Transcript - Rajkot ICAI

Hindu Undivided Family
Formation - Partition - Reunion : Legal
and Tax Framework
By
CA. Deepak M. Rindani
Disclaimer: This is a general purpose and indicative-only presentation for discussion at a study
meeting. It is neither an advisory or a legal opinion.
1
I. Basic Concepts:



Who is a Hindu
What is HUF – all persons lineally
descended from a common ancestor and
joint in property, food and worship
HUF is not a juristic person in law
2
Who are considered Hindus?

Those who are Hindus by Birth and religion

Jains and Sikhs



Illegitimate Children whose both parents are
Hindus
Any child whose father or mother is Hindu and
who is brought up as Hindu
Those of certain Hindu Sampradayas (Arya
Samaj, Swaminarayan, Brahma Samaj)
3
Who are Not considered Hindus?

Muslims, Parsis and Christians

Those who have converted from Hinduism

Khojas and Cutchhi Memons
4
Who can become Hindu?

Any person by expressing intention to live as Hindu, if
the community accepts him/her

On conversion from other faith as per Hindu custom

Child of Hindu and non-Hindu parent – status of

Marriage between Hindu and non-Hindu
5
Sources of Hindu Law
Ancient
– Vedas, Smrutis (Manusmruti), Custom, Scriptures
(Dharmashastras)
Modern
– Legislation (codified law), Judicial precedents,
Equity & Justice

Historical Background of HUF concept
6
II. Ingredients of HUF:
“Hindu”
“Undivided”
Joint in respect
of estate
By adoption
(property),
income,
By conversion(?)
membership,
food and
worship
By birth
“Family”
Related by
blood &
marriage
“Sapindaship”
(relationship) is
the essence of
HUF
7
Composition of HUF:
Coparcenary:
Common
Only
degree
ancestor- 1st
male members
and daughters
His
descendants upto 3
more degrees under him
(both sons and
daughters)
Wife
of ancestor
Daughters-in-law
8
HUF Tree – Illustrative only
- A’s Wife
Sons
Daughter
9
Division between father and son
A
B
C
D
At the time of partition the rule is that each son
takes a share equal to the share of the father.
Example: A has three sons B, C and D. Each of
them i.e., A, B, C and D will take 1/4th share in
the joint family property.
10
Division between brothers
Brothers
A
B
C
D
E
When partition takes place between them, the rule
is that they take equal shares in the joint family
property.
For instance, a coparcenary consists of five brothers
A, B, C, D and E, each of them on partition will take
1/5th share.
11
Division takes place among
branches
A
S1
S
SS
SS1
SS2
SS3
S2
SS4
SS5
When a partition takes place, the rule is that each branch
takes per stripes (i.e., according to the stock) as regards
every other branch, and the members of each branch take
per capita (i.e. per head) as regards each other.
12
Schools of Hindu Law:
MITAKSHARA SCHOOL
-Common ancestor and
his lineal male
descendants , wives ,
daughters
-Sons have right by birth
& survivorship
DAYABHAGA SCHOOL
(in Bengal & Assam)
-Sons have specified
interest but no right by
survivorship
- No Coparcenary
- No specified share but -All income belongs to
community of interest
father
-Kerala has abolished
HUF
13
III. Creation of HUF and HUF
property:
Is in God’s hands, what we can do is to
create HUF property once there is a family
nucleus. Modes of creation of HUF property
are:
1)
By Blending:


Of self acquired property into HUF
property by conduct/ declaration of
members of HUF
This has tax implications
14
III. Creation of HUF property :
2)
By Gift from Non-members:


Nucleus should exist – property created by
gift
Intention of donor, documentation,
receiver’s statement
15
3) By Partition of Pre-Existing HUF :

Partial Partition: Partial as to members
and/or as to property

Total Partition: Nothing left in HUF

Unequal partition is possible

Who is entitled to enforce partition


Who is entitled to how much share upon
partition
Nature of property on partition in hands
of receiver
16
4) By Will (of any person):

To own HUF

To HUF of others

To future HUF of unmarried son
5) By Reunion:



Of previously partitioned HUF
All members who were partitioned need
not necessarily reunite
But those who reunite must bring back all
properties received on earlier partition 17
6) By Joint Labour:

Family of craftsmen, joint activity and
creation of joint income
18
Hindu Succession Act, 1956




Effect of 2005 amendment to Sec. 6
Daughter of coparcener now treated as
coparcener-member of HUF of father with same
rights as that of son
Even daughters married earlier are covered
Effect of partition effected before 20-12-2004
19
Some Typical Situations – I





Husband & wife only – no children
Single male + mother + wife + daughter
(Gowli Buddana)
Single male + wife + daughter (N.V.
Narendranath)
single male + widow of deceased brother
two or more widows of deceased
coparceners with undivided properties ( AR
Veerappa Chettier )
20
Some Typical Situations – II




HUF can exist with totally empty kitty of
property
Females can not now blend their property into
HUF but can give gift (Pushpa Devi) – not so
after amendment?
Females can be karta in absence of major
male member
Sole surviving coparcener (male or female)
21
Typical Situations – III

Only females left in family

Single male + mother +sister

HUF can exist without single male coparcener

NRI member of HUF in India – effect in country of
residence?

Gifts by HUF of its property – restrictions :
- not to sons or karts
- reasonable amt to daughter/wife
- consent of all desirable (265 ITR 551 SC)
22
IV. Management of HUF Property:

Concept of Karta – Manager

Who can be Karta

Powers & duties of Karta

Powers & duties of other members – rights of
education, maintenance

Dispositions out of HUF property

Debts of HUF

Obligations upon HUF property


Pious obligation of sons to pay debts of father out of
coparcenary interest of sons in HUF property
Duty of father to maintain wife, minor sons, unmarried
daughters and infirm parents out of HUF property
23
VI. HUF and Law of Succession:





Devolution of interest in HUF upon death of
Karta/Member
Overriding effect of Hindu Succession Act,
1956 – Sec. 6
Succession to individual property
Testamentary vs Intestate succession to
interest in HUF
Ancestral Agricultural Lands
24
VII. Status of females in HUF:

Wife/Mother

Daughter

Daughter-in-law

Hindu Succession (Amendment) Act, 2005- daughters have same rights as
coparceners

Is there any distinction between married
and unmarried daughters now?
25
V. Partition of HUF:

Meaning of – severance of status and
interest

Mere division of shares vs Metes & Bounds

Kinds of – Total / Partial
26
Meaning of Partition

Kalyani vs. Narayani 1980 Supplement SCC 298
(Supreme Court)

I-tax Act Sec. 171 defines partition

Partition of HUF vs. Distribution of Income

Status of partitioned property in hands of
member
27
Rights to enforce partition



Karta can make total partition w/o consent of
others; for partial partition, consent required
Any coparcener can demand partition with
consent of all
If consent is denied, he/she has to file lawsuit
28
Partition



Allotment of shares of partition (Per Stripes
and Per Capita)
Documentation & Care
Obligation to provide for on partition out of
HUF kitty:
- HUF debts, maintenance/marriage of
daughters, education, family rites
29
Effect of Partition of HUF
property







On Karta
On sons unmarried at partition date
On unmarried sons marrying subsequently
(157 Taxman 527 (SC)
On sons married at partition date
On unmarried daughters
On married daughters
On wife
30
Taxation of HUF
31
VIII. Taxation of HUF:

Treated as a “person” u/s 2(31)(ii)

Tax rates – same as Individuals

W.T. also leviable

Significant provisions of I. T. Act specific to HUF:
Sec. 6 (residential status)
Sec. 10(2) – sum received
from HUF
Sec. 56(2)(vii) –
sum/property received
without/ for inadequate
consideration
Sec. 64(2) – clubbing
Sec. 140(b) – signing of
return of income
Sec. 171 – de-recognition of
partial partition
32
IX. HUF as partner in firm – I :




Implications under Partnership Act – who is real
partner qua other partners?
Interest on capital of HUF – deductible u/s 40(b) –
taxed as income of HUF, not of individual
Interest on loan by karta in individual capacity –
allowable – not hit by limit of se. 40(b) – 150 ITR
276 (Guj. FB)
Remuneration & Sec. 40(b) – deductible u/s 40(b)
– 229 ITR 458; 88 ITD 322; but taxable in
individual hands of partner – 201 ITR 831
33
HUF as partner – II

Borrowings from Banks

Drafting care in partnership deeds

Same person as partner in dual capacity – as
Karta and as Individual in same firm –
partnership law recognizes only individual as
partner (Rashik Lal & Co. 229 ITR 458 – SC)
34
HUF as Proprietor of Business:

Use of HUF funds and labour

Use of HUF property


Can professionals or service providers function
as HUF?
Issue regarding lending by Banks
35
X. Is HUF yet a Tax Planning Tool?

Is a separate taxable entity

Gives rise to division of income and wealth




Is a tool to accumulate business assets/property in
HUF name and allow use by other business entities
to distribute wealth and tax incidents
Transfer of funds inter se HUF and its members by
way of loans rather than gifts
Separate entitlements to exemption from capital
gains u/s 54, 54EC, 54F etc.
Possibilities of multiple HUFs in appropriate
situations of larger families
36
Is HUF yet a Tax Planning Tool?

Creating separate property income stream in
HUF rather than Individual

Doctors: Income from costly equipment, nursing
home, vehicle etc. in name of HUF


Building up corpus for education, medical bills,
weddings etc.
Distribution of HUF income – Sec. 10(2) –
exempt for receiver
37
Stamp Duty on HUF





On Partition
On Release
Existence of immovable property
Probate duty
Issues reg. titles, Revenue records etc.
38
XI. Is HUF Relevant In Present Times?





Rising trend of nuclear families and
individualism – changing social forces
Are our families truly joint and undivided?
Equal rights to daughters after marriage –
boon or bane – continuing debate
Issues reg. banking, borrowing, transfer of
immoveable property, probate etc.
Can we preserve our culture of unity and
mutual family bonding through HUF?
39
XII. Salient Features of HUFs and
Landmark Rulings:
1.
A single member cannot be
treated as HUF.
2.
HUF may consist of single
2.
male and widows of deceased
males, A single male, his wife
and daughters.
Family may be formed by
3.
partition though not be
survivorship.
3.
1.
C. Krisnaprasad
97 ITR 493 (SC)
Gowli Buddana
60 ITR 293 (SC)
N.V. Narendranath
74 ITR 190 (SC)
40
4.
On partition of bigger
HUF, a coparcener and
his wife can constitute
HUF.
4.
5.
It is possible to
constitute HUF on
marriage of an
individual male, if he
has received asset on
inheritance or partition.
Took a contrary view to
(5) above.
5.
6.
6.
Soth Tulsidas Bolumal
170 ITR 1 (AP)
Krishnakumar
143 ITR 462 (MP)
Premkumar
121 ITR 347 (ALL)
Vishnukumar
142 ITR 357 (ALL)
41
7.
Individual property of
7.
father who dies after
Hindu Succession Act
came into force (17-6-56)
devolves on sons As
individuals. Even the
property held by a father
received on partition, on
death of father, on second
partition, is Son’s separate
and individual property.
Chander sen
161 ITR 370 (SC)
8.
For Right of a surviving
8.
female relative, Sec. 6 of
H.S. Act (Explanation) lays
down that there will be
deemed partition.
Gurupada Khandappa
Madgam Vs. Hirabai
129 ITR 440 (SC)
42
9.
10.
11.
But HUF even then
9.
continues- Explanation:
- merely helps to
identify the share of
female members and
their Legal heirs.
On death of sole male
10.
member after HS Act
(17-656) females heirs
receive property as their
absolute property.
HUF can consist of
11.
husband and wife only
State of Maharastra
Vs. Narayan Rap 163
ITR 31 (SC)
Smt. Nagarathnama
76 ITR 352 (MYS)
Knatilal Manilal 90
ITR 289 (GUJ)
C.I.T. vs. Arunkumar
Jhunjhuwala
138 CTR 63
43
Blending of Individual Property to HUF
– Court Rulings
1.
2.
When individual throws 1.
his personal property
with joining family
character, there is no
transfer- mere
declaration unstamped,
even if it is immoveable
is Sufficient-conduct has
to be seen.
A sole male member on 2.
conversion shall
continue to be, assessed
as IND.,
Goli Eswarisash
76 ITR 675 (SC)
R. Subramania
28 ITR 352 (Mad)
Lale Knnaiyalal
75 ITR 702 (ALL)
Surjitlal Chhabds
101 ITR 776 (SC)
44
4.
A female cannot convert 4.
her individual property
into HUF property. It
would amount to
transfer. (Is this
different after
amendment to HS Act?)
Pushpa Devi
109 ITR 730 (SC)
Note: - Tax advantage of conversion has since been lost by
insertion of Sec. 64(2) in IT Act, 4(IA) in WT Act
45
Creation of HUF by Will or Gift –
Court Rulings
By unequivocal
intention of donor or
testator, a beneficiary
can take gift/ legacy
as a karta of HUF
M.P. Pariakaruppam
99 ITR 1 (SC)
46
Partition – Court Rulings
1.
2.
3.
Severance of HUF
takes place on the
date unequivocal
intention is made.
The date of suit for
partition is the date
of severance of
status of HUF.
Date of arbitrator’s
award is the date of
severance.
1.
A Raghavamma
AIR 1964 SC 136
2.
Bijoy Kumar
84 ITR 71 (CAL)
3.
Ratanchand
4 ITR 189 (ALL)
47
4.
Entries in the books will
be sufficient in case of
business.
5.
Partition can be unequal 5.
No Gift tax is payable
because there is no
transfer.
There can be partition
6.
between Father and
Minor Sons.
6.
7.
There can be no
partition if there is one
male member.
4.
7.
A. Kuppiah
63 ITR 522(M)
Bhimraj
26 ITR 185.
N.S. Getti Chettier
82 ITR 599 (SC)
Apoorva Shantilal
141-ITR-558 (SC)
V.V.S. Natarajam
111-ITR-539 (M)
T.G.K. Menon
140-ITR-876 (M)
48
Partial Partition – Court Rulings
Partial partition
Kaloomal Tapeshwar
derecognized- A
133-ITR-690.
partition (total) though
valid under Hindu Law, it
has to be within the
meaning of Sec171 (9)
i.e. by metes and
bounds, or such other
mode.
49
Interaction?
50