Dissolution of HUF

In the previous articles on HUF, we had discussed about the meaning of HUF, its formation, creation of corpus of HUF through gifts and how it can be used as a legal tax saving tool.

For previous discussions on HUF, readers can go through:

HUF: A Tax Planning Instrument

Intricacies Involved In Gifts: To And From HUF

Let’s discuss about dissolution of HUF in this article.

Firstly, we need to revise about the concept of members and coparceners.

Any male or female person born in a joint family under Hindu law who is within four levels in lineal descendent from the common male ancestor is considered as a coparcener and anyone who becomes part of the family other than by the virtue of birth (I.e., by marriage) is treated as a member. However, a person who is adopted into the family also becomes its coparcener from adoption though not born in the family. As per the amended law since 2005, even a girl child becomes a coparcener by birth and can continue to be a co-parcener of her father’s HUF even after her marriage.

All the members of a family, including wife, children, their wives, and their children can be members of HUF. The male members are called coparceners while the female members of HUF are called members. Only Co-parceners have a right to seek partition and become the Karta of the HUF. Whereas, Members cannot demand partition but have the right to be maintained out of the funds of HUF, and receive their share at the time of partition but do not have the right to seek for partition or become the Karta.

Meaning of Partition

• Where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or
• Where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition.

Simply “physical division in definite portion” for this purpose means a division in which a member takes a particular house which he can occupy and live or a piece of land which he can cultivate or which he can sell or mortgage, or takes a particular ornament which he can wear or dispose of. In other words, such a division is not one in which he can only claim as a proportion of the income and a division of the corpus but where he cannot claim any definite portion of property.

However, under the tax laws, only a physical division by metes and bounds does constitute a partition. In case a property is incapable of such division, specification of shares may however be sufficient because the main intent behind partition is to bring peace amongst family members. To be concise, there is said to be a partition under tax laws only when the Assessing officer passes an order under section 171 of the Income-tax Act, 1961

Section-171 of Income Tax Act,1961 governs the partition for HUF.

When the coparceners demand partition, the Karta shall create a statement of Assets after meeting liabilities, if any and determine the residual assets to be distributed. Partition means the status of Joint Hindu Family comes to an end. Under Hindu Law, when the Joint Family status comes to an end there is division of property among members and joint ownership of property comes to an end. Partition of the HUF property can be of two types under the Hindu Law i.e., total and partial.

However, if any partition takes place in HUF, there should be complete partition of HUF because partial partition is not recognized under Income tax Act ,1961 as per the provisions of Section-171(9) in order to avoid creation of Mutiple HUFs to misuse the law and taking advantage of minimum threshold for multiple HUF’s

Case scenarios for partition

Joint family having only brothers: All will have equal share

Joint family consisting of father, mother and sons: Though the mother will have no right to claim partition, but when partition will be effected the mother will have equal share as her sons

Joint family consisting of unmarried Daughters with the passing of the Hindu Succession (Amendment) Act, 2005 (w.e.f. 9th September, 2005), a daughter of a coparcener shall also by birth become a coparcener in her own right in the same manner as the son.

Complete partition of HUF:

Where all the properties of the family are divided amongst all the constituents of the family, and the family ceases to exist as an undivided family, it is known as a total or complete partition.

Partial partition of HUF:

In a partition of HUF, there can be a division/partition where only some of the property is divided while the balance of the property remaining joint. Similarly, there may be a partition where some of the coparceners leave the family, with their share of property, while others remaining joint. 1. However, though Hindu law recognises division of property among family members through partial partition, from assessment year 1980-1981, the Income-tax Act, 1961 does not recognise such partial partition, made after 31st December, 1978.

Share of coparceners

The Partition of HUF should be recognized as per the Income Tax Act and not as per the Hindu Law. Section 6 of the Hindu Succession Act would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1) of the Income Tax Act, 1961.Therefore, in terms of Income Tax Act, 1961 an unequal partition can also be done via will of the co-parceners as to whether to allot on partition in accordance with the share specified under the Hindu Succession Act or to allot lower or more to anyone or more persons. (CGT vs. N.S Getti Chettiar 91971) 82 ITR 599(SC).

To start partition proceedings all that is necessary is a clear indication by Coparcener of the HUF to separate himself from the family. Such declaration should be known to the members of the HUF who would be ultimately effected by the decision. Partition of the property will only take place when all the members of the HUF agree to the terms and conditions of the partition.

Registration of Partition

Partition of HUF can be done through family settlement or through partition deed. Stamp duty is not required for family settlement and thus is not required to be registered, whereas partition deed attracts stamp duty and must be registered. Siromani v. Hemkumar & Dinmani, AIR 1968 SC 1299; Nanibai v. Gitabai, AIR 1958 SC 706; Muthyalareddy v.Venkata Reddi, AIR 1969 A. P. 242.] Due to exorbitant cost involved with partition; family settlement is preferred. Things to keep in mind while perusing with the option of family settlement is that the partition should be voluntary and should be without any force, threat, coercion or fraud. It should be fair and equitable settlement and though it is unstamped and unregistered it is binding on every member.

It is not necessary to effect partition by a written partition deed. It can be effected orally and be acted upon. Even a partition of an immovable property can be by an oral agreement. –Refer the case of Popat Lal Devaram v. CIT (1970) 77 ITR 1013 (Orissa) wherein it was held by the Hon’ble Orissa High Court that Law is well settled that a partition of the joint family properties can be effected by an oral agreement irrespective of the value of the property.

It is imperative to note that Section 17 of the Registration Act, 1908 talks only when immovable property is transferred. Therefore, family settlement without registration is okay if no immovable property is involved. However, in respect of transfer of immovable property separate registered documents only for immovable property can be made. Therefore, in respect of transfer of properties of the HUF, the facts and circumstances of each case will have to be seen and analysis has to be done properly after referring to the various judicial pronouncements.

Assessment of partition

Upon making a claim regarding the partition of HUF as stated above, the Assessing Officer would issue a notice to all the members of the HUF making a detail enquiry regarding the said partition including the date of the said partition. On Completion of inquiry, On the completion of such enquiry, the Assessing Officer shall record a finding as to whether there has been a total or partial partition of the joint family property. In case the Assessing Officer has recorded a finding of total or partial partition under this section and the partition has taken place during the previous year the total income of the joint family in respect of the period upto the date of partition shall be assessed as if no partition had taken place. In such cases, each member or group of members shall, in addition to any tax for which he or it may be separately liable be jointly and severally liable for the tax on the income so assessed.

Once the full partition of the HUF is carried out, the HUF can be closed and PAN of HUF should be surrendered to AO.

For any discussion or queries readers may reach out at casupriyadewan@gmail.com.