Hindu Undivided Family Hindu law

The term “Hindu undivided family” has not been defined in the Income Tax Act. “Hindu undivided family” was included with in the meaning of the word Person in section 2(31) of the Income Tax Act [1] but “Hindu undivided family” is not defined in the Income tax Act. The exclussion has been because the term “Hindu undivided family” has already been defined in the Hindu law and the legislature wanted the meaning of the “Hindu undivided family” remain the same as that of the Hindu Law. There are two schools of Hindu Law. They are:

• Dayabhaga School in West Bengal
• Mitakshara School in Rest of India

The expression “Hindu undivided or joint family” has a definite and well-known connotation. Hindu law defines “Hindu undivided family” as all persons lineally descended from a common ancestor and includes theur wives and unmarried daughters. Common ancestor is must. It is a much wider body than a Hindu coparcenary, which includes only those persons who acquire by birth an intersest in the joint coparcenary property. The expression “Hindu Undvided family” in the Act is used in the sense in which a Hindu joint family is understood in the personal laws of Hindus. “Hindu undivided family” is purely a creature of law and cannot be created by an act of parties (except in case of adoption and reunion). A “Hindu undivided family” is a fluctuating body, its size increases with birth of a male member in the family and decreases on death of a member of the family. Females go and come into Hindu undivided family” on marriage. The daughters after the marriages cease to be a member of her father’s “Hindu undivided family” and become a member of her husband’s “Hindu undivided family”. In case of a sole male Hindu, strictly speaking, a “Hindu undivided family” comes to existence automatically upon his marriage. It has been held in Gowli Buddanna v/s. CIT [2] that to constitute a joint Hindu family, it is not necessary that there has to be more than one coparcener in the family; a husband and wife can validly constitute a “Hindu undivided family”. “Hindu undivided family” is used in the Act with reference to all school of Hindu Law mentioned above. For the purpose of the applicability of section 64(2) of the Act, the expression cannot be given a restricted meaning to include only those “Hindu undivided families” which comprises of the individual, his wife and minor child of which he is the Karta. The expression “Hindu undivided family” appearing in section 64(2) should be given its ordinary meaning. First, no contrary legislative intent is discernible from section 64(2) of the Act or the object and purpose of incorporation the same. Second the language of the section 64(2) being clear and unambiguous and the meaning of the expression “Hindu undivided family” used therein being well-known and well understood, the court cannot detract from the same unless, reading the statute as a whole, the context so requires. In the instant case, there is nothing in the context or in the circumstances to warrant such deviation with a view to give it and srtificial and restricted meaning. Thus for the purpose of section 64(2), “Hindu undivided family” would include a joint family consisting of himself (karta), his father (Coparceners) mother and female members who are staying together jointly; joint in food, estate and worship. The “Hindu undivided family” is treated as the separate entity of the purpose of assessment of tax of the joint family under Income Tax Act, 1961 and Wealth-tax Act, 1957. “Hindu undivided family” will enjoy all exemptions and deductions; including the basic exemption from income-tax.

“Hindu undivided family” is purely a creature of law and cannot be created by an act of parties (except in case of adoption and reunion). A “Hindu undivided family” is a fluctuating body, its size increases with birth of a male member in the family and decreases on death of a member of the family. Females go and come into Hindu undivided family” on marriage. In case of a sole male Hindu, strictly speaking, a Hindu undivided family” comes to existence automatically upon his marriage. It has been held in Gowli Buddanna v/s. CIT [3] that to constitute a joint Hindu family, it is not necessary that there has to be more than one coparcener in the family; a husband and wife can validly constitute a “Hindu undivided family”.

GIFTS AND “HINDU UNDIVIDED FAMILY”

HUF’s right to receive gifts

In Sukhlal Bhanwarlal (HUF) v. CIT [4] , the Tribunal was held not right in holding that the assessee, being a Hindu undivided family, could not receive the gifts. In that case, the matter was remanded to the Tribunal to decide the point of fact whether the gifts as such as alleged were received by the assessee HUF or not.

Gifts out of ancestral property by a Mitakshara karta

Movable property

Although sons acquire by birth rights equal to those of a father in ancestral property both movable and immovable, so far as movable ancestral property is concerned, a gift out of affection may be made to a wife, to a daughter ar.d even to a son, provided the gift is within reasonable limits. At the same time, a gift, for example, of the whole or almost the whole of the ancestral movable property cannot be upheld as a gift through affection [5] . If the gifts are of excessive amounts and are not given for love and affection, these may be termed as voidable and not void which could be challenged by the sons, but not by a third party.

In CITv. Dwarka Das & Sons [6] , a cash gift of Rs. 5,000 by the karta out of HUF property made to a stranger has been held not to be invalid as the same was within reasonable limit.

Immovable property

So far as immovable ancestral property is concerned, the power of gift is much more circumscribed than in the case of movable ancestral property. A karta has power to make a gift within reasonable limits for “pious purposes”, i. e., for charitable and/or religious purposes, or to a daughter in fulfillment of an antinuptial promise, etc. But the rule is firmly established that a karta has no power to make a gift of ancestral immovable property to his wife to the prejudice of his minor sons [7] .

In CIT v. K.N. Shanmuga Sundaram [8] , gifts of a reasonable portion of the joint family immovable properties to minor daughters by their father were held to be valid notwithstanding the fact that the gifts were made before their marriage. Even within the permissible limits, the power to make such gifts may be exercised by the karta. No other member of the family can do it

At the same time, a karta cannot make a gift to his minor sons or in favour of his daughter-in-law. Thus, a gift by a Jat Sikh (Karta) to his son of the ancestral property is not valid so as to attract the provisions of the gift-tax Act, 1958.

While a gift to a member of the family is merely voidable, a gift to a stranger is void Similarly, where the gift is found to be not of a reasonable proportion and within the permissible limits, the same would be void ab initio, a gift of immovable property of the value of Rs. 4,00,000 by the karta to his wife has been held to be void and ineffective in law.

In Balchand Malaiya (HUF) v. CWT [9] , the Tribunal was held justified in holding that the gift of almost the entire assets of the HUF by the karta in favour of his five sons (two major alia three minor) was void.

In R.C. Malpani v. CIT [10] , it has been held that gift of an immovable property belonging to the HUF by its karta to his wife is voidable and not void. Income from such property cannot be assessed in the hands of the HUF.

Capital Gain By Partition Among Its Members

AMENDMENT OF HINDU SUCCESSION ACT, 1956 AND ITS EFFECT ON INCOME TAX ASSESSMENT

The Hindu Succession Act 1956 brought in equal right for the daughter and also for the son in the individual property of the father and also equal share in father’s share in the joint family property. . As for the tax impact, tax law will have to follow this law as regards any fallout of such change in succession for income tax and wealth tax purposes and in recognising joint family partition under Section 171 of the Income-tax Act [11]

Position of Females after amendment in HAS, 1956 in 2005

After amendment in HAS, daughter including married treated as coparcener in joint family property with the same birth rights as son do share- to claim partition and to become Karta also sharing the liabilities.

HAS does not touch separate property (sec 8) only ancestral and joint family property are amended. In Section 8 the list of class 1 heirs is broaden. Further the act makes the hiers of pre-deceased sons and daughters equal by including heirs up to 2 generations of children of pre-deceased daughters.

Section 23 of HSA was deleted.

Section 24 was deleted. It dealt with remarriage, now widow can inherit previous husband’s property.

Every state has different law to inheritance of agricultural land. The amendment wiped out in consistency in law relating to inheritance of agricultural land. HAS now is applicable to all states in similar fashion. Now woman (married or unmarried) can inherit agricultural land.

Relation between Section 6 of HSA, 1956 and Income-Tax Act, 1961 [12]

As death of coparcener does not dissolve or disrupt the HUF Assessment will continue to be framed on the HUF. It will continue in the same manner as that of before with one coparcener less. The deceased coparcener share will then pass on to his successor- sons widow, daughter etc. The interest of the deceased coparcener is determined by assuming notional partition of HUF immediate before his death. Since the partition is notional and not real and since its only function is to determine the interest of his heirs, which they succeed to the deceased coparcener’s share, there is not question of any proceeding for partial partition under section 171 of IT act. But the Supreme court in Maharani Rai Lakshmi Devi Case [13] held that though u/s 6 of HAS there may be division of share of HUF on the death of Karta this share cant be excluded from the assessment of HUF till an order u/s 171 of IT Act is passed. Partition under Income Tax is governed by Section 171 and HAS can not override this provision. After the amendment in the Hindu Succession Act in 2005 daughters by birth becomes the coparcener, like that of a son and have same kind of liability in the coparcenary poperty. The amendment had also brought that the share of the pre-decesed son or a pre-deceased daughter shall be allotted to the surviving child of such pre-deceased son or of such predeceased daughter. The asssesment of the income tax of the “Hindu undivided family” will continue to be in the same way as that it was done previous to the amendment.

ASSESSMENT OF HINDU UNIDVIDED FAMILY

Income tax and HUF

Under the Income Tax Act, a HUF is treated as a separate entity for the purpose of assessment of the Income Tax. However, the income of a joint Hindu family can be assessed as the income of a HUF Hindu Undivided Family only if the following two conditions are satisfied:

Existence of Coparcenary

It should be ancestral joint property.

Common Property includes following:

Ancestral Property [14]

Assets created out of income of ancestral property [15]

Converted property- when individual property is converted into HUF property [16]

Assets created out of property in 3. [17]

Gifts, received by HUF

In the following cases the income of ancestral property is taxable as income of HUF:

Family of widow, mother and sons.

Family of husband and wife without any child.

Family of two widows of deceased brothers

Family of two or more brothers

Family of uncle and nephew

Family of mother, son and son’s wife

Family of male and his bro’s wife.

Income of Hindu Undivided Family

There are five heads of income:

1. Salary
2. Profits from business or profession
3. Income from house property
4. Capital gains
5. Income from other sources

Taxation of Hindu Undevided Family

The HUF are taxed as a separate entity would have been taxed but the tax slab is same for individuals and the “Hindu undivided family” . It also enjoys the deduction under Section 80C. All the income tax slabs and deductions and exemptions available to individuals are mandatarily available to the HUF. [18]

HUF as a taxable entity

On a conjoint reading of section 2(31) and section 4, it can safely be stated that a Hindu undivided family is a taxable entity for the purposes of charge of income-tax under the 1961 Act.

Ordinarily, HUF is a taxable entity but, on or after 1-12-1976, no assessment possible on a HUF in Kerala State. It is pertinent to note that the enactment of the Kerala Joint Hindu Family System (Abolition) Act, 1975, has abolished the joint family system among the Hindus in the State of Kerala. That Act has been brought into force on and with effect from 1st December, 1976. By virtue of the provisions of the said Act, the members of a Hindu undivided family holding coparcenary property as on 1-12-1976 shall be deemed to he holding such coparcenary property as tenants-in-common as if a partition had taken place among all the members of that Hindu undivided family. In that view of the matter, it is not permissible or open to the Income-tax Department to continue to make assessment In the status oftl1e Hindu undivided family on or after 1-12-1976 so far as the Kerala State is concerned [19] .

‘Total income’, for charging tax on specified HUFs

For applying a higher rate of tax in the case of a specified HUF, for assessment years 1974-75 to 1996-97, it is necessary that at least one member of the Hindu undivided family should have ‘total income’ exceeding a specified sum. For this purpose, the expression ‘total income’ should be only as referred to in section 2(45) as computed in the manner specified under section 5, including the income tagged under section 64 [20] .

‘Total income’ of the individual member is relevant

For the purpose of applying higher rates of tax to a specified HUF, the ‘total income’ of an individual member of the HUF concerned, which may be a bigger Hindu undivided family, is relevant and not the total income of a smaller HUF, which along with other smaller HUFs is constituting a bigger HUF [21] .

Hindu undivided family-special provisions applicable

There are certain special provisions in respect of Hindu undivided family, which are to be found in sections:

Sr. No

Section

Provision

6(2) and 6(6)(b)

residence in India

47(i)

transactions not regarded as transfer

49(1)(i)

cost with reference to certain modes of acquisition

80C

(operative up to 31-3-1991) LIP, etc., deduction for, also applicable to individuals

80CC

(operative up to 31-3 993) investment in certain new shares, deduction for

80CCA

[deposits under National Savings Scheme or payment to an annuity plan

80CCB

(operative from 1-41991) investment made under Equity Linked Savings Scheme, also applicable to individuals

80D

(operative between 1-4-1968 and 31-3-1985) medical treatment, etc., deduction for, also applicable to individuals

80D

(operative from 1-4-1987) medical insurance premia, also applicable to individuals

80DD

(operative between 1-4-1991 and 31-3-1999) [medical treatment, etc., of the handicapped dependants, also applicable to individuals;

80DD

(operative from 1-4-1999) [maintenance including medical treatment of handicapped dependant also applicable to individuals];

80DDA

(operative between 1-4-1996 and 31-3-1999) [deposit made for maintenance of handicapped dependant, also applicable to individuals];

80L

interest on certain secuntles, dividends, etc., deduction for, also applicable to individuals

88

(operative from 1-41991) [rebate 0n life insurance prem13, contribution to provident fund, etc., also applicable to individuals

88A

(operative between 1-4-1991 and 31-3-1994) (rebate in respect of investment in certain new shares or units, also applicable to individuals];

133(2)

[power to call for information];

14O(b)

[return by whom to be signed];

171

[assessment after partition of HUF];

194A

[deduction at source out of interest, applicable to all units except individual and HUF];

194H

(operative from 1-10-1991) [deduction at source out of commission, brokerage, etc. applicable to all units except individual and HUF];

194-1

(operative from 1-6-1994) [deduction at source out of rent, applicable to all units except individual and HUF]; 194J (operative from 1-7-1995) deduction at source out of fees for professional or technical services, applicable to all units except individual and HUF];

209(3)

[computation of advance tax j;

278C

[offences by HUF J; Ch. XXII-A (omitted w.e.f. 1-4-1988) [ss. 280A to 280X, Annuity Deposits, applicable to all units except RF, company, co-operative society, local authority, cooperation established by a Government Act];

280Z

(operative up to 31-3-1990) [tax credit certificates to equity shareholders, also applicable to individuals];

282(2)(a)

[service of notice 1; and

283(1 )

[service of notice when family is disrupted]; and Explanation to rule 73 of Schedule II [arrest of Karta possible].

Computation of Tax

It is based on following principles:

• HUF is a separate tax entity.
• HUF has to file its own return of income.

HUF can be a partner in a partnership firm through the Karta. (The Indian Partnership Act excludes an HUF carrying on family business as such from the ambit of partnership.)

When there is a direct relation between investment and income earned then it will be treated as HUF income.

HUF can not be a shareholder in a company

If Karta is director of company then his salary will be treated as income of HUF. If he devotes his personal skills to earn that income then it will be treated as his individual income.

HUF having its own business

Where the business is carried out by Karta or members and draws salary from this business, then the salary is an allowable expenditure in the hand of HUF and it will be taxable in Individual capacity of Karta or members receiving the salary.