Tuesday, March 11, 2014

A Married Woman could Own Property in Her Own Name: from the Tax Planning Angle


A married woman can have her own independent funds. She can have her own independent investible funds made up of gifts or loans. By adopting proper tax planning, a married lady could as well own a house property of her own. One of the desires of every family is to own a house. In many cases, it is advisable from the tax planning angle, to purchase or construct a property in the name of the assessee’s wife, or the main, male member of the family. If the wife has separate, independent sources of income and investible funds, she may buy a property out of the same, or she may buy land in her own name and construct a house thereon. The property could also be bought by a lady in joint names of herself and any other member of the family. Where the funds of the wife are insufficient for the purchase or construction of a house property, she would be justified in borrowing money for the purpose. There is no restriction about the persons from whom she could borrow for the purpose of investing in the house property, including her own husband, father-in-law, or mother-in-law who cannot otherwise make tax-free gifts to her. Similarly, she could also borrow money from her son, brother, sister, another relative, a friend, a bank or any other source. However, reasonable interest must be paid on the loan particularly where the borrowing is from the husband or parents-in-laws, so that the income tax officials cannot ascribe any element of gift therein. If these precautions are taken when the house property is constructed or acquired by a married woman in her own name, or jointly with other members of the family, she would be separately assessable in respect of the income, if any, from the house property. She can have a self- occupied house and take loan and claim deduction for interest upto ` 1.5 lakh. There would be substantial tax saving as a result of deduction on account of interest on loan. In some cases she could even let out the house property to her husband for the purposes of business, etc. Of course, the rent chargeable by the wife should be comparable with prevailing rents in the locality.


Hence, it is possible for your wife to own a property in her own name by investing her own funds. In case her funds are not sufficient, then she can as well take a loan from any bank, private party or even from the family members. It is also possible for the wife to buy the property jointly with other family members. From the point of view of wealth tax, for the property if purchased in the name of the wife with her own financial resources would enable her to save wealth-tax in the family. Like any other individual tax payer one property, or a plot of land up to 500 metres is fully exempt from the purview of wealth tax. Moreover, commercial properties are exempted from wealth tax without any upper limit. Likewise, all residential properties put to rent for over 300 days in a year, are also exempt from wealth tax. 

The Incomes of Spouses are Not Clubbed Together - HOW to Ensure ?


One of the important aspects of tax planning is to ensure a steady income not only for oneself but also for other members of the family. Without proper tax planning, the income accruing, arising or received by an assessee’s wife might be clubbed with the income of the husband, thereby leading to a higher incidence of income tax. Similarly, the income of the husband could be clubbed with the income of the wife for income tax assessment in certain cases. Hence, proper tax planning demands the adoption of a legal device by which the income of a wife is not clubbed with the income of the husband and vice-versa.

For this it is necessary that a married lady’s income be from her own separate or independent sources. She can then be independently assessed in a separate income tax file, without her income being clubbed with that of her husband, and enjoy a separate exemption up to a taxable income of ` 2,00,000 in respect of her own income for the A. Y. 20 13- 2014. She may form the nucleus of her own funds by way of gifts from any relatives, excepting three persons; her husband, her father-in-law or mother-in-law. In the case of any gifts received from these three, even though gifts from relatives are in general exempt from gift-tax, the income arising directly or indirectly from them would not be considered her income but that of the husband, the father-in-law or the mother-in- law, as the case may be, for the levy of income tax. Thus, a married woman may receive gifts from her adult son, her father, mother, uncle, brother, sister or friend, etc. If this precaution is taken, the income arising to a housewife, or a married working lady, would be considered to be her own separate income. If her funds are insufficient, she may take loans and thus augment her investible resources. With the help of her own funds, collected either by way of gifts from relatives, or loans, she could also enter into a partnership and thus be assessed separately in respect of her share of the income from the firm as explained elsewhere in the book.

If the gift is made to the prospective wife or the prospective daughter-in-law, then too, there is no clubbing of income. In this manner one can develop funds through gifts, etc. before the date of marriage. Gifts from non-relatives without attracting income tax can now be received only upto
` 50,000 from the financial year 2006-07 in a year. This exemption is in respect of cash gifts as wells as gifts received in kind. However, on the occasion of marriage, gifts can be received from nonrelatives as tax-free.

How HUF Status in Income Tax Save You a Lot of Money


There are many financial transactions where, persons buying or selling immovable property — residential, agricultural, commercial or industrial property or any movable property declare their status as that of Hindu Undivided Family or HUF. But a mere declaration by a Hindu buyer or seller of real estate, or any asset, that his status is that of HUF cannot be accepted in law because there are certain legal requirements for a true declaration of HUF status. In this tip we have explained the main aspects which are to be home in mind while dealing in movable and immovable property transactions and desiring to declare the status of HUF so that a good deal of money on income tax can also be saved.

Tax Benefits of HUF

The question of HUF status for Hindu buyer or sellers of any property assumes importance because of certain tax advantages attached with HUF under the income tax and wealth tax laws. Thus, if an individual has personal income and has also HUF income, he would be entitled to have an exemption of ` 2,00,000 for his individual income and another ` 2,00,000 for his HUF income for the F.Y. 2012-2013 (i.e., A.Y. 2013-2014). Besides, he would also be eligible to a further income tax deduction or exemption of ` 1 lakh under Section 80C in respect of LIP premia, PPF contribution, NSC, etc., both on individual and HUF income separately. Besides, under the Wealth Tax Act, 1957 also separate exemptions are available for individual property and HUF property. Thus, whereas the taxable individual wealth is eligible to a general exemption of `30 lakh, the HUF’s taxable wealth is also eligible to a further general exemption of ` 30 lakh. Hence, persons having immovable property and jewellery and motorcars under HUF status stand to gain from the extra exemption under Wealth Tax Act as well.

Full Partition of HUE

One important aspect of Income Tax Act, 1961 which is to be borne in mind while effecting partition of an HUF is that only complete partition of the HUF is permitted. This is because under Section 171 of the Income Tax Act partial partition of an HUF is not recognized in law. There are certain other incidental matters connected with HUF transactions which should also be taken care of.

Other Points to Keep in Mind

The bank account should be in the name of either the HUF or in the name of the Karta by specifically declaring that the account is that of the HUF only. Only the funds belonging to the HUF should be deposited in such an account. Normally, the Karta of the HUF is entitled to sign the bank transactions. He may, however, also permit the other adult members of the family to sign on behalf of the HUF. Another important thing that can be remembered in connection with HUF property is that where a person wants to transfer some property by Will to the members of his family, he can transfer the same for the specific purpose of the HUF of his son or sons so as to constitute the amounts so transferred through Will or so gifted by Will as the HUF property of the son(s) concerned. This would result into a good deal of income tax and wealth tax saving for the persons inheriting such property by Will as mentioned above. 

Capital Gains Are Taxable in the Year of Possession of Property and Not Transfer of Title



Under the Income Tax Law, very often a controversy arises as to when a particular property can be said to be transferred, namely when the possession of the property is handed over to the buyer or in the year in which the title of ownership is transferred. This is because the possession of an immovable property may be transferred in one particular financial year whereas the title to the property might be transferred in the next year. Hence, disputes do arise as to the taxability of the capital gains in the year of transfer of possession or transfer of title. Fortunately, the Income Tax Appellate Tribunal, Mumbai Bench in the case of Gripwell Industries Ltd v. Income tax Officer [2006] 284 ITR (AT) 188 has held that where there is an agreement of sale between the assessee and the vendee and the physical possession of the factory along with factory land, building and other assets is actually given in one financial year whereas the legal title to the property is transferred in the next financial year, the capital gains would be deemed to accrue in the year in which the possession is actually given and not in the later year when the legal transfer of title is effected. This judgment is of great importance for all persons possessing property and interested in transferring it.

Various Ways to Get Exemption from Capital Gains Tax


A taxpayer is required to pay tax on income under different heads of income under the Income Tax Act, 1961. Of the 5 heads of income, one very important head of income is “Capital Gains.” Under this head of income, income tax is payable by a taxpayer on the gains made by him on the transfer of a capital asset during a particular financial year. Since this tax is applicable only in relation to a capital asset, the meaning of the expression “capital asset” assumes a very special significance. Under Section 2(14) of the IT Act normally, a capital asset means property of any kind held by an assessee, whether or not connected with his or her business or profession, but does not include stock-in-trade and personal effects meant for personal use by the assessee or members of his or her family. Some types otrural agricultural land are also outside the definition of capital asset.
There are two types of capital gains, namely, long-term capital gain and short-term capital gain, depending on whether the gain is in relation to the transfer of a long-term capital asset or a short-term capital asset. The distinction between long-term capital gain and short-term capital gain assumes special significance because short-term capital gains are liable to income tax like any other income, and at the same rates as any other income is. Generally speaking, no deduction or exemption is available in respect of a short-term capital gain, whereas, long-term capital gains are subject to various deductions and exemptions. Let’s find out.

Long-Term and Short-Term Capita! Gains

A long-term capital gain means capital gain arising from the transfer of a long-term capital asset. A long-term capital asset means a capital asset, which is not a short-term capital asset. Generally speaking, a capital asset held by an assessee for more than three years, i.e. 36 months, is a long-term capital asset. There are exceptions in the case of shares, units, debentures and securities traded on the stock exchange in respect of which a holding period of only 12 months is sufficient for it to be classified as a long-term capital asset. As noted earlier, it is certain tax deductions and exemptions available only in regard to long-term capital gains.

Exemption of Long-Term Capita’ Gains on Shares, etc.

Under the provisions of Section 10(38) of the Income Tax Act, any income arising from the transfer of a long-term capital asset, being equity shares as also units of equity oriented mutual funds would be exempted from the purview of long-term capital gains. This exemption is available only in respect of transactions relating to the sale of equity shares or units of equity oriented mutual funds entered into on or after 1.10.2004, and which are subject to securities transaction tax. Thus, if a person sells shares of a listed company directly to a friend without routing the transaction through a stock broker and stock exchange, then the benefit of tax-exemption of long-term capital gain would not be available on the sale of such equity shares. As regards short-term capital gain on the sale of equities and units of equity oriented funds, there is a lower rate of tax, namely 15% only as against the normal rate of 20% payable on taxable long-term capital gains as in the case of other types of capital assets.

Cost Inflation Index

Under the provisions of Section 48 of the IT Act, a deduction is allowed in computing the taxable capital gain in respect of the cost of acquisi

tion. However, where the capital asset is acquired prior to 1.4.1981, then the market value of the asset as on 1.4.1981 can be substituted for its cost of acquisition. As regards any acquisition on or after 1.4.1981, the cost of acquisition of the capital asset is increased by the application of the Cost Inflation index. The indexed cost of acquisition means the amount which bears to the cost of acquisition, the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation index for the first year for which the asset was held by the assessed or for the year beginning on 1.4.1981, whichever is later. The Cost inflation Index for the initial base year 1981-82 is 100 and the Cost Inflation Index notified for the financial year 2011- 2012 is 785. Thus, the indexed cost of acquisition of an asset purchased in the year 1981-82 for ` 10,00,000 for the F.Y. 2011-12 would be deemed to be:

` 10,00,000 x 785
-----------------    = ` 78,50,000
100

which would be available for deduction from the sale price of an asset for the purposes of computing the taxable capital gain. Thus, if a plot of land acquired in the financial year 1981-82 for
` 10 lakh is sold for ` 80 lakh, then the taxable long-term capital gain would be calculated by deducting ` 78.50 lakh from ` 75 lakh, i.e. only ` 2,15,000 would be considered as the taxable long-term captal gain in respect of that plot of land. Even such capital gain can be made fully exempt as per the provisions described below.

Exemption of Long-Term Capital Gain of a Residential House

One of the important exemptions regarding long-term capital gains relates to a residential house property as per Section 54 of the IT Act. Thus, it is provided that if an assessee, being an individual or a Hindu Undivided Family transfers, his or its residential house, or part thereof, and makes a long-term capital gain and the entire long-term capital gain is invested in the purchase of a residential house property within one year in anticipation of the transfer or within two years of the transfer of his first residential house, or if the new residential house property is constructed within three years of the transfer of the first house and the entire long-term capital gain only is invested in the acquisition of such residential house property, then the entire long-term capital gain in respect of the transfer of the first residential house property would be fully exempt from tax. Where only part of the taxable long-term capital gain is so utilized, then proportionate exemption would be available. There are certain procedural conditions regarding the utilisation of the amount to be kept in a capital gains scheme account in a bank if the money is not fully utilised within the time limit.

Exemption of Long-Term Capita’ Gains Regarding Any Other Asset

Another very important exemption which can be enjoyed by an individual or a Hindu Undivided Family is in respect of long-term capital gains in respect of any capital asset, other than a residential house property, under Section 54F of the IT Act. Thus, it is provided that where the assessee had a long-term capital gain on the transfer of any other capital asset, such as shares, a plot of land, commercial house property, jewellery, etc., then he can secure complete income tax exemption on the long-term capital gain in respect of the sale of the capital asset if the entire net sale proceeds thereof are invested in the acquisition of a residential house either by purchase or by construction within the same period of one, two or three years as in the above case. This exemption is available only when the assessee does not own more than one residential house as on date of the transfer of the capital asset concerned. Lockin period for the new residential house is three years during which it should not be sold or transferred, otherwise the entire long-term capital gain would become taxable.

Exemption on Long-Term Capital Gain on Investment in Capital Gain Bonds

Under the provisions of Section 54EC, a complete exemption is available in respect of the long-term capital gain from any asset provided the net capital gain is invested in six months after the date of transfer of the capital asset in any of the two types of bonds issued by the Rural Electrification Corporation Ltd. or the National Highway Authority of India tip to a maximum sum of ` 50 lakh.

No Capital Gains Tax on Transfer of Residential Property if Invested in Manufacturing Small or Medium Enterprise (SME)

As per the Finance Act, 2012 a new Section 54GB has been added in the Income-tax Act which provides relief from re-investment of sale consideration in the equity of a new start-up SME company in the manufacturing sector which is utilized by the company for the purchase of new plant and machinery. Some of the important conditions to avail this benefit are as under:

(i)      The amount of net consideration is used by the individual of HIJF before the due date of furnishing of return of income under subsection (1) of Section 139, for subscription in equity shares in the SME company in which he holds more than 50% share capital or more than 50% voting rights.

(ii)     The amount of subscription as share capital is to be utilized by the SME company for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares.

(iii)    If the amount of net consideration subscribed as equity shares in the SME company is not utilized by the SME Company for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited under a deposit scheme to be prescribed in this behalf.

(iv)    Suitable safeguards so as to restrict the transfer of the shares of the company and of the plant and machinery for a period of 5 years are proposed to be provided to prevent diversion of these funds. Further, capital gains would be subject to taxation in case any of the conditions are violated.

The tax benefit would be available in case of investments made on or before 31.3.2017. The above mentioned tax benefits are applicable only in respect of long-term capital gains arising on sale of a residential property, namely a house and not a plot of land.

Other Aspects of Capital Gains

If there is a loss under the head “Capital Gains”, then the loss is to be computed as loss in respect of short-term capital asset and loss in respect of long-term capital asset, respectively. It has to be remembered clearly that short-term capital loss can be set off or adjusted against long-term capital gain, but not vice-versa. Similarly, any unadjusted short-term capital loss can be carried forward for eight years to be set off against long-term capital gains or short-term capital gains. However, long-term capital loss can be carried forward for eight years to be set off only against long-term capital gains. Besides, there are certain exemptions available in respect of capital gains regarding agricultural land, merger and demerger, etc. which looking to the nature of this tip, are not described here.

Gifts received from Friends, Relatives or from NRIs could be Exempt from Income Tax ! How ?


It is very common for, people to receive gifts from friends and relatives. In some cases, gifts are also received from NRIs. Let us consider the latest provisions of the Income Tax Act, 1961 regarding gifts, and analyse how individuals can plan to have complete exemption from income tax in respect of the gifts they are likely to receive during the financial year. The sections mentioned below refer to the Income Tax Act, 1961.

Only Individuals and HUFs

Under the provisions of Section 56(2)(vi) certain gifts are liable to income tax as “income from other sources”. However, this provision is applicable only for individuals and Hindu Undivided Families (HUFs). Thus, if gift is received by any Trust or A.O.P., then it is not liable to income tax as “income from other sources”. The provision of taxation’ of gifts became applicable in respect of gifts received on or after 1.9.2004 and before 1.4.2006 if the gift money exceeded ` 25,000. From 1.4.2006, this amount has now been increased to ` 50,000 so that cash gifts or gifts by cheque or bank draft from non-relatives and from non-exempted categories can be fully exempt from income tax up to ` 50,000 in aggregate in one financial year. As per the Finance (No. 2) Act, 2009 even the gifts in kind like immovable property, jewellery, shares, etc. received in excess of ` 50,000 from non-relatives are subject to tax as income of the tax payer. From 1-6-2010 even “Bullion” received from non-relatives is taxable as income. From 1-6-2010 even for firms and companies the shares, etc if received without proper market value would be taxed.

Gifts from Relatives are Tax-Exempt

Jmportanty, the provisions of the aforesaid Section 56(2)(vi) applicable to the taxation of gifts in excess of ` 50,000 in a financial year in the aggregate are applicable for gifts received from non-relatives. Thus, any gift from relatives of any amount during the financial year is completely exempt from tax. Therefore, it’s crucial to know the meaning of the expression “relative” for this purpose. The Explanation to Section 56(2)(vi) provides that the expression “relative” means:

(i) Spouse of the individual;

(ii) Brother or sister of the individual;

(iii) Brother or sister of the spouse of the individual;

(iv) Brother or sister of either of the parents of the individual;

(v) Any lineal ascendant or descendant of the individual;

(vi) Any lineal ascendant or descendant of the spouse of the individual; and

(vii)Spouse of the person referred to in clauses (ii) to (vi).

Thus, a gift received by an individual from his spouse, or from his brother or sister, or from the brother or sister of the spouse, parents, or from any lineal ascendant or descendant of himself or his spouse would normally be fully tax-exempt. Similarly, any gifts received from the spouses of any of these persons would also be completely exempt from income tax.

For example, if Mr. A receives a gift of
` 2 lakh in cash from his maternal uncle, that is, his mother’s brother, it would be exempt since the maternal uncle would be brother of the parent of the individual concerned and would come within clause (iv) of the aforesaid Explanation.

Hence, whenever you receive any gifts from relatives you must carefully apply the test whether the person concerned falls within one of the seven categories of “relatives” or not. If a person who makes a gift does not fall within any of the above categories, then he would be considered as a non-relative and gifts from such people would be exempt only up to the extent of
` 50,000 in a financial year. It may be noted that since a Hindu Undivided Family can’t have relative, any gifts received by it in excess of ` 50,000 in a year would be liable to full income tax.

Exemption for Marriage Gifts

One very happy feature of the provision of taxation of gifts is that any gift received from any person on the occasion of the marriage of the gift’s recipient would not be liable to income tax at all. There is no monetary limit attached to this exemption, which is provided by the proviso to Section 56(2)(vi). However, it is not made clear by this provision whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should suffice if the gift is given just on the occasion of the individual’s marriage, which means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in these cases.

Exempted Gifts from Other Persons

Besides gifts received from a relative or on the occasion of an individual’s marriage, the following are the other gifts which are completely exempt from tax as provided in the proviso to Section 56(2)(vi) of the I.T. Act:

1. Gift received under a Will or by way of inheritance;

2. Gift in contemplation of death of the donor;

3. Gift from any local authority;

4. Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and

5. Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 1 2AA.

Thus, scholarships, stipends or charities received from a charitable institution would be completely exempt from income tax in the hands of the recipients without any limit provided the trust or institution giving the charity is registered under Section 12AA. Likewise, all gifts under a Will, and all amounts received on the death of a person as a part of the inheritance are fully exempt from income tax.

Gifts in Kind are now not Exempt

Here is something which should be very carefully noted that the provisions relating to taxation of gifts from non-relatives and non-specified persons in excess of ` 50,000 would be liable to income tax only when the gift is a sum of money, whether in cash, by way of cheque or a bank draft. However, the Finance (No. 2) Act, 2009 now provides that gift in kind either of immovable property, or jewellery, or shares, paintings, etc. in excess of ` 50,000 in a year from non-relatives would be added to your income. From 1-6-2010 even the gift in the form of “Bullion” would be taxable.

A proper knowledge and understanding of the provisions of Section 56(2)(vi) relating to gifts is very helpful in order to get full tax exemption in respect of gifts received during a financial year.


As per the Finance Act, 2012 the gifts received by a Hindu Undivided Family from its members would be exempted from Income tax.

Section 139(4) of the IT Act - Exemption from Capital Gains


Under the Income-tax Act, 1961 exemption is available to an assessee under Section 54 of the IT Act in respect of capital gains where a new residential property is purchased on or before the particular date, as provided under Section 54 of the IT Act. The date for furnishing the return could also be date under Section 139(4) of the IT Act.  

[ This has recently been held by the Punjab and Haryana High Court in the case of CIT v. Ms. Jagriti Aggarwal (2011) 339 ITR 610. As this is an important judgment concerning the exemption of Long-term Capital Gains, the facts and the judgment in this case are analysed in this tip below. ]

The assessee sold her house property for
` 45 lakh and claimed deduction under Section 54 of the IT Act. The assessee was served with a notice under Section 142(1) of the IT Act as to why the amount deducted be not added to her income as long-term capital gain, as the assessee failed to deposit the amount in the capital gain account scheme and also failed to purchase house property before the due date for filing the return of income. The assessee contested the claim of the Revenue and asserted that she was not liable to deposit the amount in the capital gain deposit scheme and that the due date of filing the return of income was not as specified in Section 139(1) but as specified in section 139(4) of the IT Act. The Assessing Officer declined the claim of the assessee and returned finding that the assessee had concealed her particulars of income and initiated proceedings for penalty as well.

The appeal against the said order was accepted by the CIT (Appeals). It was found that the assessee had purchased a new residential property on 2.1.2007, and the due date as per Section 139(4) was 31.3.2007, and thus the assessee had complied with the provisions of Section 54 of the IT Act. It was held that Section 139 included sub-section (4) as well. The said order of the CIT was affirmed in appeal as well.

The assessee sold her residential house on 13.1.2006, for a sum of
` 45 lakh and purchased another property jointly with Mr. D. P. Azad, her father-in-law on 2.1.2007, for a consideration of ` 95 lakh. The due date of filing of return as per Section 139(1) of the IT Act was 3.7.2006. but the assessee filed her return on 28.3.2007 and that the extended due date of filing of return as per Section 139(4) was 3 1.3.2007

Section 54 of the IT Act contemplates that the capital gain arises from the transfer of a long-term capital asset, but if the assessee within a period of one year before or two years after the date on which the transfer took place purchases residential house, then instead of the capital gain, the income would be charged in terms of the provisions of subsection (1) of Section 54.

As per Section 54(2) of the IT Act, if the amount of capital gains is not appropriated by the assessee towards the purchase of new asset within one year before the date on which the transfer of the original asset took place or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under Section 139, the amount would be deposited by him before furnishing such return not later than due date applicable in the case of the assessee for furnishing the return of income under subsection (1) of Section 139 in an account in any such bank or institution as may be specified. The question which arose was whether the return filed by the assessee before the expiry of the year ending with the assessment year was valid under Section 139(4) of the IT Act.

The counsel for the Revenue argued that the assessee was required to file return under Section 139(1) of the IT Act in terms of Section 54(2) of the IT Act. It was contended that sub-section (4) was not applicable in respect of the assessee so as to avoid payment of long-term capital gain.

On the other hand, the counsel for the assessee relied upon a Division Bench judgment of the Kamataka High Court reported as Fatima Bai v. ITO (2009) 32 DTR 243, where in somewhat similar circumstances, it was held that the time limit for deposit under the scheme or utilization could be made before the due date for filing of return under Section 139(4) of the IT Act. The assessee could file the return before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment year, whichever was earlier. Finally, it was held that the due date for furnishing the return of income as per Section 139(1) of the IT Act was subject to the extended period provided by taking note of the nature of expenses, namely cane development expenses, travelling expenses, interest charges, administrative expenses, lease rent, etc. which were all in the nature of revenue expenses and also the decisions in various cases that such expenses in- cuffed in setting up of a new unit do not amount to starting of a new business but only expansion or extension of the business which was being carried on by the assessee held that they were deductible as revenue expenditure. The CIT (Appeals) also placed reliance upon various judgments. It was further held by the CIT (Appeals) that the assessing authority should verify whether the entire expenses claimed were incuffed during the year and if so then to allow the claim in full.

Therefore, applying the various decisions, the High Court did not find any scope to interfere with the order impugned herein. The question was, therefore, answered in favour of the assessee and against the Revenue. The appeal of the Revenue failed and the same was dismissed.

Pay Zero Income Tax ! How is it Legally Possible ?


One of the commonest questions we are asked is:

Is it legally possible to not pay any income tax at all?

Indeed, this is possible in several situations…

An individual is not required to pay any income tax at all if he can plan his tax affairs as described here.

The golden rule for this purpose is that a person’s total taxable income should not exceed the exemption limit, i.e. ` 2,00,000 during the F.Y. 2012-13, relevant to the assessment year 2013-2014.

This may sound common place but it contains the essence of tax planning.

-              Thus, if an assessee’s total income is likely to exceed ` 2,00,000 for the F.Y. 2012-2013, he should plan the tax affairs of his family such that each male member of the family has a total taxable income up to ` 2,00,000, and thus become entitled to complete income tax exemption.

-              This amount, of ` 2,00,000 which is completely exempt from income tax in the case of a male individual assessee is, of course, to be computed after taking into consideration several deductions that are admissible in computing total income and are mentioned in various tips in this book at appropriate places.

o   For example, deduction in full is allowed upto  ` 1 lakh under Section 80C for various investments, such as payments towards life insurance premium, provident fund contributions, N.S.C., etc. Only after the deduction of these items, the net resultant income becomes the total taxable income considered for income tax purposes.

-              Thus, if the net taxable total income is kept within ` 2,00,000 for the F.Y. 2012-2013 through tax planning, an individual can enjoy his income completely tax-free.

-              A senior citizen is entitled to an initial exemption of ` 2,50,000 for the A.Y. 2013-2014.

-              The exemption limit for very senior citizens for financial year 2012-
2013 would be
` 5,00,000 for all those who are of 80 years and above.

-              As per the Finance Act 2012 the income-tax slabs for the financial year 2012-2013 relevant to the assessment year 2013-2014 are changed as under:

In the case of a male/female individual tax payer:

Upto  
` 2,00,000                                Nil

` 2,00,001 to  ` 5,00,000                            10 per cent

` 5,00,001 to ` 10,00,000                 20 percent

Above
` 10,00,000                                      30 per cent

In the case of every individual, being a resident in India, who is of the age of sixty years (60 Years)  or more but less than eighty years (80 Years) at any time during the previous year:

Upto
` 2,50,000                                 Nil

` 2,50,001 to ` 5,00,000                            10 per cent

` 5,00,001 to ` 10,00,000                 20 per cent

Above
` 10,00,000                                      30 per cent

In the case of every senior citizen, being a resident in India, who is of the age of eighty years (80 Years)  or more at any time during the previous year:

Upto
` 5,00,000                                 Nil

` 5,00,001 to ` 10,00,000                 20 per cent

Above
` 10,00,000                                      30 per cent

In all the above three cases there will he no surcharge.

In the case of co-operative societies, the rates of income-tax will continue to be the same as those specified for assessment year 2013- 2014. [ No surcharge will be levied. ]

-              Similarly, for payments made towards Medi-Claim Policy, a taxpayer is entitled deduction up to ` 15,000 (` 20,000 for a Senior Citizen). Besides, additional deduction is available for parents. Further, in case some donation is paid to a recognised charity trust, then a further deduction is available under Section 80G of the Income Tax Act, 1961.
-              The theme of not paying income tax is also helped if a taxpayer were to buy a residential self-occupied house property with the help of a loan, deduction is available on the interest on loan up to a maximum extent of ` 1.5 lakh. This one single aspect is so very important that it would bring a tax saving to the extent of about `45,000.

-              Thus, if a family were to spread its income among different family members, and plan their incomes as well as investments keeping in mind the available deduction, then they may not pay any income tax at all on substantial amount of income derived by them because a person can individually enjoy tax-free income up to ` 2,00,000 per annum. This figure could easily go up to over ` 3 lakh per person and still no payment of income tax in case they liberally take advantage of provisions relating to deduction by making investments as per Section 80C.

If a person receives money by way of gift or on inheritance, then too he does not pay any income tax on gift amount received or the assets inherited.

It should be kept in mind, however, that the definition of income was amended by the Finance (No. 2) Act, 2004 whereby gifts received from non-relatives are now taxed as income. However, gifts up to
` 50,000 would be exempted. Also, gifts received on the occasion of marriage from non-relatives would not be taxed as income.

As per the Finance (No. 2) Act, 2009 not only cash gifts but even gifts in kind like property, jewellery, shares, etc. in excess of ` 50,000 received during the year from non-relatives are to be taxed as income.

As per the Finance Act 2010 w.e.f. 1-6-2010 even “Bullion” received from non-relatives would be subject to tax in case the present day value exceeds ` 50.000, However, marriage gifts even from non-relatives are never treated as income.

Saturday, March 8, 2014

Tax Planning through Hindu Undivided Family (HUF)

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.