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 & bountes, 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.
Partial partition of an HUF has been derecognised by the provisions of sec. 171(9) & moreover, according to sec. 171(9), any partial partition effected after 31.12.78, is not recognized.
Motive or need for partition cannot be questioned by the Income Tax Department. T. G. Sulakhe v. CIT, 39 ITR 394 (AP).
I. Following methods or devices may prove useful in reducing the tax incidence in the case of HUF :
(i) By increasing the number of assessable units through the device of partition of the HUF;
(ii) By creation of separate taxable units of HUF through will in favour of HUF or gift to HUF;
(iii) Through family settlement / arrangement;
(iv) By payment of remuneration to the Karta and other members of the HUF;
(v) By use of loan from HUF to the members of the HUF;
(vi) Through gift by HUF to its members specially to the female members;
(vii) Through other methods / devices;
The aforesaid methods / devices are discussed in detail below as follows :
Partition of HUF
In the case of certain HUFs, 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.
Then there may be a case where the HUF has got only one business establishment which does not admit of a physical division. For the sake of partition the business 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 has been de-recognised by the provisions of sec. 171(9) of the Income Tax Act, 1961 according to which any partial partition effected after 31.12.78, will not be recognized.
The provisions of sec. 171(9) have been declared ultra-vires by the Madras H.C. in the case of M.V.Valliappan v. ITO, 170 ITR 238. The Supreme Court has granted S.L.P. and stayed the operation of the above decision of Madras H.C. as reported in 171 ITR (St.) 52. The Gujrat H.C. has, however, held the ITAT justified in following the aforesaid decision of Madras H.C., CIT v. M. M. Panchal HUF, 210 ITR 580 (Guj.)
Notwithstanding the provisions of sec. 171(9) partial partition, 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.
The following legal aspects in respect of partition of HUF, should also be kept in mind while the partition of HUF which are as under :-
(i) Distribution of the assets of an HUF in the course of partition, would not attract any capital gains tax liability as it does not involve a transfer.
(ii) On the basis of the same reasoning distribution of assets in the course of partition would not attract any gift tax liability, and
(iii) There would be no clubbing of incomes u/s. 64 as it would not involve any direct or indirect transfer.