How to Create Hindu Undivided Family (HUF)

MODES OF CREATION OF HUF

A Hindu Undivided Family can be created by following ways

1. Blending of individual property with the family Hotchpot

2. Receipts of Gifts

3. Doing Joint labour for the benefit of HUF

4. Inheritance through a specific bequest under a Will

5. Partition of a larger Hindu Undivided Family

6. Reunion of separated co-parceners

A. Creation of HUF Corpus by Blending

Blending means transfer of one’s individual property in the common hotchpot and make it a part of the common property of the HUF. There must be an intention to throw the separate property into the common stock and it is necessary to waive all separate rights in respect of the property, which must be clearly established through a declaration. Only the coparcener is entitled to throw in HUF’s common property.

a. Blending can be utilized for creating smaller HUF. HUF can be created by impressing one’s self acquired property with the character of HUF property by bringing in to existence an HUF comprising the person himself, his wife & children.

b. Applicability of Section 64(2) of I. T. Act, 1961-  Transfer of individual property in the common hotchpot is deemed to be a gift and income from the transferred asset is deemed to be the income of individual under Section 64(2) of the Income Tax Act, 1961. As per section 64(2) of the Income Tax Act, if any property has been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration then the income derived from such property shall be deemed to arise to the individual and not to the family and where the converted property or any part thereof is received by the spouse of that individual on partition the provisions of sub-section (1) shall apply. Similarly provision was inserted in the Wealth Tax Act, 1957 under section 4(1A).

c. Rights of members of HUF do not get enlarged on throwing property into family hotchpot, income from said property had to be treated as assessee’s individual income only. The property can change its legal incidents on the birth of son.

d. Partition of HUF after blending

This is for achieving distribution of immovable property among members because giving it in any other manner will require registration for effective transfer.

Each division is entitle to claim exemption under Sec 5 (vi) of the Wealth Tax Act.

B. Creation of HUF by receipts of Gifts

HUF is a creation of law and cannot be created by the act of parties, therefore, HUF cannot be created for the first time by a gift from the stranger. If HUF already exists, gift can be made by a stranger to such HUF.

The gifted property will be HUF property if the gift is made to HUF.

Intention of donor & the character of the gifted property will depend on the construction of the gift deed.

Precautions to be taken by family while accepting gifts

– Clear declaration of intention through affidavit. {C.N. Arunachala Mudaliar Vs C.A. Muruganatha Mudaliar & Anr. AIR 1953 SC 495: (1954) SCR 243 (SC)}

– Gift to be valid & genuine.

No specific bar to a gift by the father to the HUF of his son, his wife & minor children. However, for avoiding the clutches of sec 64 (1)(vi) such gifts better be avoided.{CIT Vs Smt. T. Suryamani Kothavalasala (2003) 263 ITR 271 also see CIT Vs S.N. Malhotra (1989) 178 ITR 380 (Cal)}

– HUF can accept gifts from relative who may not be the member of the family.

C. Creation of HUF by Doing Joint labour for the benefit of HUF

Property acquired in the course of some business carried on by the persons constituting a joint Hindu family, takes the characteristic of joint family property.

As per Hindu law, in case of properties not acquired with the aid of joint family property, it is presumed that property acquired by coparceners by working together is joint family property unless the persons concerned desire to hold it as co-owners. This is valid if the coparceners are carrying on work together and belong to the same line of ancestors.

The income from such property is out of the purview of section 64(2) of the Income Tax Act, 1961 and section 4(1 A) of the Wealth Tax Act, 1957.

In the cases of properties acquired with the aid of joint family property is also the joint family property.

D. Creation of HUF by Inheritance through a specific bequest under a Will

A HUF can also be created by will of a person provided the will is valid and there is a specific bequest in favour of the HUF as held by Punjab & Haryana High Court in CIT vs. Ghansham Dass Mukim (1979) 118 ITR 930. Moreover, HUF need not be in existence at the time of execution of will. Even a stranger can bring a HUF into existence by making a will in the favour of HUF of a person.

Creation by will

–     No existence of HUF at the time of execution of will.

–    Valid will should be there. {CIT Vs Ghanshyam Das Mukim (1979) 118 ITR 930 (Punj & Har)}

– An HUF is created if there exist a valid will.

E. Creation of HUF by Partition of a larger Hindu Undivided Family

Partition of an existing HUF can also result in creation of many smaller HUFs. As per Hindu Law, the property does not change its character on partition. Property received by a coparcener having a family, continues to have characteristic of HUF. An unmarried coparcener receiving any property will own the property in the status of HUF until he acquires the status of HUF. In case of married coparceners who have no child, the property will continue with the status of HUF as held by High Court of Madhya Pradesh in CIT vs. Krishna Kumar (1982) 10 Taxman 292 (MP).

However, the partition has to be total partition because the law does not recognize partial partition as per section 171(9) of the Income Tax Act, 1961.

F. Creation of HUF by Reunion of separated coparceners

Even after partition of HUF, members may re-unite to form a new HUF. However, there are certain conditions to make such reunion valid in the eyes of law. Reunion can take place only when there was in existence a HUF and there was total partition of such HUF. It can take place only between persons who were parties to the original partition and to support such reunion, there must be an agreement between the parties. To constitute a reunion there must be an intention of the parties to reunite in estate & interest and such intention is evident. As per Mitkarsha, Dayabhaga and SmritiChandrika, a member of a joint family once separated can reunite only with his

• father,
• brother or
• paternal uncle but not with any other relation.

Gems of Judiciary

1. Paramanand L. Bajaj Vs CIT (1982) 135 ITR 673(Kar)-

Under the Hindu Law:

• It is possible among persons who were on earlier date, members of HUF.
• There must have been a partition in fact.
• Reunion must be effected by the parties or some of them who had made their partition.
• Must be a junction of estate & reunion of the property

Further, share of property of reunited members got at an earlier partition &

• its possession at the reunion
• becomes the property of the joint family.

2. CIT Vs A.M. Vaiyapuri Chettiar & Anr. (1995) 215 ITR 836 (Mad)-

It is not necessary that all the property

• Belong to HUF should be brought back
• in to the re-united joint family
• This reunion is said to be VALID

3. CIT Vs Rupchand Routhmall (1963) 50 ITR 295 (Cal) –

The minor cannot be a part of reunion neither by self nor by someone on behalf of such minor.

4. Madhuri Doulatram Choitram Vs Lachmandas Tulsiram Nayar (HUF) (Bombay High Court)

In Absence of Karta, Any Family member may be permitted to Prosecute Suit

5. Gyanchand M. Bardia Vs. ITO (ITAT Ahmedabad)

Section 56(2)(vii) HUF can’t be treated as a ‘Donor’ of Gift

6. Subodh Gupta (HUF) Vs Pr CIT (ITAT Delhi)

ITAT explains Meaning of term “relative” in context of HUF

7. Shri. Deen Dayal Kothari Vs Income Tax Officer, (ITAT Chennai)

Assessment of Individual cannot be done by issuing notice on HUF

8. Mrs. Sujata Sharma Vs Shri Manu Gupta (Delhi High Court)

Women can be Karta of HUF

Also Read –

Creation of HUF – Tax Planning Advantage

Create HUF to save tax & Format of HUF Creation Deed

(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains  written by CA Agarwal Sanjay ‘Voice of CA’ & Team)

Republished with Amendment