew or cousins.

These are only two ways to rebut the presumption of jointness i.e. partition and extinction of the family.

• For the purpose of tax assessment, the revenue statute uses the expression Hindu Undivided Family (HUF) which is slightly different from the definition of Joint Hindu Family (JHF).

MITAKSHARA COPARCENARY (or COPARCENER)

All coparceners are joint family members but all joint family members are not coparceners. The Mitakshara concept of coparcenary is based on the notion of son's birth right in the joint family property not merely a son but also a son's son and son's son's son acquire an interest by birth in the JHF property. Coparcenary is a narrower body of persons with a joint family and consists of father, son, son's son and son's son's son i.e. father and his 3 male lineal descendants. It may be noted that in its coparcenary continuance the existence of the father son relationship is not necessary. Thus a coparcenary can consist of grandfather and grandson of brothers of uncle's and nephews and so on.

The coparcenary is limited to 3 generations of lineal male descendants of the last holder of the property only. Last holder means the senior most living lineal male ancestor.

An illegitimate son cannot be a coparcener. Also, an insane coparcener has no right to claim partition but this does not make him cease to be a coparcener. Further, his son is not excluded from taking a share in partition.

If a Hindu performs a marriage under the Special Marriage Act, 1954 with a non-Hindu his interest in the joint Hindu property is severed but it does not mean that there cannot be a coparcenary between such a Hindu and son born to him out of this marriage. A coparcenary will come into existence between him and his son provided his son is a Hindu.

The characteristic features of a coparcenary are:

1. Existence of Property - existence of joint Hindu property is essential in a coparcenary if a Hindu acquires property in his lifetime, on his death, the property inherited by his son shall be held by the latter as joint Hindu property and he will form a coparcenary along with his son by operation of law, whether he likes it or not.

2. Four Generation Rule - Only such males as are within 4 generations inclusive of the last male holder or owner of the property (the eldest surviving male member in the family) forms a coparcenary.

3. Interest by Birth - Coparceners acquire interest in the joint Hindu property from their birth rather conception (i.e. child in mother's womb). The doctrine of right of birth is a unique feature of coparcenary as it gives a right in the property of a person to another during the lifetime of the former.

4. Only Males - Only males including the adopted ones can be member of a coparcenary. This clause has been amended from the year 2005 (discussed later#). An illegitimate son although a member of JHF, is not a coparcener. An insane son is a coparcener though he has no right to claim partition.

5. Rule of Survivorship and Fluctuation of Interest - On the death of the coparcener, his interest in the joint Hindu property devolves on the surviving coparceners by rule of survivorship and not according to law of succession. For example, Mr. R has 2 sons Mr. X and Mr. Y. On the death of Mr. Y, his share in the family property will vest in the surviving coparceners Mr. R and Mr. X and the share which was 1/3rd each during the lifetime of Mr. Y shall now enlarge to ½ between Mr. R and Mr. X, after the death of Mr. Y.

Further, the interest of a coparcener is not fixed at all times i.e. the interest keeps changing with passage of time i.e. some new members may be added to the family or some members may be removed from the family. At a particular point of time it may not be possible without partition to declare as to what will be the share of individual coparcener. Thus, it is said that the undivided coparcenary interest keeps on fluctuating with passage of time.

6. Coparcenary within a Coparcenary - Within a JHF, there can be coparcenaries more than one in different branches of the family. Likewise, there can be a coparcenary within a coparcenary. This is because a coparcenary is formed automatically by operation of law and the moment a Hindu inherits property from her father, grandfather or great grandfather, he immediately forms a coparcenary with his son, grandson and great grandson. For example, a coparcenary exists between Mr. A and his 3 sons Mr. N, Mr. O and Mr. P. O and P has 2 sons each. If O and P acquire separate property in their lifetime and dies, the sons of O and P inherit the separate property of O and P and between themselves constitute a coparcenary. If sons are born to sons of O and P, they will get, by birth, a right not only in the coparcenary headed by Mr. A but also in the sub-coparcenary created among the sons of O and P.

#AMENDMENT - DAUGHTER CAN NOW BE A COPARCENER

The sons as coparceners in the joint family property can additionally claim a direct birth right to an independent share besides a claim in the deceased man's notional portion. A female could not be a coparcener. The female heirs (daughter, widow, and mother) could claim only in deceased man's notional portion. Consequently, in every joint family a daughter got a much smaller share than her brother because she shared equally in her father's property whereas the brother in addition had a share in his own right. In this way a son can effectively inherit atleast 3 times as much as of the ancestral property as a daughter. Also, sons could demand partition and daughters could not.

The Law Commission in its 174th Report (2000) proposed reforms under Hindu Law to remove gender inequalities under the Act.

The Hindu Succession (Amendment) Act, 2005 assented by The President of India on 5th September, 2005 came into force on 9th September, 2005. It has effected some significant changes in the concept of Mitakshara Coparcenary, joint family property, parental dwelling house and certain widow rights. The significant changes making all daughters including married ones coparcener in the joint family property is of great importance for women both economically and symbolically. The amendment abolishes the doctrine survivorship~, and also modifies the law relating to devolution of interest in Mitakshara Coparcenary.

Devolution of Interest in Coparcenary Property - As per the Hindu Succession (Amendment) Act, 2005, in Hindu families which are governed by Mitakshara law, the daughter of a coparcener shall

- by birth become coparcener in her own right (irrespective of her marital status) in the same manner as the son.

- have the same right in the coparcenary property as she would have had it if she would have been a son.

- be subject to the same liabilities in respect of the said coparcenary property as that of the son

- any reference to a Hindu Mitakshara Coparcener shall be deemed to include a reference to a daughter of coparcener.

The major change brought in by the amendment is that the exclusive prerogative of males to be coparcener has been changed all together and the right by birth in the coparcenary property has been conferred in the favour of daughters as well. Her liabilities and rights are the same as that of a son. She can also claim partition or to become Karta (in some cases, discussed later^). A daughter can now not only continue a joint family but also form one with her father and brothers. Since the daughters have been made coparceners irrespective of their marital status, thus, even after their marriage she will continue to be a coparcener as well as a member of JHF because all the members of a coparcenary are necessarily the members of JHF too. This means that after marriage the daughter will be a member of 2 joint families. Similarly, the children born to her will be members as well as coparceners in their maternal as well as paternal families. It may further be noted that after the amendment if she happens to be senior most member, a female can become Karta. She will continue to be Karta even after her marriage. She can even acquire the status of the head of the family (discussed later in detail^).

After the amendment, the following clarifications have been given. The 2 classes of female are:

- who are born in the family

- who become member of JHF by marriage to the coparceners

Females who are born in the family i.e. daughters, sisters possess a right by birth in the coparcenary property and those who become members of the joint family by marriage to coparcener are subject to the same law as it stood before the amendment. Their rights over the joint family property continue to be the same like maintenance out of its fund, a right of residence in the family house, etc.

RETROSPECTIVITY OF COPARCENERSHIP OF A DAUGHTER

The daughter has been declared to be coparcener by birth in her own right and therefore the coparcenership is created in a daughter not from the date of amendment coming into effect i.e. 9th September, 2005 rather from the date of her birth (even if it was before 09/09/2005). However, a restriction has been put upon the right to claim her share. A full retrospectivity has not been provided rather a limited retrospectivity dating back till 20th December, 2004 has been provided. A daughter as a coparcener cannot claim reopening of any partition or other disposition of property to claim her share if such partition or disposition was done before 20th December, 2004. But any such partition done on or after 20th December, 2004 can be reopened to claim her share even if it was done through a registered partition deed or through the decree of the court. Moreover, in cases of partitions done before 20th December, 2004, the daughter coparcener can get it reopened and claim her share if, the said partition was not done to a post decree or a registered partition deed. Thus, if partition before 20th December, 2004 was documented but was not registered, it can be reopened and the daughter can claim her share.

~AMENDMENT - ABOLISHES DOCTRINE OF SURVIVORSHIP

The amendment abolishes the incidents of survivorship. When a male coparcener dies survivorship implies that on his death his interest was taken by the surviving coparceners and nothing remain for his female dependents. This rule was first modified in the year 1937 where the coparcener's widow was permitted to hold on to his share for the rest of her life and only on her death the doctrine of survivorship implied and the male collateral could take out the property. The rule was further diluted in the year 1956 when the Hindu Succession Act was enacted. As per the amendment made in the year 2005, the doctrine of survivorship has been abolished unconditionally. Now if any male Hindu dies, for the undivided interest in Mitakshara Coparcenary, the rule of survivorship would not apply instead the same would be dealt as per principles of succession.

CRUX OF THE AMENDMENT IN HINDU SUCCESSION ACT (2005)

The amendments so made are important steps towards gender equality and abolition of par lineal system of inheritance prevailing among Hindus. This would enhance the women's security by giving them birth right in the property. Also the women can now become Karta of property (in some cases, discussed later^). This will enhance her confidence and social worth and also greater bargaining power for herself and for her children in both parental and marital families.

KARTA

A Karta is a head of JHF and he is the senior most male member of the family. Such senior most male member becomes a Karta per se i.e. by virtue of the mere fact that he is the senior most male member, it is said that the Karta's position is sui generis (unique). The concept of “pind-daan” which relates to the coparcenary in itself has the concept of Karta. The Karta being the senior most male member is considered to be the last holder of the joint property and the closest to the ancestors and that is why he holds that peculiar position. The Karta can be compared to an agent or a trustee but technically he is neither an agent nor a trustee. He has certain powers which differentiate him from a mere agent or a trustee. For all family matters he represents the joint family i.e. he can incur liabilities for the joint family. He represents a joint family in all civil proceedings. But he has some peculiar powers -

- he cannot be held accountable for his past dealings of the property unless a partition suit has been filed and fraud or misappropriation has been alleged against him.

- He can differentiate between the persons of the joint family and grant maintenance or any other benefit(s) and he cannot be questioned if he does this discrimination.

- He can incur debt for his personal requirements and the entire joint family property will be liable to pay the debts.

^CAN A DAUGHTER BE A KARTA?

The daughter no doubt has been made a coparcener by the amendment in her own right and she occupies the same status in the family as that of a son i.e. her proprietary right in the joint Hindu property are equal to the son including the right to claim partition and with that much of change the purpose of the amendment is served. The purpose of the amendment is not to bring about any socio-religious reforms as such rather it is to do proprietary justice to the daughters in the joint family and therefore any interpretation of the amendment shall be limited to that purpose. No doubts making a daughter a Karta as she is now a coparcener also would be a welcome step and such socio-religious reforms are required for the purposes of complete gender justice in the Indian society. However, the issue is whether that is the purpose of the amendment? It has not been seen to be so. In order to provide Kartaship to daughter there has to be socio-religious reform by providing her right to “pind-daan” and also making her the source of coparcenary. Kartaship is not a mere managerial position rather it has got its own peculiarities and it results into some peculiar powers as discussed above. Those powers are only because the Karta is the senior most member of the family.

The amendment in light of its purpose does not suggest any such larger changes in the joint family.

The Hon'ble Supreme Court in CIT v. Seth Govind Ram (1966) had held that a female member of a joint family not being a coparcener cannot be a Karta though she can be a manager of the joint Hindu property.

On the above logic, now a daughter being a coparcener, the issue is whether she now can be a Karta? As discussed above, even not been declared to be a source of coparcenary and also has not been given the right to “pind-daan” and hence as per the amendment she cannot be a Karta.

It is for the Hon'ble Supreme Court to decide the issue in accordance with his own judicial wisdom and the Supreme Court may find an opportunity in the amendment itself to pass a progressive judgement by declaring that she can become a Karta.

^FEMALE CAN BECOME A KARTA - DELHI HIGH COURT (2016)

The Hon'ble High Court of Delhi, in its landmark verdict pronounced in the matter of Mrs. Sujata Sharma v. Sh. Manu Gupta & Others [CS (OS) 2011/2006], has held that the eldest woman member of a Mitakshara Hindu Undivided Family (HUF) can be its "Karta/ Manager". The ruling came on a suit filed by the eldest daughter of a HUF in North Delhi.

This ruling is pivotal as it takes the Hindu Succession (Amendment) Act, 2005 which amended Section 6 of the Hindu Succession Act, 1956 (HSA) to its logical conclusion.

The Hon'ble High Court of Delhi has now cleared this position in law and has provided a clear and unambiguous interpretation to the object and reasons of the Hindu Succession (Amendment) Act, 2005 by extending the applicability of the amendment to not only Hindu women being recognized as coparceners on equal footing with a son, but also recognizing the eldest woman member of the HUF as the Karta of the HUF and its properties.

This judgement would have a far reaching effect in most of the HUF in the country where female are the eldest surviving member

We have explained the entire history and evolution of a joint Hindu family above. This is the maximum available information in relation to JHF/HUF. I am sure after reading this; all our readers must have found it interesting and must have learnt something new.

Let's now move ahead to section B and explore the various benefits of forming an HUF.

SECTION B:

BENEFITS OF FORMING A HINDU UNDIVIDED FAMILY (HUF)

HUF is a creation of law. It has various benefits. Some of them are listed below:

• Benefit of HUF is available to all Hindus regardless of whether they are salaried, professional, government employees, running a business or otherwise:

HUF is a creation of law. Thus any Hindu household can form an HUF. Jain, Sikh and Buddhist families even though are not governed by the Hindu Law, but they are eligible to form and get treatment as an HUF under the Income Tax Act.

The source of income is irrelevant for creation of an HUF. You can be a salaried employee, a government employee or a self employed professional or running your own business! You are eligible to form an HUF under all the situations.

HUF creation requires an HUF Creation Deed (which in all cases should be prepared). The HUF creation hardly costs much.

Mostly, people have heard about HUF but due to various myths they haven't formed one. People can form HUF at any time. It is not necessary that it can only be formed when a child is born post marriage. Even when your son gets married, you can then form your HUF!

It's yet not late! Form your HUF today if not formed until now.

• HUF unites and keeps the social fabric intact:

HUF keeps the family's social fabric intact. It keeps all the members of the family united. With time children in a family grow up and move to distant places away from their parents/family due to work, job, business, etc. HUF helps keep all the members close-knit even when they are living separately. The famous axiom “A family, who eats together, stays together” seems true to a great extent.

An HUF keeps all the members of the joint family connected and attached.

• HUF is a separate Person/Entity:

HUF is treated as a separate ‘person' under section 2(31) ​ of the Income Tax Act, 1961. HUF is a separate entity for the purpose of tax assessment under the Act. It acts as bonus for Hindu families which enables creation of an additional (artificial) member in the family who can earn its own income and save the taxes just like all the other earning members of the family. It enjoys various separate tax benefits (deductions, slab rates, etc.) just like the individuals. Also, it possesses its own PAN and files its own income tax returns.

• HUF is a Wealth Creator:

HUF is a wealth creator. The incomes and gains in an HUF accrue over a long period of time and multiply. In due course of time, HUF becomes financially robust and serves as a strong and distinct (artificial) member of your family.

It has been seen many times that HUFs hold a number of properties and earns handsome income by way of rentals and interest. A Hindu household is blessed with this gift that is recognized by the Income Tax department as well. One should reap full benefits out of this privilege.

• HUF is an effective tool to save Taxes:

As discussed above HUF is a separate person. It is a separate entity for the purpose of income tax assessment.

An HUF is entitled for deductions available under Chapter VI-A i.e. deduction under section 80C, 80D, 80G, etc. (as applicable) while calculating its total taxable income.

An HUF is taxed on same slab rates which are applicable to an Individual (i.e. NIL tax upto total income of Rs. 2,50,000/-)

Moreover, the new tax regime given effect by the Finance Act, 2020 (applicable for F/Y 2020-21 and onwards) is available for an HUF as well.

Let's discuss how HUF can help you save your taxes with the help of an example!

Example: Mr. Vinay Gupta, a resident, aged 42, decides to start an HUF with his wife, 1 son, and 1 daughter as members/coparceners. Since Mr. Vinay had no siblings, the property held by his father, who died 1 year back, was transferred in the name of his HUF. The property held by Late Mr. Gupta (father) earns an annual rental income of Rs. 10 lakh. Mr. Vinay has an annual income from salary for the year 2019-20 of Rs. 15 lakh. He also invests Rs. 1.50 lakh in PPF and pays a premium of Rs. 25,000 towards health insurance policy taken for his family. He also earned an interest income of Rs. 3,60,000 from investment in various debt instruments.

By creating an HUF, Mr. Vinay can save tax as follows:

*The HUF cannot invest in PPF anymore. The already running PPF accounts in the name of HUF can continue upto 15 years. A new account is no longer entertained. In the above example for claiming deduction under section 80C, it is assumed that the HUF has invested Rs. 1,50,000 in a 5 year tax saver FD with SBI.

**The HUF can also buy health insurance policy on the life of its members. The premium so paid is allowed as deduction under section 80D upto Rs. 25,000. In the above example, however, we have considered the premium payment by Mr. Vinay as he is under higher tax slab than the HUF.

Thus, having an HUF for a Hindu household is a boon. Mr. Vinay saved tax of Rs. 1,95,000 by forming an HUF.

Just like Mr. Vinay Gupta (in the above example) all Hindu households can form HUF and save taxes. To know the other ways and means to create HUF's capital you can contact us on our email.

• Proficient support system at hour of need:

HUF is a separate person. It has its own income and wealth. The same can be used by the members of the HUF. At times of crisis or to meet some exigency, there can be a sudden need of resources. HUF stands upright to help the family at the hour of need.

HUF property is like a big reservoir into which income flows in from various sources and all members of the joint family draws out from this reservoir to fulfill their multifarious needs.

This can be well correlated at this time when the entire world is going through a tough phase due to COVID-19 pandemic. The incomes have squeezed to a great extent and during this time your HUF property/income could prove to be your family's saviour.

There are a number of other benefits of forming an HUF that are noteworthy, but due to brevity of space and time, mentioning all of them would not be possible. For more information on the same, you can reach out to us at our email.

Let's now move to the last section C and find out the tax implications of HUF.

SECTION C:

TAX IMPLICATIONS OF HUF AS PER THE INCOME TAX ACT, 1961

For the purpose of tax assessment, the revenue statute uses the expression Hindu Undivided Family (HUF) which is slightly different from the definition of Joint Hindu Family (JHF) as explained in Section A above.

The basic principle of taxation is that where a person has absolute power of disposition of his property, it is taxed as his individual property and where an individual has other claims it is taxed as joint property or HUF property.

Hindu Undivided Family (HUF) is treated as a ‘person' under section 2(31) of the Income Tax Act, 1961. HUF is a separate entity for the purpose of tax assessment under this Act.

Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract; it is created automatically in a Hindu Family.

Jain, Sikh and Buddhist families even though are not governed by the Hindu Law, but they are eligible to form and get treatment as an HUF under the Income Tax Act.

ASSESSMENT OF HUF

An HUF is recognized as a separate assessable entity under this Act. Its income may be assessed if following two conditions are satisfied:

• There should be a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is assessed as that of HUF, it continues to be assessed as such in subsequent years till partition is claimed by coparceners.

• There should be a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members.

Ancestral Property: Ancestral property may be defined as the property which a man inherits from any of his 3 immediate male ancestors, i.e. his father, grandfather and great grandfather. Therefore, property inherited from any other relation is not treated as ancestral property.

Income from ancestral property held by following families is taxable as income of HUF:

• A family of widow mother and sons (may be minor or major) ;
• Family of husband and wife, having no child;
• Family of two widows of deceased brothers;
• Family of two or more brothers;
• Family of uncle and nephew;
• Family of mother, son and son's wife;
• Family of a male and his late brother's wife.

Note: Property obtained by daughter from joint family property would be her absolute property. Any income therefrom is chargeable to tax in her hands in the individual status only. This will also apply to any legal heir obtaining property in the capacity of a descendent.

PARTITION OF HUF

Partition means division of property. Where the property is capable of admitting a physical division, share of each member is determined by making physical division of the property. On the other hand, where the property is not capable of physical division, partition shall mean such division as the property may admit i.e. to the maximum extent possible.

Though partition can be claimed only by coparceners, the following persons are also entitled to their share in the property:

• A son in the womb of mother at the time of partition; and

• Mother (gets equal share if there is partition between sons after the death of their father)

ASSESSMENT AFTER PARTITION [SECTION 171]

Once income of a joint family is assessed as income of a HUF, it will continue to be assessed as such until one or more coparceners claim partition. Such claim must be made before the relevant assessment year. The Assessing Officer, on the receipt of such claim, must make an enquiry after giving due notice to the members and record a finding whether there has been a partition and, if so, the date of partition.

Income of the family from the first date of the previous year till the date of partition is assessed as income of HUF and, thereafter, income from the property which was subject to partition is assessed as individual income of the recipient members. If, however, the recipient member forms another HUF along with his wife, son(s) and daughter(s), income of the property which was subject to partition is chargeable to tax in the hands of new HUF.

PARTITION - TOTAL OR PARTIAL

Under the Hindu Law, an HUF is entitled to affect a partition which may be total or partial.

• Total Partition - where an HUF undergoes a total partition, the entire joint family property is divided amongst all coparceners and the family ceases to exist as an HUF.

• Partial Partition - A partial partition, on the other hand, may be partial as regards the persons constituting the joint family or as regards the properties belonging to the joint family or both.

In a partial partition, as regards the persons constituting the family, one or more coparceners may separate from others and the remaining coparceners may continue to be joint.

In a partial partition, as regards the property, a joint family may make a division and severance of interest in respect of a part of joint estate while retaining their status as a joint family and holding the rest of the properties as joint and undivided property.

EFFECT OF PARTIAL PARTITION [SECTION 171(9)]

Partial partition is not recognized under the Act. The provisions of section 171(9) are applicable on satisfaction of two conditions, firstly, the partial partition should have taken place after 31st December, 1978 and secondly, such partition must have taken place in an HUF which was assessed as an HUF before.

If the above two conditions are satisfied, such family will continue to be assessed as if no such partial partition has taken place i.e. the property or source of income will be deemed to be belonging to the HUF and no member will be deemed to have separated from the family.

Each member or group of members of such family immediately before such partial partition and the family will be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this act by such HUF, whether before or after such partial partition.

The several liabilities of any member or group members of such family will be computed according to the portion of the joint family property allotted to him on such partial partition.

TAXABILITY OF HUF

In order to compute the income of an HUF, one has to first ascertain its total income under the different heads of income (ignoring incomes exempted under sections 10 to 13A of this Act). The following points should be kept in mind while computing income:

• If funds of an HUF are invested in a company or a firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family (if fees or remuneration is earned essentially as a result of investment of funds).

However, if fees or remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.

• If any remuneration is paid by the HUF to the Karta or any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine and not excessive and paid under a valid and bona fide agreement.

The following incomes are not taxed as income of HUF:

• If a member has converted or transferred without adequate consideration his self-acquired property into joint family property, income from such property is not taxable in hands of the family. It continues to get taxed in the hands of the transferor [Clubbing of incomes as per section 64(2)]

• Income of impartible estate (though it belongs to family) is taxable in the hands of holder of estate and not in hands of HUF.

• Personal income of the members cannot be treated as income of HUF.

• "Stridhan" is absolute property of a woman; hence income arising therefrom is not taxable as income of HUF.

• Income from individual property of daughter is not taxable in hands of HUF even if such property is vested into HUF by daughter.

DEDUCTION FROM GROSS TOTAL INCOME [GTI]

An HUF is entitled for deductions available under Chapter VI-A i.e. deduction under Section 80C, 80D, 80G, etc. (as applicable) while calculating its taxable income.

RATE OF TAX

• An HUF is taxed on same slab rates which are applicable to an Individual (i.e. NIL tax upto total income of Rs. 2,50,000/-)

• The tax rebate provided under section 87A, as available to an individual, is however, not available to an HUF.

• The new tax regime given effect by the Finance Act, 2020 (applicable for F/Y 2020-21 and onwards) is available for an HUF as well. (Read our article: “The New Tax Regime - Beneficial for you” to explore further details)

• An HUF is liable to pay Alternate Minimum Tax (AMT) if the tax payable is less than 18.5% (including cess and surcharge) of “Adjusted Total Income” subject to prescribed conditions.

RETURN OF INCOME

HUF has to file the return of income if its total income without giving effect to the provisions of section 10(38), 10A, 10B or 10BA or 54 or 54B or 54D or 54EC or 54F or 54G or 54GA or 54 GB or Chapter VIA (i.e., deduction under section 80C to section 80U ), exceeds the maximum amount which is not chargeable to tax i.e. exceeds the exemption limit.

However, as per the Finance Act, 2020 an HUF shall file its return of income, even if its income does not exceed the maximum exemption limit, if the HUF

• has deposited an amount (or aggregate of amount) exceeding Rs. 1 crore in one or more current accounts maintained with a banking company or a co-operative bank

• has incurred more than Rs. 2 lakh on travel to a foreign country, for any of members or any other person

• has incurred an expenditure exceeding Rs. 1 lakh on electricity consumption

An HUF can file its return of income using the following income tax return forms (ITRs):

*HUF shall be resident in India in any previous year in every case where the control and management of its affairs is situated in India (i.e. not wholly outside India).

**OR - HUF whose manager has been a resident in India in 9 out of the 10 previous years (proceeding that year), or has during the 7 previous years (preceding that year) been in India for a period of, or periods amounting in all to, 730 days or more shall be considered as Ordinarily Resident (OR).

If any HUF satisfies both the above pointers, it is Resident and Ordinarily Resident (ROR) and only then it can file ITR-4 otherwise it will have to file ITR-3.

The due dates for filing return of income are as follows:

RETURN BY WHOM TO BE VERIFIED

The return filed under section 139 shall be verified in the case of a HUF, by the Karta and where the Karta is absent from India or is mentally incapacitated from attending to his affairs, by any other adult member of such family.

OFFENCES BY HUF [SECTION 278C]

Where an offence under this Act has been committed by a HUF, the Karta thereof shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

However, this shall not make the Karta liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

Moreover, where an offence has been committed by HUF and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any member of the HUF, such member shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

THE CONCLUSION :

By this article we have tried to clear the concept of HUF for all our readers.

We started by tracing the history and evolution of HUF and later explored the various benefits of forming an HUF.

We have tried to clear all the myths associated with HUF; its formation and taxation.

Thereafter, we have explained the in-depth provisions as contained in the Income Tax Act with regard to the HUFs.

We are sure that this article must have given a deeper insight on HUF to all our readers. We urge everyone to save this article so that it serves as a ready reckoner for everyone who intends to form an HUF anytime.

Finally, at last we are delighted to provide our readers a comprehensive 15 point summary which would be highly useful:

• Hindu Undivided Family (HUF) is treated as a separate entity for the purposes of assessment under the Income Tax Act. The term Hindu Undivided Family has not been defined under any law till date.

• HUF does not arise from a contract. It is a creation of law. After marriage, as soon as a child is born, HUF comes into existence. HUF consists of father, sons, and daughters. Wife is not a part of the HUF. (Until January 2016, a woman could not be the Karta of HUF. But in a landmark case, the Delhi High Court ruled in favour of a female being the Karta of a HUF. However, the same has not been incorporated in the Income Tax Act as yet)

• Sons and daughters and the father i.e. Karta are the coparceners in the joint family and have a right to demand partition. Prior to the amendment in the Hindu Succession Act, the daughters were not coparceners and could not demand partition. Now, after the amendment, the daughters can be coparceners and have equal share as that of a son. However, mother/wife is not a coparcener and cannot demand partition but she has a coparcenary interest in her father's property post amendment. Moreover, the Karta can give his share in the coparcenary to his wife.

• If partition of HUF is made by Courts, the courts will always award equal partition. However, the family may mutually affect partition without going to the courts and mutual partition can be unequal.

• Partition of HUF takes place on the date the properties are actually physically divided. There must be a physical division of the properties. Physical division of income without physical division of properties does not amount to partition. Where the property is not capable of physical division, then the division should take place by metes and bound. For example, the Supreme Court by its dated 5th January, 2020 ordered partition of HUF. The physical division of the properties pursuant to SC's order takes place on 31.05.2020. The income from the properties of HUF upto 31.05.2020 shall be included in the income of HUF and not the members.

• There can be two types of partitions:

- Total partition
- Partial partition

• Total partition is where all the properties of the family are divided amongst all the members of the family and the family ceases to exist as an HUF.

• Partial partition is when some members of the HUF go out and others remain together or some property is divided and balance remains joint. PARTIAL PARTITION IS NOT RECOGNIZED BY INCOME TAX ACT. PARTIAL PARTITION SHALL BE DISREGARDED. Partition has to be a total partition. If there is a partial partition of HUF, then it shall be deemed that no partition has taken place and he income from the property distributed on partial partition shall be assessed in the hands of HUF as if no partition has taken place.

• HUF cannot make any gift of HUF property to coparceners and/or non coparceners. Any gifts made by HUF are void-ab-initio. The gifted property shall be included in the wealth of the HUF and not the donee. Similarly, the income from gifted properties shall be taxable in the hands of the HUF and not the donee.

• The provisions of computing income of HUF are the same as for a normal assessee.

• No capital gains shall arise to HUF on distribution of assets on partition of HUF [Sec. 47]

• Cost of acquisition of such assets to the member shall be the cost of acquisition of such asset in the hands of HUF. [Sect. 49(1)]

• Where an individual converts his self acquired into HUF property without adequate consideration, then cost of acquisition of the converted property to the HUF shall be the cost of acquisition in the hands of the transferor individual. However, section 64(2) shall be applicable here and the provisions of clubbing of income would apply.

• In the above 2 cases, the period of holding of asset of transferor shall also be considered for computing the period of holding of the asset in hands of the transferee. [Section 2(42A)].

• Any remuneration paid by HUF to the Karta or any other members of for services rendered by them in conducting family's business, is deductible if remuneration is

- Paid under a valid and bona fide agreement;

- In the interest of and expedient for the business of the family; and

- Reasonable and not excessive. (Jugal Kishore Baldeo Sahai v. CIT)

The author can also be reached at connect@ujandco.com

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