Article covers Some Important Aspects of HUF Under Income Tax, 1961 which includes Partition of HUF under Income Tax Act, 1961 and its assessment after Partition, Residential Status of HUF, Taxability of Income from house property in the name of HUF, Proprietorship and Partnership by HUF, Capital Gain Exemption available to HUF, Deductions under Chapter VIA, Taxability of gift received in cash or in kind by HUF without consideration, Return of Income, Clubbing Provisions of Section 64(2) in case of HUF and other Miscellaneous Issues.
Page Contents
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 [Add. CIT v. Maharani Raj Laxmi Devi [1997] 091 Taxman 020 (SC)]. The Hindu Law does not require that the property in every case be partitioned by metes and bound or physically into different portions to complete a partition. But the Income Tax Law introduced certain additional conditions of its own to give effect to the partition u/s 171.
Section 171 of the Income Tax Act, 1961 defines the partition of HUF and deals with the provisions of assessment after its partition. Thus a transaction may be treated as severance of status under Hindu Law but not a partition under 1961 Act as physical division of property is necessary under 1961 Act [CIT v. Smt. Meera Prem Sundar (HUF) [2005] 147 TAXMAN 535 (ALL.)].
• The Partition of HUF can be categorized as under:-
Partial partition means a partition which is partial as regards the persons constituting the HUF, or the properties belonging to the HUF, or both.
2. Total or Complete Partition –
Assets of HUF are physically divided. As per explanation to section 171 of the Income Tax Act,
‘Partition’ means
(i) 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
(ii) 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.
Therefore a transaction can be recorded as a partition u/s 171 only if, where the property admits of a physical division, such division has actually taken place. [Kalloomal Tapeshwari Prasad (HUF ) v. CIT [1 982] 133 ITR 690 (SC)]
A Partial partition taken place after 31-12-1 978 is not recognized the Income Tax Act, 1961 (Sub-section 9 of section 179. Therefore even after the Partial partition, the income of the HUF shall be liable to be assessed under the Income-Tax Act as if no partition had taken place.
After the Partition, the assessment of HUF shall be made as per the provisions of Section 171 of the Income Tax Act and order to be passed by the Assessing Officer.
The following procedure u/s 171 is prescribed under the Income Tax Act regarding partition and assessment after partition of HUF:
(i) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place; and
(ii) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed.
The sum received by a member as and towards his share as coparcener of HUF, on its partition cannot be brought to tax as income [Smt. Sudha V. Iyer v. ITO 15 taxmann.com 234 (ITAT-Mum.) [2011]
Setting apart of certain assets of HUF in favour of certain coparceners on the condition that no further claim in properties will be made by them, is nothing but a partial partition and not a family arrangement and not recognised in view of section 171(9) of the Act. [ITO v. P. Shankaraiah Yadav 91 ITD 228 (2004) (ITAT-Hyd.)].
The gist of the various pronouncements of the Hon’ble Supreme Court is that there is no ipso facto partition of joint Hindu family properties immediately after the death of a male coparcener of the Mitakshara school having coparcenary interest in the coparcenary property. The fiction given by Explanation 1 to section 6 of 1956 Act has nothing to do with the actual disruption of the status of a HUF. It freezes or quantifies the share of a female heir in the coparcenary property on account of the death of a coparcener at the relevant point of time.
Therefore, there was no partition and disruption of the HUF as per Explanation 1 to section 6 of the 1956 Act, in the instant case. [CIT vs. Charan Dass (HUF) [2006]153Taxman 307(All.)]
Section 6(2) of the Income-tax Act, 1961, clearly contemplates a situation where a HUF can be non-resident also. In fact, HUF can also be Not Ordinarily Resident.
HUF will be considered to be resident in India unless, during the previous year, the control and management of its affairs is situated wholly outside India. In such a case, it will be treated as non-resident HUF.
Section 6(6)(b) of the Income-tax Act, 1961 further provides that, in case of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the previous year or has, during the seven previous years preceding that year, been in India for a total 729 days or less, such HUF is to be regarded as not-ordinarily resident within the meaning of the Income-tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.
In case of change of Karta of HUF during the year, the residential status of HUF can be determined by considering the period of stay in India of both Karta of HUF i.e. previous Karta and successive Karta.
Under the Income Tax Act the residential status is determined with reference to the previous year relevant to a particular assessment year. Therefore the residential status of HUF may also be different for different assessment years considering the facts of relevant previous year.
As discussed in the earlier answer, the test is not where the Karta resides; the test is where the control and management of the affairs of HUF is situated. Even if a part of control and management is situated in India, such HUF will be treated as resident in India.
Though, generally, Karta is supposed to manage the affairs of HUF, it is not an absolute rule and, by consent, the power of control and management may be delegated to other members of the family, either fully or partially.
The relevant factor for determining the status is where the control and management of HUF is situated (even in part). Therefore the HUF may be resident even where the Karta was residing outside India for whole of the year.
As per Section 10(2) of the Income-tax Act, 1961, any sum received by an individual from Hindu Undivided Family of which he is member is exempt from tax.
But the amount received not as a member of Joint Family but in pursuance of some statutory provision, etc. would not be exempted in this section. Also the position of member of joint family in law to claim the right u/s 10(2) does not get affected only with the reason that they are living apart from the other members of the family.
1. Self occupied one Residential House & the tax gain specially by way of Interest on Loan & Repayment of Loan
2. Special 30% deduction on Rental Income also to HUF.
3. Exemption from Wealth-tax the real estate of HUF – One House Wealth Tax Free (Commercial / Rented Residential)
Property purchased with the aid of joint family funds, howsoever small that may be, still the property would be HUF income and cannot be income of the individual with major portion of purchase price.
The Hon’ble Madras High Court has held in the case of S. Periannan v. CIT (1991) 191 ITR 278, that
“When once the estate had become the property of the assessee-Hindu undivided family on its coming into existence, there could be no change in its character by reason of the fact that, subsequently, in the books of the assessee-Hindu undivided family, the account of Sathappa Chettiar was debited with the amount which have been drawn for the purchase of the estate. In these circumstances. The Tribunal rightly held that the Grove Estate should be considered as belonging to the assessee-Hindu undivided family.”
In the case of ACIT vs. Rakesh S. Agrawal [2010] 36 SOT 148 (AHD.) it was held that:
AO found that the assessee had purchased a house property from ‘A’. The assessee’s case was that since the investment was made in the name of HUF, it was not declared in his individual return. The AO, however, took a view that the funds for acquiring the property in question were met from the personal sources of the assessee. He thus determined annual letting value of the property resulting in certain addition to the assessee’s income. On appeal, the Commissioner (Appeals) directed the AO to consider the annual letting value of the property in the hands of HUF and deleted the impugned addition.
The Hon’ble Supreme Court in Ram Laxman Sugar Mills vs. CIT [1967] 66 ITR 613 observed that a HUF is undoubtedly a “Person” with in the meaning of section 2(31), it is however not a juristic person for all purposes and cannot enter in to an agreement of partnership either with another HUF or Individual. It is open to the manager of a Joint Hindu family, as representing the family, to agree to become a partner with another person. And therefore any remuneration received by Karta would be the personal income of Karta and not the income of the HUF as there is no real connection between the investment of the assets of HUF and remuneration received by Karta.
The remuneration received by Karta as representative of HUF cannot be treated as income of the HUF. Remuneration will be income of HUF only when there is direct nexus between family funds and remuneration paid.
In Brij Mohan vs. CIT 201 ITR 831 (1993), the Supreme Court held that where the receipt is a compensation made for the services rendered and not for the return of investment, it is to be treated as individual income of the partner.
However, where members of HUF become the partners in a firm by investment of family funds & not because of any Special Services rendered by them, then the income will belong to HUF. {Lachman Das Bhatia & Sons vs. Commissioner of Income-tax [2007] 162 Taxman 118 (Delhi)} {D.N. Bhandarkar v. CIT 158 ITR 724 Kar (1986)}
Once the character of an individual has been treated differently than H UF for the purposes of interest, there is no reason as to why that would not extend to the salary and bonus paid to such partners on account of their personal services rendered to the firm in contra-distinction to their capacity as representatives of HUF .
Therefore, the same reasoning would apply to the cases where payment in the form of salary and bonus has been made to a partner in his individual capacity in contra-distinction to his representative character of the HUF. [CIT v. Unimax Laboratories [2007] 164 Taxman 373 (P & H)].
As per Section 40(b)(i)
“in the case of any firm assessable as such,—
any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration”) to any partner who is not a working partner”
Partner of a firm is an individual even if he is partner as a representative of HUF
Where a person is a partner in a partnership firm not in his individual capacity but as the karta of the Hindu undivided family, the income accruing to his wife on account of her being a partner in the same partnership firm cannot be included in the total income of such person in an individual assessment or in the assessment of the Hindu undivided family. [CIT v. Om Prakash [1996] 217 ITR 785 (SC) See also CIT v. Ram Krishna Tekriwal [2005] 274 ITR 266 , Satish Chand Gupta v. CIT [2007] 160 Taxman 224 (All.)].
In the case of Pratap H. Desai (HUF ) v. ACIT [2009] 118 ITD 29 (Pat.) it was held that:
Assessee was a partner in a firm which was dissolved with effect from 1-1-1999 and its business was taken over by the assessee in the capacity of a HUF – the assessee sought to set-off loss of the said firm against the profit of his business as HUF
Section 78(2) prohibits carry forward and set-off of losses of one person by another person except when the other person receives the losses by inheritance. Section 78 shows that where succession to business is by inheritance, then loss will be allowed to be set-off and not otherwise.
Therefore, assessee was not entitled to set-off of losses of firm against his individual income
Capital asset should have become property of previous owner before 1-4-1981 to make assessee entitled to benefit of adopting market value as on 1-4-1981
but where construction of building was completed in 1988 and possession of flat was handed over to previous owner, i.e., HUF, it could not be said that flat itself became property of HUF prior to that date and, hence, assessees were not entitled to adopt market value of flat as on 1-4-1981.In view of specific provisions of Explanation (iii) to section 48, indexing had to be allowed of the financial year in which flat was held by assessee on partition of HUF. [DCIT v. Kishore Kanungo 102 ITD 437 (Mum.) [2006]].
A plain reading of section 54(1) discloses that when an individual assessee or an HUF assessee sells a residential building or land appurtenant thereto, he can invest capital gain for purchase of a residential building to seek exemption of the capital gain tax. The expression ‘a residential house’ should be understood in a sense that building should be residential in nature and ‘a’ should not be understood to indicate a singular number.
That when an HUF’s residential house is sold, the capital gain should be invested for the purchase of only one residential house, is an incorrect proposition. After all, the property of the HUF is held by the members as joint tenants. If the members, keeping in view the future needs in event of separation, purchase more than one residential building, it cannot be said that the benefit of exemption is to be denied u/s 54(1).
[CIT v. D. Ananda Basappa 180 Taxman 4 (Kar.) [2009] ]
To claim benefit u/s 54F, residential house which is purchased or constructed has to be of same assessee whose agricultural land is sold.
The, it is written it same view is expressed by Delhi High Court in the case of Vipin Malik (HUF) Vs CIT 183 Taxman 296 (2009), It was held that:
“The agricultural land, which was sold was of the HUF of the assessee but the flat purchased in the co-operative society was not in the name of the HUF. The flat was in the individual name of the assessee along with his mother. To claim the benefit of section 54F, the residential house which is purchased or constructed has to be of the same assessee whose agricultural land is sold and it was not the case in the instant case. [Para 9]
Clearly, therefore, there was no question of applicability of section 54F in the aforesaid facts and circumstances.”
Under section 48, any payment made by assessee for education, maintenance and marriage of his unmarried daughter, though under consent decree, could not be said to be an expenditure wholly and exclusively incurred in connection with transfer of property or could also not be considered as a cost of acquisition or cost of improvement.
[Krishnadas G. Parikh v. DCIT [2008] 114 ITD 362 (AHD)].
Exemption under Section 54B is also available to HUF subject to the following condition:
If HUF transfer a land which is used for agricultural purposes by a HUF, the rollover relief u/s 54B is available to the HUF. The amendment is applicable on transfers made after 01-04-2013.
*Even before the amendment, exemption was being allowed to HUF.
Same view is expressed in K.S. Jain & Sons (HUF ) v. ITO 173 Taxman 114 (Delhi) (Mag.) [2008], it was Held, AO was wrong in denying deduction u/s 54B to assessee on ground that assessee being an HUF was not entitled to deduction u/s 54B.
Exemption from tax on LTCG on transfer of residential property if invested in a manufacturing small or medium enterprise.
1. If any sum of money exceeding Rs. 50,000 is received by the HUF without consideration then provisions of section 56(2)(vii) are applicable and the same is taxable in the hands of HUF.
2. Gift received in kind by HUF without consideration is also taxable subject to the provisions of s. 56(2)(vii).
The definition of relative provided under Explanation to Section 56(2) (vii) shall be amended by Finance Act, 2012. The amendment is as under:
The provisions of section 56 are amended so as to provide that any sum or property received without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation [w.r.e.f. 1-10-2009].
For this purpose, clause (e) of the Explanation below section 56(2)(vii) is to be substituted to provide that in case of HUF, relative means members of the HUF.
After the amendment,
“(e) “relative” means,—
(i) in case of an individual—
(A) ******; and
(ii) in case of a Hindu undivided family, any member thereof.”
The amendment as above is inspired by the decision of ITAT in Vineetkumar Raghavjibhai Bhalodia v. ITO 46 SOT 97 (Rajkot-ITAT) (2011) where it was held that Gift received from HUF is gift from relative.
S.No. | Section | Deduction |
1 | Section 80C | Deduction available to HUF[Insurance Premium can be paid on the life of any member which does not exceed 10% of total sum assured for policies issued on or after 1st Apr, 2012] |
2 | Section 80CCF | Investment in Infrastructure Bonds up to Rs. 20,000/- (Discontinued wef A.Y. 2013-14) |
3 | Section 80D | Mediclaim Policy on the health of any member of the family.Deduction for payment on account of preventive health check ups not available. |
4 | Section 80DD | For maintenance including medical treatment of a dependant member of the family. |
5 | Section 80DDB | Medical treatment for any dependant member of the HUF |
6 | Section 80G | Donation to certain funds, charitable institutions ,etc. |
7 | Sections 80IA / 80IAB / 80IB / 80IC / 80ID / 80IE / 80JJA | New Industrial undertakings |
HUF is required to furnish return in Form ITR-2 or ITR-3 or ITR-4S or ITR-4, as the case may be.
However, ITR-4S (Sugam) not applicable to residents HUFs
(i) having assets (including financial interest in any entity) located outside India; or
(ii)signing authority in any account located outside India. [Inserted vide Finance Act, 2012] In case of above HUFs, the return to be furnished
(i) electronically under digital signature, or
(ii) transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V.
Note: E- filing is mandatory if total income exceeds Rs. 10 lakhs, (Inserted vide Finance Act, 2012).
HUFs to whom Section 44AB is applicable, shall furnish the return electronically in ITR-4 under digital signature.
Where any member of HUF converts any property belonging to it, in to the common property of HUF, then :
Demand against member of HUF can be recovered from HUF to the extent of its share in property of HUF. [Naresh B. Chheda v. JCIT [2011] 9 taxmann.com 86 (Bom.)]
“‘N’, a constituent of the HUF, would, therefore, have an undivided share in the amount lying in the bank account of the HUF. The Assessing Officer, therefore, would not be entitled to attach and appropriate entire amount which was in the account of the HUF for the liabilities of ‘N’ as an individual. It could attach and appropriate the amount lying in the bank account of the HUF only to the extent falling to the share of the said ‘N’.”
The Act recognizes status of HUF different from individual status of Karta of HUF and two are treated as different legal entities, it is necessary that notice u/s 148 should be sent in correct status because jurisdiction to make assessment is assumed by issuing valid notice and it cannot be conferred by consent of parties. After having issued notice u/s 148 to individual, AO had no jurisdiction to assess HUF of assessee and that defect of jurisdiction could not be cured by obtaining consent of assessee to assess him in status of HUF. [Suraj Mal, HUF v. ITO 109 ITD 327 (Delhi) (TM) [2007], also see CIT v. Rohtas 167 Taxman 233 (P & H) [2008]].
“Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-sec., and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.”
Note that the Expenditure must be unreasonable or excessive
(a) Primary Market
(b) Secondary Market
– The gift made by the family of a sole coparcener to the wife of the Karta of the family is considered to be VALID. {M.S.P. Rajah Vs CGT (1982) 134 ITR 1 (Mad)}
– Gift by HUF to bride of male member in the form of jewellery at the time of marriage is valid. Obligation of Karta is towards marriage of both sons & daughters. {CIT Vs A.K. Daga & Sons (2008) 296 ITR 623 (Mad) also see CGT Vs Basant Kumar Aditya Vikram Birla (1982) 137 ITR 72 (Cal)}
– Gift of HUF Property By Father
[Gift of affection can be made to a wife, daughter & son]
– Gift to stranger
The other persons may be related to the Karta or the coparceners in the contest of family. Other persons means excluding relatives not being members of HUF.
The gift of family property by Karta of an HUF to coparceners or noncoparceners is void ab initio & not merely voidable.{CGTVs TejNath (1972) 86 ITR 96 (P&H) (FB)}
– Gift to daughter
Hindu father can make a gift of ancestral property within reasonable limits at the time of marriage or even long after marriage. {R. Kuppayee Vs Raja Gounder (2004) 265 ITR 551 (SC)
– Gift to wife by Karta
The Karta is empowered to make gifts to his wife within reasonable limit of the movable assets. But the Karta CANNOT make gifts to his second wife. It is invalid.{Commissioner of Gift Tax VsBanshilalNarsidas (2004) 270 ITR 231 (MP)}
– Gift by Karta to nephew
Gift made by Karta to nephew & interest on the amount gifted was deposited in the firm. It was held that gift was void. Pranjivandas S. Patel Vs CIT (1994) 210 ITR 1047 (Mad)}
– Gift by Karta to minor children of family
Gift made by Karta from
– Natural love & Affection
– within reasonable limits
The gift was said to be Valid {CWT/CGT Vs Shanmugasundaram (1998) 232 ITR 354 (SC)]
Marriage of daughter still remains an obligation of the Family under Hindu law. Thus, reasonable amount of gift given on her marriage should not objected by the male coparcener.
(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains written by CA Agarwal Sanjay ‘Voice of CA’ & Team)
Republished with Amendments
Can I withdraw money from my HUF account by paying the appropriate income tax over it?
Is there a limitation on duration from the account creation like after 6 years I cannot withdraw the money anymore by even paying the taxes?
Thanks
respected sir
can i apply broker code of mutel fund & debenture in my HUF NAME. is it legal in income tax law?
Dear Sir,
I am Nikhil, my salary income pluse share income crossing the I.T limited and comes to heavy taxes on me. I want know that can I open a huf account and save the tax.
please suggest me on the same.
regards,
Nikhil
Pratibha Says 08/12/2015 aT 8.00PM Dear Sir, I want to know that ,if we bought the plot her mother in low in 2010[take persnal lone in her sallery] And then take home lone for construction .In lone we are Co-borrow .HOW can I am take rebbat .I am repaying the whole amount of EMI in my sallery.mother in low totaly dependent on we .How we can take rebbat in HUF. 9 9719195019
I am the Kartha of my HUF consisting of my wife and two sons since 1986 since completing proper documentation of agricultural property which I received through unregistered Partitian Deed by my father who expired in the year 1961. I was a minor at the time of father’s death and complete documentation in Taluk offices was done after attaining majority and after marriage.
In the year 1987-88, I have given funds out of HUF in the form of cash to my wife, who was a house-wife with no other sources of independent earnings or employment, to buy a residential site. The HUF funds so generated were from the sale of agricultural produce obtained from HUF agriculture property and that was sold for cash during the period as per the practice prevailing in villages.
Now we want to dispose this residential site for the benefit of HUFcoparceners. For availing various benefits available to HUF, what proof or documents I have to produce before Assessing Officer? How to prove that the property is funded from HUF and not through any source by my wife who is a member of my HUF?
I have recently created a HUF with myself as Karta, wife and 2 children as members.
I have the following questions:
1) Can i give a gift of Rs 6,00,000/- (Rs 6L ) to the HUF without any tax liability on either side.
2) This 6L will be put into FDs and also used for short term equity trading and hopefully generate income. What will be the tax treatment of this income.
Please provide a reply with proper references.
Later i may want to withdraw the full/partial amount or use if for family (same as HUF members) expenses. Will that be taxable?
I have purchased a life insurance policy under HUF, what will be the treatment to my policy, if I dissolve the HUF in future.
Dear Sir,
I would like to request the tax liability on my HUF. I am the Karta of my HUF of which my father and mother both are members along with my wife. Out of affection my father and mother both have transferred their FDs after maturing to the HUF a/c. Now the HUF is drawing interest from the sum after opening FDs, they have done the transfer along with a gift deed on a Rs. 100/- stamp paper each after my son turned 1 year old. Will the Gift be considered for taxation in HUF a/c. Also the interest received on the FDs of HUF will be clubbed to my parents income or to the income of HUF.
Regards,
I want to know that whether we can transfer a property that is in the personal name of the Karta to its own HUF, if that property has been inherited by the karta from its ancestors after the division of the property of the forefathers ??
Respected sir,
i want to know that if one partnership is dissolved and new huf is formed then the property brought by the partner in huf will charged to stamp dut or there is any other way out of it.
yours sincerely,
Darshil shah
Dear Sir,
I want to know that whether we can transfer a property that is in the name of HUF to personal name of the Karta.
Regards
Ashish