TREATMENT OF SELF ACQUIRED PROPERTY CONVERTED TO JOINT FAMILY PROPERTY UNDER IT ACT, 1961
It is our duty to pay our taxes to the government for development of country and the society. A person is required to file return if his income from all sources increase threshold limit as prescribed during preceding financial year. In some circumstances a person even though his total income does not exceed threshold limit is required to file income tax return and pay the taxes.
We use various methods and ways to avoid payment of taxes or reduce our tax burden. There are various ways of tax evasion or tax avoidance. Such as concealment, excess claiming of deductions, exemptions , submitting fake TDS certificates , transferring our source of income to others ,without transferring the assets , transfer of source of income to relatives , minors etc.
One of the method of transfer of income of a person is conversion of a self occupied property to property of Joint Family or HUF.
PROVISIONS OF SECTION 64(2); provides that
Where an individual , who is a member of Hindu Undivided Family (HUF), after 31.12.1969-
(a) Converts, his separate property as the property of HUF, or
(b) Throws the property int the Common Stock of the family; or
(c) Otherwise transfers his individual property to the family , otherwise than for adequate consideration.
Then income from such property shall continue to be included in the total income of the individual.
Please Note That : if self occupied property of an individual is treated/converted into Joint Family property without adequate consideration , the income derived by the Joint Family on account of such property shall be included in the total come of the individual ,who was the owner of self occupied property.
LET’S CONSIDER DOCTRINE OF BLENDING
Law relating to blending of separate property with joint family property is well-settled. Property separate on self-acquired of a member of a joint Hindu family may be impressed with the character of joint family property if it is voluntarily thrown by the owner into the common stock with the intention of abandoning his separate claim therein but to establish such abandonment a clear intention to waive separate rights must be established.
From the mere fact that other members of the family were allowed to use the property jointly with himself, or that the income of the separate property was utilised out of generosity to support persons whom the holder was not bound to support, or from the failure to maintain separate accounts, abandonment cannot be inferred, for an act of generosity or kindness will not ordinarily be regarded as an admission of a legal obligation.
For applying the Doctrine of Blending , below mentioned certain preconditions to be fulfilled;
1. Existence of a coparcenary;
2. Existence of coparcenary property; and
3. Existence of a separate property of a coparcener.
Please Note That: the existence of a coparcenary is absolutely necessary before a coparcener can throw into common stock his self acquired properties. The Doctrine of Blending into common stock is a doctrine peculiar to the Mitakshara School of Hindu Law ,where every coparcener is entitled to throw his separate property into the Common Stock.
Goli Eswairah vs. CGT (1970) 76ITR675(SC) the Apex Court has analysed conditions to be applied for invoking “Doctrine of Blending “or Throwing Property into common stock in above case as follows;
To pronounce on the question of law presented for our decision, we must first examine what is the true scope of the doctrine of throwing into the ‘common stock’ or ‘common hotchpotch’.
It must be remembered that a Hindu family is not a creature of a contract. As observed by this Court in Mallesappa Bandeppa Desai and Others Vs. Desai Mallappa and Others, that the doctrine of throwing into common stock inevitably postulates that the owner of a separate property is a coparcener who has an interest in the coparcenery property and desires to blend his separate property with the coparcenery property.
The existence of a coparcenary is absolutely necessary before a coparcener can throw into the common stock his self acquired properties. The separate property of a member of a joint Hindu family may be impressed with the character of joint family property if it is voluntarily thrown by him into the common stock with the intention of abandoning his separate claim therein.
The separate property of a Hindu ceases to be a separate property and acquires the characteristic of joint family or ancestral property not by any physical mixing with his joint family or ancestral property but by his own volition and intention by his waiving and surrendering his separate rights in it as separate property. The act by which the coparcener throws his separate property to the common stock is a unilateral act. There is no question of either the family rejecting or accepting it. By his individual volition he renounces his individual right in that property and treats it as a property of the family. No longer he declares his intention to treat his self acquired property as that of the joint family property, the property assumes the character of joint family property.
The doctrine of throwing into the common stock is a doctrine peculiar to the Mitakshara School of Hindu law. When a coparcener throws his separate property into the common stock, he makes no gift under Chapter VII of the Transfer of Property Act. In such a case thee is no donor or donee. Further no question of acceptance of the property thrown into the common stock arises.”
LET’S ANALYSE ABOVE DECISION; From above we can draw a conclusion that a Hindu Undivided Family (HUF) is not a creature of law, it is originates due to costumes prevailing in Hindus for long times to keep a joint family. A person became member of HUF not by entering Into a contract but mere by birth they called as coparcener. Every coparcener has right to throw his separate property into common stock of HUF or Joint Family. One a coparcener throws his self acquired property into common stock, its become property of HUF or Joint Family. The decision of HUF or Joint Family to accept or reject the decision does not matter. It is unilateral act of a coparcener to blend his self acquired property into common stock. But existence of Corparcenary it is absolutely necessary at the time of. Transfer of self acquired property into Joint Family Stock.
i) for the purpose of Section 64(2), property includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method ,such other property.
ii) Income from the converted property or property transferred for less than adequate considerations is chargeable to tax in the hands of transferor ( before partition of HUF).
iii) Income arising to the transferee ((HUF) from the property transferred is taxable in the hands of the transfer. However ,incomes arising to the property from the accretion of such property or from accumulated income of such property is not included in the total income of the transferor.
iv) Income includes loss also if any loss arising by using transferred asset during any financial year ,same will be given affect while computing income of transferor same as income from the asset transferred.
TAX TREATMENT AT THE TIME OF PARTITION OF HUF:
Where the converted property has been the subject matter of partition (whether partial or total) amongst the members of the family, the income derived from such, converted property as is received by the spouse, on partition, shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the income from the portion, received by the spouse, shall be clubbed in the hands of the transferor.
EXAMPLE: Mr. X has transferred his self acquired house property into common stock of his HUF ,consisting of himself, his wife ,one minor son and two major sons. The property is fetching income of Rs. 6,00,000/- p.a. if there is partition in the family and there are five members entitled to a share in the HUF property i.e.Mr. X, Mrs. X, a minor child of X and two major sons of X assuming they decide to share the property equally then the income from the property shall be treated as follows:
i. Income from 1/5th share of X Rs. 1,20,000;
ii. Income from 1/5th share of Mrs. X Rs. 1,20,000 (to be clubbed with the income of X);
iii. Income from 1/5th share of minor child of X Rs. 1,20,000 (to be clubbed with the income of X or Mrs. X, whose income is higher, u/s 64(1A). ( However, X can claim exemption upto Rs. 1,500 u/s 10(32); )
iv. Income from 2/5th share of other members shall be taxable in the hands of the major sons individually.
Situation 1- the income from property of Rs. 6,00,000/- will be taxable in hands of Mr. X till the date of partition.
Situation 2- after partition of HUF below mentioned transactions will be added in income of Mr. X
1. Share of Mr. X in partition – Rs. 1,20,000/-
2. Share of Mrs. X in partition – Rs. 1,20,000/-
3. Share of minor child in partition- Rs. 1,20,000/-[ Less Rs.. 1500/- u/s. 10(32)]
LET’S CONSIDER PROVISIONS OF SECTION 56(2)(vii) OF INCOME TAX ACT, 1961
Gifts not chargeable to tax [Sec. 56(2)(vii)] is applicable when sum of money/property is received by Individuals/HUF on or after October 1, 2009.
‘Movable property’ shall include shares, securities, jewellery, archaeological collection, drawings, paintings, sculptures, any work of art or bullion etc.
Any sum of money or property received by any person [on or after 01-04-2017] in the following circumstances shall not be chargeable to tax:
a) Gifts received from relatives;
b) Gifts received by an individual on occasion of his/her marriage;
c) Gifts received by way of Inheritance/will;;
d) Gifts received in contemplation of death of the payer;
e) Gifts received from any local authority;
f) Gifts received from any fund, foundation, university, educational institution, hospital, medical institution, any trust or institution referred to in Section 10(23C);
g) Gifts received from any trust or institution registered under section 12A/12AA.
h) Share received as a consequences of demerger or amalgamation of a company under clause (vid) or clause (vii) of section 47, respectively.
i) Share received as a consequences of business reorganization of a co-operative bank under section 47(vicb)
j) from such class of persons and subject to such conditions as may be prescribed Relative’ shall mean:
1. Spouse of the individual
2. Brother or sister of the individual
3. Brother or sister of the spouse of the individual
4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of spouse of the individual
7. Spouse of the person referred in point 2-6 above
Please Note That: from above we find that ;
1. If an individual receives any gift from his relatives on such occasions ,such gifts not chargeable to tax.
2. The gift received by HUFs from its members will be treated as gift received from relatives and same will not b taxable.
3. Even if gifs received by an individual from a group of persons such as a HUF will not be taxable.
4. A HUF received gift from relatives of a Karta, same will not be taxable in the hands of HUF.
5. Gifts on other occasion than marriage i.e. on anniversary, birthday will be chargeable to tax.
6. The above provisions will be applicable to both a resident as well as a non-resident Indians.
7. The receipt of Gifts to an individual/HUF is on or after April 1, 2017.
CONCLUSION: the government should align the provisions of Sections 64((2) and Section 56((2)(vii) for more clarity. It should be kept in mind ,while transferring self occupied property in the common stock of a Joint Family that you should be coparcener of the Joint family and voluntarily transferring property into common stock.
DISCLAIMER: the article produced above is only form information and knowledge of readers.the view expressed here are the personal views of the author. We have taken care to avoid any mistake at the time of preparation of this article. It is advisable to take advice of professionals before acting on any part of this article.