Last week, we examined how an HUF can be partitioned and how it can be ended. We also briefly dwelled on the tax benefits associated with an HUF. In the third and concluding part of our series on HUF, we shall look at some of the court decisions / case laws on various aspects of an HUF including its constitution and partition.
Unfortunately, many provisions are ambiguous. Understandably decisions taken by different courts are contradictory in nature, confounding the confusion further. However, the following case laws provide some guidance, though these are not the last word.
Constitution
Minimum 2 Members: C. Krishna Prasad v CIT (1974) 97ITR493: A family consisting of a single individual is a contradiction in terms. An individual, who has obtained a share on partition of a joint family or has inherited ancestral property has potentiality of creating a joint family but not until he/she marries. Thereafter, the person can create joint family out of the corpus received and accretion thereto provided he has kept a separate track of the same.
Ancestral Property: Girdhari Lal v CIT (2004) 269ITR50 (All.): On the death of a Hindu male, even his self-acquired property becomes ancestral property in the hands of his sons. This is because under the Hindu law the property which a person inherits from father, grandfather and great grand father is ancestral property. Hence even if the property of the deceased was the self acquired, it becomes HUF property.
Junior Member as Karta: Champa Kumari Singhi v Revenue (1962) 46 ITR 81 (Cal.): Where the senior most coparcener is not capable of managing the affairs or is unwilling to take on the mantle for any reason, the next senior coparcener can take the reigns of Karta.
Marrying a Non-Hindu: CWT v R. Sridharan (1976) 104 ITR 436 (SC): When a coparcener gets married to a non-Hindu (or even a Hindu) under the provisions of Sec. 19 of the Special Marriage Act, he shall be deemed to have severed and separated from the family. On this deemed partition he/she will cease to be a coparcener after the marriage but acquire a sui generis right to a share in the HUF properties. The severance of interest cannot be construed as a ‘partition’, for it does not cause a severance among the other members, inter se.
No circumstances, other than unchastity, murder, lunacy, etc., can disinherit a person from his share in the HUF. He can be paid his share of the HUF and this will not be treated as a partial partition.
Later, when a child is born, he and the child can constitute an HUF if and only if the son remains a Hindu. For this purpose, ‘any child, legitimate or illegitimate, whose parent is a Hindu, Buddhist, Jain or Sikh by religion and who is brought up as a member of the tribe, group or community to which such a parent belongs or belonged is treated as a Hindu.
Unborn Child: T. S. Srinivasan v CIT (1966) 60ITR36 (SC): Under the Hindu law, a son conceived in his mother’s womb has the same rights and privileges of a son actually in existence for inheritance, partition, survivorship and the right to impeach an alienation made by his father. In this case, the father claimed the benefit of HUF from the FY in which the son was conceived. The Department recognised the family from the FY when the son was born.
Born Child: CITv Jitendra Kumar (HUF) (2006) 205CTR181 (All): A Minor received some amount on partition of HUF and it was invested in a firm. Share of profit and interest received by the minor till his marriage is required to be treated as his income (clubbable in the hands of his father until he attains majority) and after his marriage it can be assessed as his HUF income.
PARTITION OF HUF
Compensation to Non-member: Ashok Soi v. CIT [2005] 273 ITR 165 (Del): The assessee was the absolute owner of the property. It was he who threw the property into his HUF. When the property was transferred consequent upon a partition suit by the owners, any amount paid to settle the claims of his father who had no right, title or interest in the property could not be regarded as ‘expenditure incurred wholly or exclusively in connection with such transfer’. The payment could not be regarded as payment for any relinquished right and would not be covered by provisions of capital gains. The amount paid was not deductible.
Only Karta Can Effect Partition: CIT v Seth Gopaldas (1979) 116 ITR 577 (MP): A Karta has a right as patria potestas and can have a total partition even against the wishes of other coparceners. Any other coparcener can demand partition only by getting a court order.
Cost of Acquisition: CIT v Shanthi Chandran [2003] 127 Taxman 475 (Mad): In a partition, consideration for the partition is the mutual relinquishment of the rights of the parties in the joint family properties in which each has a share. The family settlement in this context is analogous to a partition. It is the cost to the previous owner that is to be taken into account as the cost of acquisition of property and not the amounts mentioned in family settlement deed.
Oral Partition is Valid: CWT v N. R. Srinivasan (2003) 259 ITR 40 (Mad): Where the physical partition of property was not possible and income of the property was partitioned amongst the members of the HUF, it shall constitute a valid partition. The partition is a mere agreement to divide the properties and therefore does not require registration unless the division is through a written instrument. If the partition is oral, a memorandum of the partition can be executed recording the oral partition that took place earlier. Such a memorandum does not have to be registered. Thus, an oral partition of joint family property among members of HUF is permissible.
Reunion after Partitio: nCIT v A.M Vaiyapuri Chettiar and Another [1995] 215ITR836: The conditions precedent for a valid reunion under Hindu Law are —
1. Reunion is possible only among the persons who were, before a partition in fact members of an HUF.
2. The reunion must be effected by the parties or some of them who had made the partition; and
3. There must be a junction of the estate and the reunion of property because a reunion is intended to bring about a fusion in interest and in the estate among the divided members of an erstwhile HUF 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.
GIFTS & Clubbing
HUFs cannot have any relative and therefore, gifts given by any HUF was treated as income of the recipient. Finance Act 2012 has included any of its members in the definition of relative for HUF but not vice versa. Consequently, any sum or property received without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation. An HUF continues to be not a relative of its members. Therefore, gifts given by HUF to its members are exigible to tax in the hands of the member. But gifts out of the HUF property may be made by the Karta for certain approved purposes such as performing indispensable acts of duty or for satisfying legal obligations or through affection, support of the family, relief from distress, etc., within reasonable limits without the consent of the other members.
HUF Expenses: CIT v Muthappa Chettiar [1997] 90Taxman198 (Mad): The HUF is obliged to provide for education and marriage of its members. Therefore, any provision settled for such purpose should not be considered as a gift.
This concludes our discussions on the general subject of the HUF. While at one time, the entity of HUF was a useful tax saving mechanism, over time, the utility of HUF has become considerably diluted. However, that being said, the concept of an HUF nonetheless remains an intergral part of the Indian tax planning environment and every taxpayer should know how he can use this tool to his advantage.
The authors may be contacted at wonderlandconsultants@yahoo.com
