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Hi everyone,
Here are my two pennies on the topic of HUF:The Hindu Undivided Family has its roots in the ancient Hindu lawlike the Manu Smriti, compiled by a male chauvinist Hindu "Scholar"called Manu, who lived around 200 BC; the Yajnavalikya Smriticompiled by Yajnavalikya and Narada in 100 and 200AD (it merelyembellished what had already been laid down by Manu); and Mitaksharacodified by a guy called Vijneshwara somewhere around the year 1100AD. Mulla, the foremost authority on Hindu law, has described theMitakshara as "the quintessence of the Smriti law, its precepts andinjunctions". Later in the 12th century, there came along anothervariation of the Hindu law called the Dayabhaga written by oneJimutavahana. The Dayabhaga challenged and deviated from theMitakshara law in some ways, particularly in relation to successionand inheritance.Under the Dayabhaga system, the father is the sole owner and theexclusive possessor of the joint family property. No member canenforce the partition of the HUF so long as the father lives. Butthe Mitakshara law stipulates that the property vests in the HUFitself and not in any individual member of the family and thereforecan be partitioned within the lifetime of the father.The Dayabhaga law is prevalent in West Bengal and Assam. Hindus inthe rest of the country are governed by the Mitakshara law.Actually, there are a few more variations of these laws prevalent insome parts of the country. But for the sake of this discussion, Ihave restricted myself to the exposition and practice of theMitakshara law only.Manu, as I said earlier, was a sexist. In Manusmriti he wrote thatthe husband had full dominion over his wife's body and soul and thatshe was his goods and chattel. It is sad but true that the modernHindu family laws have their roots in what this MCP wrote more than2200 years ago. Manusmriti completely forbade women to have a sharein the family property. The modern Indian government embarrassed bythese antediluvian, anachronistic laws has sought to bring them inline from time to time with the egalitarian values of 21st century.On 9th September 2005, the Hindu Succession Act, 1956 was amended toprovide that a daughter too could be a coparcener i.e. joint heir,like her brother to the joint family's assets and she too couldenforce the partition of the family property to claim her individualshare. She continues to be the coparcener in her father's HUF evenafter she gets married and forms another HUF with her husband.So gender bias has largely been taken out of the HUF laws. Or hasit? Some enlightened opinion had questioned the wisdom of thisapparently benign amendment in the HS Act. They argued thatunscrupulous and dowry-hungry in-laws of a married girl may harassher to press her father to partition the family property and claimher share.A coparcener is one who has a right to demand that the familyproperty be divided and they be handed over their share in theproperty (or whatever assets the HUF has) in case he or she decidesto part ways with the HUF. Not all members of the HUF are itscoparceners. The coparcenery extends to four degrees down the familyhierarchy in the following manner:1st degree : Holder of ancestral property for the first time.2nd degree : Sons and daughters (09.09.2005).3rd degree : Grandsons.4th degree : Great grandsons.The most frequently asked question about HUF is: How does it comeinto being?To form an HUF, all you have to do is Get Married. The HUF getscreated as soon as you complete the seven (or four, whatever)circles round the holy fire and become Man and Wife. There have tobe a minimum of two people to constitute a family. The husband andwife together make up a family. They don't have to wait till theyhave a baby to constitute their HUF.Someone asked "Can an unmarried man create an HUF?" No, he cannot,if you mean an HUF of which he seeks to be the Karta himself. He canvery well be the member of the HUF of his father or grandfather, butto create his own HUF he has to wait till he ties the nuptials.Come to think of it, "Creation of an HUF" is an oxymoron—-acontradiction in terms. Only orphan-and-unmarried Hindus don'tbelong to an HUF. Every Hindu becomes a member of an HUF the momentshe ejects out of her mother's womb, mode of delivery--C-section orNormal--notwithstanding. Till the time the HUF has an empty kitty,it is like a balloon that no one has yet blown air into. A ballooncan rightfully be called a "ball"oon only when it swells up with airinside it. Without the air the balloon is inert, dormant. An HUF toois inert and dormant without funds.The Karta, which in Hindi means the Doer, is usually the Father, thepaterfamilias of the family. He has immense powers over the affairsof the family, more than any other coparcener can wield. Can afemale be the Karta? The answer can't be No in the light of theamendment in the HS Act in 2005. An unmarried daughter, in theunfortunate event of her father passing away, will become the Kartaof the HUF if she has no brother. This also answers anotherquestion: Can there be an all-female HUF? Yes, there can be. Where acouple has only one issue—-a daughter—-and the husband passes away,the mother-daughter duo can continue the HUF (although a problem mayarise after she gets married and becomes a member of her husband'sHUF). It has been held by the Allahabad High Court in CIT v. SarwanKumar 13 ITR 361 (All) that there can be an HUF consisting of femalemembers onlyThe Karta can enter into partnership with a firm on behalf of theHUF. But the HUF itself, being not a legal person, can never be apartner in a firm. The fact that Income Tax law grants a PAN to itand treats it as an assessable entity does not bestow upon it thestatus of a person under the general laws. This has been held to beso in numerous cases. In Ram Laxman Sugar Mills v. CIT 66 ITR 613(SC), the Supreme Court said that "an HUF is undoubtedly a personwithin the meaning of the Indian Income Tax Act, It is however, nota juristic person for all purposes and cannot enter into anagreement of partnership either with another undivided family orindividual".This has again been unequivocally reiterated by the Apex Court inthe case of Rashik Lal & Co v. CIT 229 ITR 458 (SC).The Karta may have deployed the HUF's money into a partnershipbusiness, introducing it as his capital. He may be liable to his HUFin case he burns his fingers in the firm's business. But it'sbetween him and the HUF; the partnership firm has got nothing to dowith it. The firm recognizes the Karta in his individual capacityonly. The creditors of the firm can't go after the assets of the HUFin case the firm goes bankrupt and hasn't got funds to repay itsdebts.So while conducting bank audit, in case you come across a loan filewhere the HUF is shown to be the partner, raise an objection.As chartered accountants, we are primarily concerned with exploringhow the HUF can be used to save taxes for the assessee. So in theremaining paras, we shall look at the HUF as an Income Tax assesseewith a PAN.The million-dollar question indeed is: How to blow funds into theHUF and turn it into a balloon that floats?A member of the HUF throwing his money into the common pool, or touse that overused cliché' the family hotchpot, is out of thequestion, thanks to Section 64(2) which would tax the income earnedby the HUF on that money in the individual member's hands only. Butthe clubbing provisions can be bypassed if the HUF invests the moneyin instruments yielding tax-free income. The tax-free income canthen be reinvested to earn even taxable income--income on income isout of the clubbing provisions. Strangers can make gifts but onlyupto Rs 50000 (Section 56). And you will have a hard time explainingthe benevolence of strangers if you have a number of themcontributing Rs 50000 each.A way-out is to receive gifts from members of bigger HUFs, whothough your relatives, aren't members of your smaller HUF. A fathermay make a gift of money to his son's newly-created HUF, clearlyspecifying in the Gift Deed that the gift is to his son's smallerHUF and not to the son himself. This will keep both Section 64(2)and Section 56(2) at bay. Some other people, who aren't members ofthe HUF but are relatives in terms of Section 56(2) can also befound out.After the HUF has a nucleus of its own and gets going, care has tobe taken to keep the HUF's affairs completely distinct from theindividual members' affairs. Where the members of the HUF carry ontheir individual businesses, as they normally do, the distinctionbetween what constitutes the individual's income and what is HUF'sincome may get blurred. There have been cases where the courts haveheld that businesses started by individual members after borrowingfunds from the HUF were assessable in the HUF's hands, especiallywhere the HUF is already engaged in the same business. So thinktwice before letting the HUF lend any money to its members and viceversa. In CIT v. Gopal Bansilal Inani (2000) 245 ITR 2 (SC), theSupreme Court disallowed the interest paid to coparceners on theloan the HUF had taken from them as a business expenditure u/s 37(1).Can an HUF pay remuneration to its Karta? Yes, in Jugal KishoreBaldev Sahai v. CIT 63 ITR 238 (SC), the Supreme Court held that "ifa remuneration is paid to a Karta of the family under a validagreement which is bona fide in the interest of and expedient forthe business of the family and the payment is genuine and notexcessive, such a remuneration must be held to be an expenditurelaid out wholly and exclusively, for the purpose of the business andmust be allowed as an expenditure under section 10(2)(xv)[corresponding to the present-day Section 37(1)] of the Act".There is also the issue of Partition of the HUF. Although theMitakshara and other Hindu laws do not forbid partial partition ofthe HUF, the Income Tax law frowns upon it. Under the Hindu law, youmay have eliminated the HUF by partioning the property (or whateverassets) of the HUF, but the taxation authorities have investedthemselves with powers u/s 171 of the I T Act to continue to treatthe defunct HUF as an assessee liable to pay tax unless thepartition is effected in strict keeping with the manner laid down inthat section. The law wants to dissuade assessees to smash up theirbigger HUFs into smaller ones just to create more files to bringdown their tax liabilities.Total partition in the context of the I T Act means partition bymetes and bounds. "Metes and Bounds", an Anglo-French term, meansthe boundaries or limits of a tract of land. If the HUF property isphysical, it isn't difficult to divide it up, delineating the shareof each member. But a non-physical property will have to be divviedup amongst the members in such a manner as to comply withExplanation (b) below Section 171(9). Care must be taken thaterstwhile coparceners don't simply end up becoming co-owners in theproperty. For example an FD held by the HUF being partitioned can'tbe converted into a joint FD of members after partition; if it is,interest on it will continue to be assessed in the HUF's hands. TheFD can continue only in one member's name; he can cough up some cashto the other members to compensate them for loss of FD.What a metes and bounds partition does is deflate the balloon of theHUF. The Income Tax law will recognize its demise (for want of abetter word, since a divided Hindu family can be reunited again),only when the HUF is stripped naked of each and every layer of theclothing of property—-tangible or intangible, movable or immovable--it had. It has to get back into its birthday suit again to be trulypartitioned.I have tried to cover the relevant aspects of HUF as it concerns us.Unfortunately, there isn't a great deal of literature available onHUF in the market. There is a book titled "Formation & Management ofHUF along with Tax Planning" by authors S R Kharbanda and Prem Nathpublished by Commercial Law publishers. Though repetitive andredundant at times, it's a good one.Thanks,CA Sanjeev Bedi--- In
ICAI_CIRC_MEERUT_CA@yahoogroups.com, "vijay_as2003"
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