Tax
Planning through Hindu Undivided Family (HUF)
Income
From Two Partnership Firms Is Separately Assessable Even When The Partner Is
The Same Person
This
might sound to be impracticable in real life, but it is not so, as this is made
possible in actual practice by proper tax planning. Thus, where an individual
who is a Karta of a Hindu Undivided Family joins a partnership firm as a
partner with the help of the funds belonging to the HUF, the income by way of
interest on capital and working partner’s salary from such a partnership would
not be taxable in his hand in an individual capacity but such income received
from a partnership firm would be included in the assessment of the HUF. Of
course, the share of profit from such a firm is fully exempt from tax under
Section 10 (2A) of the IT Act. If the same individual were to become a partner
in another concern with the help of his own fund i.e., in an individual
capacity, such income would be assessable in his status of an individual. Thus,
two separate assessments would be possible even where the person concerned (who
has entered into partnership in two firms) remains the same. This is also
possible in the case of more than two firms. The essential condition for a
separate assessment of the income from a partnership firm in the hands of a
Illustration :
Mr. A is a partner in two
partnership firms known as Messrs C and Messrs D. The interest and salary
income received from the firm of Messrs C for the financial year 201 2-2013 is
say, `
2,50,000,
whereas the income received from the firm of Messrs D is ` 2,10,000. Mr. A has
joined the partnership firm of Messrs C with the help of funds belonging to the
Hindu Undivided Family and in his capacity as its Karta. Thus, the income of ` 2,50,000 would be
taxable in the assessment of the HUF of A and not in his personal assessment.
Mr. A would be liable to assessment only in respect of the sum of ` 2,10,000 being his
income from the firm of Messrs D where he is a partner in his individual
capacity.
Hindu Undivided Family is that the money must come out of the joint family
funds. In some cases an individual may not have any funds of his own and might
be having funds belonging to a Hindu Undivided Family only. In such a case the
income received by him in his capacity as the Karta of the joint family would
be assessable in the hands of the HUF only. But if the same individual were to
take a loan from an outside source and were to join another partnership firm as
a partner in his individual capacity, the income received by him from such
firm, without any detriment to the HUF capital or property, would be assessable
separately in his individual assessment. This is also illustrated with the help
of an example.
Salary
Received By The Karta Of An HUF May Be Separate From The Income Of The
Partnership Firm Of The HUF
Normally,
where the Karta of an HUF is a working partner in a firm on behalf of his Hindu
Undivided Family, and receives a salary from the said firm, the remuneration
paid by the firm to the partner, the Karta of an HUF is assessable as the
income of the HUF if the remuneration is directly related to the investment in
the partnership business from the assets of the family. Thus, where there is
real and sufficient connection between the investment from the joint family
funds and remuneration paid to the partner, the salary paid to the partner is
assessable as the income of the HUF. However, it is not a universal rule of law
that where a Karta of an HUF
Therefore, by proper tax planning, the
remuneration received by a person on his appointment as the director or
managing director of a company can be made assessable not as the income of the
individual as such but as the income of his Hindu Undivided Family by the use
of joint family property in purchasing a substantial number of the shares of
the company.
How
And When A Complete Partition Of HUF Can Save Tax
Partition
of a Hindu Undivided Family is sometimes effected out of necessity and
sometimes as a step for proper tax planning. Whatever be the purpose of the partition
of a Hindu Undivided Family, it should be genuine. The partition of an HUF can
be total or partial. The partial partition can be with regard to persons and/or
to property. So long as there is no finding of partition recorded by an
Assessing Officer (AO), the HUF assessed as such has to be deemed to be a Hindu
Undivided Family. The following provisions of law should be remembered in
respect of partition of a Hindu Undivided Family:
(i) In the case of total or complete partition,
the Hindu Undivided Family ceases to exist as such and therefore, where there
is a proper claim for partition and where the same is accepted by the AO, the
Hindu Undivided Family ceases to be assessed as an HUF after the date of total
partition. However, in the case of a partial partition, the Hindu Undivided
Family does not cease to exist as such and hence the HUF continues to exist.
For income of the assets which are partitioned and in respect of vhich the
partial partition is accepted, no assessment can be made in respect of the
income of those assets in the hands of that HUF, after the date of partition.
Partial partition of an HUF after 31 December 1978, cannot be recognised by the
AO and will be ignored.
(ii) Where, at the time of making an assessment
under Section 143 or 144, it is claimed by or on behalf of any member of a
Hindu Undivided Family that a total partition has taken place amongst the
members of such family, the AO shall make an inquiry thereon after giving
notice of the inquiry to all the members of the family.
(iii) On the completion of the inquiry, the AO
shall record a finding as to whether there has been a total partition of the
joint family property, and if there has been such a partition, the date on
which it has taken place.
(iv) The term ‘Partition’ means:
(a) where the property admits of a physical
division, 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
(b) 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. “Partial partition”
means a partition which is partial as regards the persons constituting the
Hindu Undivided Family or the properties belonging to the HUF or both. As
stated earlier, partial partition after 31 December 1978 is not recognised by
the AO.
(v) Where a finding of total partition
has been recorded by the AO under Section 171 of the IT Act, and the partition
has taken place during the previous year
(a) 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
(b) Each member or group of members shall, in
addition to any tax for which he or it may be separately liable, be jointly and
severally liable for the tax on the income so assessed.
(vi) If the partition has taken place after the
expiry of the previous year, the income of the joint family shall be assessed
as if no partition has taken place.
(vii) After the completion of the assessment of the
HUF, if the AO finds that the family has already effected a total partition,
the AO shall proceed to recover the tax return from every person who was a member
of the family before the partition, and every such person shall be jointly and
severally liable for the tax on the income so assessed. The several liability
of any member or any group of members thereunder shall be computed according to
the portion of the joint family property allotted to him or it at the
partition.
(viii) An order under Section 171 of the Income Tax
Act remains effective for, and should be followed by the AO for the relevant
year for which the order is passed as well as all subsequent years. If the
property has been physically divided in definite portions, the AO cannot refuse
to recognise the partition merely because the shares allotted to the various
members are not in accordance with the parties’ legal rights or because the
interests of minor coparceners are prejudiced by inequality in the division of
property. An unequal partition of the family properties amongst the Karta and
his sons does not give rise to any disposition made by the Karta in favour of
his relatives. In a partition of an HUF there could be disparities for a
variety of reasons.
Thus, where a genuine complete partition takes place and some property is
divided among the persons entitled to the share on partition, the income from
the partitioned assets is liable to be assessed in the hands of the smaller
branches of the HUF formed by the coparceners of a bigger Hindu Undivided
Family. Where certain income is assessed in the hands of a bigger Hindu
Undivided Family which has some coparceners who are the Kartas of their respective
branches of the HUFs, the complete partition of the bigger HUF can enable the
smaller HUFs to have their own separate income tax files if they did not exist
before. The total partition of a Hindu Undivided Family can be taken advantage
of by an HUF for effecting tax saving by proper tax planning. In the case of
partition of an HUF, the important condition that must be remembered by the HUF
is that an application under Section 171 of the Income Tax Act must be made to
the AO assessing the bigger HUF.
HUF
Can Be Utilised For Receiving Loans And Paying Interest Without TDS
Under
the provisions of Section 1 94A, it has been made obligatory for a person who
is responsible for paying any interest (other than “interest on securities”) to
the recipient, to deduct income tax at source at the rates in force. This had
to be done either at the time of credit of such interest income exceeding ` 5,000 to the
account of the payee, or at the time of payment thereof in cash or by issue of
a cheque or draft or by any other mode, whichever is earlier. In certain
circumstances, prescribed under the said Section, no deduction has to be made.
One such important condition is that where a Hindu Undivided Family pays such
interest to any resident person, it need not deduct any income tax thereon in
respect of the amount of the interest so paid or credited by it. This is a very
useful concession available to a Hindu Undivided Family and can be utilised by
taxpayers in planning their affairs and in the matter of taking loans so that
they are saved from the legal requirements of deduction of tax at source from
interest and also from furnishing several statements and returns in respect
thereof. In case the HUF is subjected to tax audit (for turnover exceeding ` 60 Lakh) then it will
be required to deduct tax at source.
Additional
Deductions Available To An HUF For Certain Income And Investments
Presently
the basic exemption limit even for a Hindu undivided family is `2,00,000 for the
A.Y. 2013-2014. For investments made, the HUF would enjoy the benefit of tax
deduction under Section 80C of the Income-tax Act, 1961 to the full extent of ` 1 Lath. However,
from 13 May, 2005 an HUF cannot subscribe to PPF. Old HUF accounts, if they
have completed 15 years will have to be closed. Thus, the HUF is able to enjoy
same tax benefits as are enjoyed by an individual tax payer savings bank
account interest upto `
10,000
also exempt for HUF
You Can Have An HUF Even Now
A
question that is frequently asked by Hindus not having the separate tax entity
of an HUF is whether it is still possible for the members of a Hindu family to
enjoy the status of an HUF? The answer is “yes”. Thus, even where the separate
branch of a Hindu Undivided Family has no ancestral property or divided joint
family property, it can claim the separate status of “HUF” in income tax
matters if special gifts meant for the HUF only are received by the HUF from
father, mother or relatives and friends. In the latter case, the HUF will be
assessable as a separate taxable entity. All HUFs are now having exemption
limit like an individual.
HUF
Comprising Of Only Husband And Wife
There
is a general feeling amongst the tax payers that a new Hindu Undivided Family
(HUe comes into existence as a separate tax entity only when the couple has a
male child. This is a wrong notion of the tax payers. The Gauhati High Court in
the case of CITy Awn Kumarjhunjhunwalla & Sons 223 ITR 45 held that the
assessee after his marriage formed a Hindu Undivided Family comprising of
himself and his wife and thus could be a Hindu Undivided Family and be assessed
in the status of HUI for the purposes of income tax.
Property
Received On Partial Partition Is HUF Property
A
common question arises as to whether the assets received as a result of partial
partition whether it would be treated as the assets belonging to the HUF, i.e.,
Hindu Undivided Family or to the individual. It is also not necessary that to
constitute a valid HUF there must be at least two male members. A question
recently came up before the Punjab and Haryana High Court as to whether
consequent to partial partition of HUF and the subsequent birth of the
daughter, the amount received on partial partition would belong to HUF
comprising of the individual as also his daughter born after the partition. It
was held by the Punjab and Haryana High Court in the case of Commissioner of
Income Tax v. Bhagat Singh 229 ITR 239 that the income received from the
properties consequent to partial partition would be assessable in the hands of
a Hindu Undivided Family.
HUF
Reunion And Tax Planning
The
Madras High Court gave a very interesting decision with regard to HUF reunion.
This decision is a very classic one for all those who are interested to have a
reunion of their earlier Hindu Unidivided Family. The Madras High Court in the
case of CIT v. A.M Vayapuri Chettiar and Another [1995] 215 ITR 836 laid down
very precisely the condition which are precedent for a valid reunion under the
Hindu Law.
When the matter came up before the judges, first of all they opined that
conditions precedent for a valid reunion under Hindu Law are as under:
1. There must have been a previous state of
union, reunion is possible only among the persons who were, on an earlier date,
members of a Hindu undivided family;
2. There must have been a partition
in fact;
3. The reunion must be effected by the
parties or some of them who had made the partition; and
4. There must be a junction of the estate and
the reunion of property because a reunion is not merely an agreement to live
together as tenant-in-common. Reunion is intended to bring about a fusion in
interest and in the estate among the divided members of an erstwhile Hindu
Undivided family so as to restore to them the status of a Hindu undivided
family once again and, therefore, reunion creates a right on all the reuniting
coparceners in the joint family properties which were the subject matter of
partition among them, to the extent they were not dissipated before the
reunion.
Finally, the High Court upheld the order passed by the Income Tax Appellate
Tribunal regarding the reunion of the HUF.
From the A.Y. 2013-2014 the gifts received
by HUF from its members would not be treated as gift and hence not added to
income.
