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2014

Everything about HUF

  • Though every body is interested in this question and this question has been asked by many and generally not have any answer in text book also ,why it so ?
  • The answer is very Interesting that the above question is wrong the correct question is

    How we can create capital for HUF?

    We can not create HUF but can arrange capital for it.

  • Till the time the HUF has an empty kitty,it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a ‘ball’oon only when it swells up with air inside it. Without the air the balloon is inert,dormant. An HUF too is inert and dormant without funds.

    – CA Sanjeev Bedi (Ludhiana)

 

  • The million-dollar question indeed is: How to blow funds into the HUF and turn it into a balloon that floats?
  • A member of the HUF throwing his money into the common pool, or to use that overused cliché’ the family hotchpot, is out of the question, thanks to Section 64(2) which would tax the income earned by the HUF on that money in the individual member’s hands only.
  • But the clubbing provisions can be bypassed if the HUF invests the money in instruments yielding tax-free income. The tax-free income can then be reinvested to earn even taxable income–income on income is out of the clubbing provisions.
  • Strangers can make gifts but only up to Rs 50000 (Section 56).
  • A way-out is to receive gifts from members of bigger HUFs, who though your relatives, aren’t members of your smaller HUF.
  • A father may make a gift of money to his son’s newly-created HUF, clearly specifying in the Gift Deed that the gift is to his son’s smaller HUF and not to the son himself. This will keep both Section 64(2)and Section 56(2) at bay.
  • After the HUF has a nucleus of its own and gets going, care has to be taken to keep the HUF’s affairs completely distinct from the individual members’ affairs. Where the members of the HUF carry ontheir individual businesses, as they normally do, the distinction between what constitutes the individual’s income and what is HUF’s income may get blurred.
  • Some other people, who aren’t members ofthe HUF but are relatives in terms of Section 56(2) can also be found out.
  • Now every body comfortable with the question because creating a capital by transfer ,gift and all like stuff as hinted by Sanjeev we all know to some extent.
  • So to have capital in HUF account we should take following steps:

    1. We should have opened a bank account first (not must) but it is advisable so that we can have transaction by cheques.
    2. Apply for Permanent Account Number (PAN)
    3. Formation of capital of HUF,Transfer money by gifts etc to HUF capital keeping in view the clubbing provisions and tax on gifts under Income tax act,Remember there is no Tax on gifts in kind though they may attract clubbing provisions in some cases.
  • Regarding HUF an Interesting and detailed reply has been given by our group star contributor CA Sanjeev Bedi we are giving abstract of the answer.
  • The Hindu Undivided Family has its roots in the ancient Hindu law like the Manu Smriti, compiled by a male chauvinist Hindu Scholar called Manu, who lived around 200 BC; the Yajnavalikya Smriti compiled by Yajnavalikya and Narada in 100 and 200AD (it merely embellished what had already been laid down by Manu); and Mitakshara codified by a guy called Vijneshwara somewhere around the year 1100AD. Mulla, the foremost authority on Hindu law, has described the Mitakshara as the quintessence of the Smriti law,its precepts and injunctions.
  • Later in the 12th century, there came along another variation of the Hindu law called the Dayabhaga written by one Jimutavahana.
  • The Dayabhaga challenged and deviated from the Mitakshara law in some ways, particularly in relation to succession and inheritance.
  • Under the Dayabhaga system, the father is the sole owner and the exclusive possessor of the joint family property. No member can enforce the partition of the HUF so long as the father lives.
  • But the Mitakshara law stipulates that the property vests in the HUF itself and not in any individual member of the family and therefore can be partitioned within the lifetime of the father.
  • The Dayabhaga law is prevalent in West Bengal and Assam.
  • Hindus in the rest of the country are governed by the Mitakshara law.
  • Manusmriti completely forbade women to have a share in the family property.
  • The modern Indian government embarrassed by these antediluvian,anachronistic laws has sought to bring them inline from time to time with the egalitarian values of 21st century.On 9th September 2005, the Hindu Succession Act, 1956 was amended to provide that
    • a daughter too could be a coparcener i.e. joint heir,like her brother to the joint family’s assets and
    • She too could enforce the partition of the family property to claim her individual share.
    • She continues to be the coparcener in her father’s HUF evenafter she gets married and forms another HUF with her husband.So gender bias has largely been taken outof the HUF laws.
  • A coparcener is one who has a right to demand that the family property be divided and they be handed over their share in the property (or whatever assets the HUF has) in case he or she decides to part ways with the HUF.
  • Not all members of the HUF are its coparceners. The coparcenery extends to four degrees down the family hierarchy in the following manner:
    • 1st degree: Holder of ancestral property for the first time.
    • 2nd degree: Sons and daughters(09.09.2005).
    • 3rd degree: Grandsons.
    • 4th degree: Great grandsons.
  • The most frequently asked question about HUF is: How does it come into being? To form an HUF, all you have to do is Get Married. The HUF gets created as soon as you complete the seven (or four,whatever) circles round the holy fire and become Man and Wife.
  • There have to be a minimum of two people to constitute a family. The husband and wife together make up a family. They don’t have to wait till they have a baby to constitute their HUF.
  • Someone asked Can an unmarried man create an HUF? No, he cannot,if you mean an HUF of which he seeks to be the Karta himself. He can very well be the member of the HUF of his father or grandfather, but to create his own HUF he has to wait till he ties the nuptials.Come to think of it, “Creation of an HUF” is an oxymoron—-acontradiction in terms. Only orphan-and-unmarried Hindus don’tbelong to an HUF. Every Hindu becomes a member of an HUF the moment she ejects out of her mother’s womb, mode of delivery–C-section or Normal–notwithstanding.
  • Till the time the HUF has an empty kitty,it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a “ball”oon only when it swells up with air inside it. Without the air the balloon is inert,dormant. An HUF too is inert and dormant without funds.
  • The Karta, which in Hindi means the Doer, is usually the Father, the pater familias of the family. He has immense powers over the affairs of the family, more than any other coparcener can wield.
  • Can a female be the Karta? The answer can’t be No in the light of the amendment in the HS Act in 2005.An unmarried daughter, in the unfortunate event of her father passing away, will become the Karta of the HUF if she has no brother.
  • Can there be an all-female HUF? Yes, there can be. Where a couple has only one issue—-a daughter—-and the husband passes away,the mother-daughter duo can continue the HUF (although a problem mayarise after she gets married and becomes a member of her husband’sHUF). It has been held by the Allahabad High Court in CIT v. Sarwan Kumar 13 ITR 361 (All) that there can be an HUF consisting of female members only
  • The Karta can enter into partnership with a firm on behalf of the HUF. But the HUF itself, being not a legal person, can never be a partner in a firm. The fact that Income Tax law grants a PAN to itand treats it as an assessable entity does not bestow upon it the status of a person under the general laws. This has been held to be so in numerous cases. In Ram Laxman Sugar Mills v. CIT 66 ITR 613(SC), the Supreme Court said that “an HUF is undoubtedly a person within the meaning of the Indian Income Tax Act, It is however,not a juristic person for all purposes and cannot enter into an agreement of partnership either with another undivided family or individual”.
  • So while conducting bank audit, in case you come across a loan filewhere the HUF is shown to be the partner, raise an objection.
  • There have been cases where the courts have held that businesses started by individual members after borrowing funds from the HUF were assessable in the HUF’s hands, especially where the HUF is already engaged in the same business. So think twice before letting the HUF lend any money to its members and viceversa.
  • In CIT v. Gopal Bansilal Inani (2000) 245 ITR 2 (SC),theSupreme Court disallowed the interest paid to coparceners on the loan the HUF had taken from them as a business expenditure u/s 37(1).
  • Can an HUF pay remuneration to its Karta? Yes, in Jugal Kishore Baldev Sahai v. CIT 63 ITR 238 (SC), the Supreme Court held that “ifa remuneration is paid to a Karta of the family under a valid agreement which is bona fide in the interest of and expedient forthe business of the family and the payment is genuine and not excessive, such a remuneration must be held to be an expenditure laid out wholly and exclusively, for the purpose of the business and must be allowed as an expenditure under section 10(2)(xv)[corresponding to the present-day Section 37(1)] of theAct”.
  • There is also the issue of Partition of the HUF. Al though the Mitakshara and other Hindu laws do not forbid partial partition ofthe HUF, the Income Tax law frowns upon it. Under the Hindu law,you may have eliminated the HUF by partioning the property (or what ever assets) of the HUF, but the taxation authorities have invested themselves with powers u/s 171 of the I T Act to continue to treat the defunct HUF as an assessee liable to pay tax unless the partition is effected in strict keeping with the manner laid downinthat section. The law wants to dissuade assessees to smash up their bigger HUFs into smaller ones just to create more files to bring down their tax liabilities.Total partition in the context of theI T Act means partition by metes and bounds. “Metes and Bounds”, anAnglo-French term, means the boundaries or limits of a tract of land.If the HUF property is physical, it isn’t difficult to divide it up,delineating the shareof each member. But a non-physical property will have to be divvied up amongst the members in such a manner as to comply with Explanation (b) below Section 171(9). Care must be taken that erst while coparceners don’t simply end up becoming co-owners in the property. For example an FD held by the HUF being partitioned can’t be converted into a joint FD of members after partition; if itis,interest on it will continue to be assessed in the HUF’s hands.The FD can continue only in one member’s name; he can cough up some cash to the other members to compensate them for loss of FD.What ametes and bounds partition does is deflate the balloon of the HUF. The Income Tax law will recognize its demise (for want of a better word,since a divided Hindu family can be reunited again),only when the HUF is stripped naked of each and every layer of the clothing of property—-tangible or intangible, movable or immovable–it had. It has to get back into its birthday suit again to be truly partitioned.
 

Q 1. How does Hindu Undivided Family come into existence under Hindu Law as well as under Income-tax Act, 1961?

The concept of HUF under Hindu law as well as Income-tax Act, 1961 is the same. As stated earlier, HUF is purely a creature of law and cannot be created by an act of parties (except in case of adoption and reunion). A HUF is a fluctuating body, its size increases with birth of a male member in the family and decreases on death of a member of the family. Females go and come into HUF on marriage. In case of a sole male Hindu, strictly speaking, a HUF comes to existence automatically upon his marriage. It has been held [Refer : Gowli Buddanna v/s. CIT [(1966) 60 ITR 293 (SC)] that to constitute a joint Hindu family, it is not necessary that there has to be more than one coparcener in the family; a husband and wife can validly constitute a HUF.

 

Q 2. Whether a single person can constitute HUF?

No. A single person cannot constitute HUF. There has to be minimum two members to constitute a HUF. [Refer : C. Krishna Prasad v/s. CIT (1974) 97 ITR 493 (SC)]

 

Q 3. Can a son who is the sole surviving coparcener along with other females in the family after his father’s death constitute an HUF?

Yes. As discussed in answer 10, to constitute a HUF, it is not necessary that there has to be minimum two co-parceners or minimum two male members in the family. In the given case, the HUF of the father will continue even after death of the father, with the son as Karta and other family members of the family as its members.

 

Q 4. What will be the position if the son is the sole male coparcener without any female members?

In such a case, there will not be any HUF. However, upon marriage of such son, automatically, HUF will come into existence.

 

Q 5. Can a son being a member of HUF consisting of his father, himself and his brothers, form an HUF consisting of himself, his wife and minor son?

Under Hindu law, there can be a HUF within a HUF. Therefore, a son can have his own smaller HUF while he continues to be a member of his father’s HUF. In his father’s HUF, he is a mere member and in his own HUF, he is Karta.

 

Q 6. Whether a Hindu marrying Christian, and bringing up his daughter as Christian, can claim HUF status?

No. If the child is not brought up as a Hindu, confirming the habits and usages of Hinduism, such child will not be regarded as a Hindu. Consequently, there can not be a Hindu Undivided Family, as recognized by law. [Refer : Addl. CIT vs. G. Venkataraman [(1977) 109 ITR 247 (Mad)].

 

Q 7. Whether an assessee can claim a status of HUF on ground of legal obligation to maintain his wife after partition allotting shares to wife and children?

There is a difference of opinion among various courts on this issue. One view is that the status of Joint Hindu Family does not come to an end even if the wife is given a share on partition, as the status depends upon the relationship of husband and wife, which does not get snapped in case of partition, and the wife continues to be a member of her husband’s family. [Refer : Prem Chand vs. CIT (1984) 148 ITR 440 (AP)].
Another view is that in such a case, the HUF comes to an end, till a son is born to or adopted by such couple. This view is based on the logic that the wife will have no right of maintenance or right to get a share on partition she has already taken her share [Refer : CIT vs. Radheshyam Agarwal (1998) 230 ITR 21 (Pat)]. The second view appears to be a correct view.

 

Q 8. Where the coparcener is an individual at the time of partition, whether he can constitute a HUF on marriage?

As discussed in answers 2 and 4, such coparcener along with his wife, can constitute HUF upon his marriage. However, as to whether the share received on partition becomes HUF property on marriage there is a difference of opinion among various Courts. The better view seems to be that it becomes HUF property.

 

Q 9. What is HUF Property?

A property owned by a HUF is HUF property. A HUF can acquire properties from various sources viz., on partition, by way of gift, through will, accretion to the existing properties, blending, by joint labour, etc. However, after the codification of major aspects of Hindu law in 1956, the concept of ancestral property is considerably diluted, as there is now a clear demarcation between individual property and HUF property of a Hindu male. Self acquired property of a Hindu male will pass on to his legal heirs as per the rules of succession and the legal heirs receive the property as individual property. So also the share of the deceased co-parcener in HUF, which otherwise devolves by survivorship to other co-parcener goes by succession to legal heirs, which they hold as separate property, if such co-parcener has left certain class of female relatives or a male relative who claims through such female relative, specified in Class I of the first schedule to Hindu Succession Act, 1956.

 

Q 10. Whether a family that does not own any property can have the character of Hindu joint family?

Yes, the concept of HUF is not related to possession of any property by the family nor the existence of such joint property is an essential pre-condition for constituting a HUF. This is because Hindus get joint family status by birth and joint property is simply an adjunct to the joint family.

 

Q 11. What is the nature of property received by a male member after his marriage but before a male child is born?

There is considerable controversy on these aspects. There are divergent views expressed by different courts from time to time. One view is that since a HUF, as known under Hindu law, can consist of even husband and wife only, once such a HUF has come into existence upon marriage of a Hindu male, such family can receive property from any source and regard the same as HUF property. However, the other view is that in such a case, a distinction should be made between a property that already has characteristic of a joint property, (for example, property received on partition) and other than such properties. In case of receipt of properties of the former kind, such family (that is, consisting only of husband and wife) can receive and treat such property as joint Hindu family property. But in case of latter (that is, in the cases like gift or will), unless there are at least two coparceners in the family, such HUF cannot receive or treat such property as HUF property. In other words, since, in such family of husband and wife, there is only one coparcener i.e. husband (wife being a mere member and not coparcener), if such HUF wants to receive and regard any property from an outside source as HUF property, then it has to have another coparcener in the family; i.e., son. The latter view seems to be a safer one.

 

Q 12. What is the nature of property received by a Hindu from his father and having only a wife and daughters in his family?

This will depend upon whether the property received by such Hindu from his father is father’s individual property or property of father’s HUF. In case of the former, such Hindu will be receiving the property as a legal heir of the father and the rules of succession as prescribed under Hindu Succession Act, 1956, will prevail. If the property is received from father’s HUF, then it can form part of HUF of such Hindu. But the share of the father in the HUF, upon his death, can go to his legal heirs, which will be their individual property, if the father has left behind him any female relative or a male relative claiming through such female relative, as in Class I of the schedule to that Act.

 

Q 13. Whether property acquired by gift by the assessee from his mother with an intention of his mother that the money should be used for the benefit of his family is HUF property or not?

Subject to answer 20, HUF can receive gifts from anybody, including a stranger. In any case, as held by the Supreme Court, [Ref : CIT vs. K. Satyendra Kumar (1998) 232 ITR 360] (SC)] a gift by mother also can be a source of HUF property.

 

Q 14. Can a coparcener blend his self-acquired property with that of HUF?

Yes, a co-parcener can blend his self-acquired property with that of HUF by throwing his individual or self-acquired property into family hotchpots or by impressing such property with the character of HUF property.

 

Q 15. Whether such blending of individual property with that of HUF requires consent of other members of the family?

No, the act of blending does not require consent of other members of the family. The act is an unilateral act and is a matter of individual volition. There is no question of family either accepting it or rejecting it. Such blending does not constitute a transfer. [Ref : CIT v/s. A. Krishna Murthy (1978) 113 ITR 133 (AP)]

 

Q 16. Can the act of the coparcener blending individual property into HUF be considered as revocable transfer?

No, once blending is done, it is not revocable. There is no provision for retransfer, directly or indirectly, of the whole or any part of the income or assets to the transferor. As such, there is no question of blending being regarded revocable transfer for the purpose of Income-tax Act, 1961. [Refer : Addl. CIT vs. A. R. Sahasranamam (1977) 109 ITR 493 (Mad)]

 

Q 17. Can a coparcener blend his individual property into his smaller HUF wherein he is a Karta, while continuing to be a member of the bigger HUF consisting of his father, himself and his brothers?

A co-parcener can be co-parcener of two joint Hindu families. The blending is at his option, he may blend his property with either of the HUFs. In that view of the matter, a co-parcener can blend his individual property with his smaller HUF, wherein he is Karta, while continuing to be a member of the bigger HUF consisting of his father, himself and his brother. [Refer : CIT vs. M. M. Khanna (1963) 49 ITR 232 (Bom)]

 

Q 18. What will be the position where the smaller HUF consists of only his wife and minor daughter?

As discussed in answer 20, there are divergent views on the aspect of the treatment of the property received by a HUF, consisting of only husband, wife and minor daughter. The Supreme Court in the case of Surjit Lal Chhabda vs. CIT [(1975) 101 ITR 776)], on similar facts has held that in such a case, such husband cannot blend his individual property, which has no ancestral characteristic, with his HUF property.

 

Q 19. Is it necessary for the HUF to have any ancestral property prior to receiving the property from one of the coparceners?

No, it is not necessary for the HUF. Even an empty hotchpots can receive and hold any property that is thrown into it by the co-parcener [Refer : CIT vs. S. Sivaprakasa Mudaliar (1983) 144 ITR 285 (Mad)]

 

Q 20. Can a female member of the family blend her individual property into the HUF?

Ans. Blending is a power given only to co-parceners. Since females are not co-parceners, a female member of a joint family cannot blend her individual property with HUF property. [Refer : Mallesappa vs. Desai (AIR (1961) SC 1298) and Pushpa Devi v/s. CIT [(1977) 109 ITR 730 (SC)]

 

Q 21. Will the clubbing provisions be applicable with respect to any income generated from such blended or converted property?

Yes, the clubbing provisions u/s. 64(2) of the Income-tax Act as well as section 4(1A) of the Wealth-tax Act are specifically introduced to tax income/wealth arising from such blending. Under the Income-tax Act, the income arising from such converted property will be deemed to be income of the transferor individual. Moreover, on partition of such property, in case such property is distributed to wife of such individual, the income arising there from shall be continued to be taxable in the hands of the transferor individual. Similarly under the Wealth-tax Act, the converted property is deemed to be the asset belonging to the individual and when such converted property has been the subject matter of partition, the converted property or any part thereof, which is received by wife of the individual on such partition, shall be deemed to be the property belonging to such individual and as such will be includible in the wealth of such individual.

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