Hindu Undivided Family Formation - Partition - Reunion : Legal and Tax Framework By CA. Deepak M. Rindani Disclaimer: This is a general purpose and indicative-only presentation for discussion at a study meeting. It is neither an advisory or a legal opinion.

I. Basic Concepts: Who is a Hindu What is HUF – all persons lineally descended from a common ancestor and joint in property, food and worship HUF is not a juristic person in law

Who are considered Hindus? Those who are Hindus by Birth and religion Jains and Sikhs Illegitimate Children whose both parents are Hindus Any child whose father or mother is Hindu and who is brought up as Hindu Those of certain Hindu Sampradayas (Arya Samaj, Swaminarayan, Brahma Samaj)

Who are Not considered Hindus? Muslims, Parsis and Christians Those who have converted from Hinduism Khojas and Cutchhi Memons

Who can become Hindu? Any person by expressing intention to live as Hindu, if the community accepts him/her On conversion from other faith as per Hindu custom Child of Hindu and non-Hindu parent – status of Marriage between Hindu and non-Hindu

Sources of Hindu Law Ancient – Vedas, Smrutis (Manusmruti), Custom, Scriptures (Dharmashastras) Modern – Legislation (codified law), Judicial precedents, Equity & Justice Historical Background of HUF concept

II. Ingredients of HUF: “Hindu” “Undivided” “Family” By birth By adoption By conversion(?) Joint in respect of estate (property), income, membership, food and worship Related by blood & marriage “Sapindaship” (relationship) is the essence of HUF

Composition of HUF: Coparcenary: Common ancestor- 1st degree His descendants upto 3 more degrees under him (both sons and daughters) Wife of ancestor Daughters-in-law Only male members and daughters

HUF Tree – Illustrative only - A’s Wife Sons Daughter

Division between father and son C D At the time of partition the rule is that each son takes a share equal to the share of the father. Example: A has three sons B, C and D. Each of them i.e., A, B, C and D will take 1/4th share in the joint family property.

Division between brothers A B C D E When partition takes place between them, the rule is that they take equal shares in the joint family property. For instance, a coparcenary consists of five brothers A, B, C, D and E, each of them on partition will take 1/5th share.

Division takes place among branches When a partition takes place, the rule is that each branch takes per stripes (i.e., according to the stock) as regards every other branch, and the members of each branch take per capita (i.e. per head) as regards each other. A S SS SS1 SS2 S1 SS3 SS4 S2 SS5

Schools of Hindu Law: MITAKSHARA SCHOOL DAYABHAGA SCHOOL (in Bengal & Assam) -Common ancestor and his lineal male descendants , wives , daughters -Sons have specified interest but no right by survivorship -Sons have right by birth & survivorship - No Coparcenary - No specified share but community of interest -All income belongs to father -Kerala has abolished HUF

III. Creation of HUF and HUF property: Is in God’s hands, what we can do is to create HUF property once there is a family nucleus. Modes of creation of HUF property are: 1) By Blending: Of self acquired property into HUF property by conduct/ declaration of members of HUF This has tax implications

III. Creation of HUF property : 2) By Gift from Non-members: Nucleus should exist – property created by gift Intention of donor, documentation, receiver’s statement

3) By Partition of Pre-Existing HUF : Partial Partition: Partial as to members and/or as to property Total Partition: Nothing left in HUF Unequal partition is possible Who is entitled to enforce partition Who is entitled to how much share upon partition Nature of property on partition in hands of receiver

4) By Will (of any person): To own HUF To HUF of others To future HUF of unmarried son 5) By Reunion: Of previously partitioned HUF All members who were partitioned need not necessarily reunite But those who reunite must bring back all properties received on earlier partition

6) By Joint Labour: Family of craftsmen, joint activity and creation of joint income

Hindu Succession Act, 1956 Effect of 2005 amendment to Sec. 6 Daughter of coparcener now treated as coparcener-member of HUF of father with same rights as that of son Even daughters married earlier are covered Effect of partition effected before 20-12-2004

Some Typical Situations – I Husband & wife only – no children Single male + mother + wife + daughter (Gowli Buddana) Single male + wife + daughter (N.V. Narendranath) single male + widow of deceased brother two or more widows of deceased coparceners with undivided properties ( AR Veerappa Chettier )

Some Typical Situations – II HUF can exist with totally empty kitty of property Females can not now blend their property into HUF but can give gift (Pushpa Devi) – not so after amendment? Females can be karta in absence of major male member Sole surviving coparcener (male or female)

Typical Situations – III Only females left in family Single male + mother +sister HUF can exist without single male coparcener NRI member of HUF in India – effect in country of residence? Gifts by HUF of its property – restrictions : - not to sons or karts - reasonable amt to daughter/wife - consent of all desirable (265 ITR 551 SC)

IV. Management of HUF Property: Concept of Karta – Manager Who can be Karta Powers & duties of Karta Powers & duties of other members – rights of education, maintenance Dispositions out of HUF property Debts of HUF Obligations upon HUF property Pious obligation of sons to pay debts of father out of coparcenary interest of sons in HUF property Duty of father to maintain wife, minor sons, unmarried daughters and infirm parents out of HUF property

VI. HUF and Law of Succession: Devolution of interest in HUF upon death of Karta/Member Overriding effect of Hindu Succession Act, 1956 – Sec. 6 Succession to individual property Testamentary vs Intestate succession to interest in HUF Ancestral Agricultural Lands

VII. Status of females in HUF: Wife/Mother Daughter Daughter-in-law Hindu Succession (Amendment) Act, 2005- - daughters have same rights as coparceners Is there any distinction between married and unmarried daughters now?

V. Partition of HUF: Meaning of – severance of status and interest Mere division of shares vs Metes & Bounds Kinds of – Total / Partial

Meaning of Partition Kalyani vs. Narayani 1980 Supplement SCC 298 (Supreme Court) I-tax Act Sec. 171 defines partition Partition of HUF vs. Distribution of Income Status of partitioned property in hands of member

Rights to enforce partition Karta can make total partition w/o consent of others; for partial partition, consent required Any coparcener can demand partition with consent of all If consent is denied, he/she has to file lawsuit

Partition Allotment of shares of partition (Per Stripes and Per Capita) Documentation & Care Obligation to provide for on partition out of HUF kitty: - HUF debts, maintenance/marriage of daughters, education, family rites

Effect of Partition of HUF property On Karta On sons unmarried at partition date On unmarried sons marrying subsequently (157 Taxman 527 (SC) On sons married at partition date On unmarried daughters On married daughters On wife

Taxation of HUF

VIII. Taxation of HUF: Treated as a “person” u/s 2(31)(ii) Tax rates – same as Individuals W.T. also leviable Significant provisions of I. T. Act specific to HUF: Sec. 6 (residential status) Sec. 10(2) – sum received from HUF Sec. 56(2)(vii) – sum/property received without/ for inadequate consideration Sec. 64(2) – clubbing Sec. 140(b) – signing of return of income Sec. 171 – de-recognition of partial partition

IX. HUF as partner in firm – I : Implications under Partnership Act – who is real partner qua other partners? Interest on capital of HUF – deductible u/s 40(b) – taxed as income of HUF, not of individual Interest on loan by karta in individual capacity – allowable – not hit by limit of se. 40(b) – 150 ITR 276 (Guj. FB) Remuneration & Sec. 40(b) – deductible u/s 40(b) – 229 ITR 458; 88 ITD 322; but taxable in individual hands of partner – 201 ITR 831

HUF as partner – II Borrowings from Banks Drafting care in partnership deeds Same person as partner in dual capacity – as Karta and as Individual in same firm – partnership law recognizes only individual as partner (Rashik Lal & Co. 229 ITR 458 – SC)

HUF as Proprietor of Business: Use of HUF funds and labour Use of HUF property Can professionals or service providers function as HUF? Issue regarding lending by Banks

X. Is HUF yet a Tax Planning Tool? Is a separate taxable entity Gives rise to division of income and wealth Is a tool to accumulate business assets/property in HUF name and allow use by other business entities to distribute wealth and tax incidents Transfer of funds inter se HUF and its members by way of loans rather than gifts Separate entitlements to exemption from capital gains u/s 54, 54EC, 54F etc. Possibilities of multiple HUFs in appropriate situations of larger families

Is HUF yet a Tax Planning Tool? Creating separate property income stream in HUF rather than Individual Doctors: Income from costly equipment, nursing home, vehicle etc. in name of HUF Building up corpus for education, medical bills, weddings etc. Distribution of HUF income – Sec. 10(2) – exempt for receiver

Stamp Duty on HUF On Partition On Release Existence of immovable property Probate duty Issues reg. titles, Revenue records etc.

XI. Is HUF Relevant In Present Times? Rising trend of nuclear families and individualism – changing social forces Are our families truly joint and undivided? Equal rights to daughters after marriage – boon or bane – continuing debate Issues reg. banking, borrowing, transfer of immoveable property, probate etc. Can we preserve our culture of unity and mutual family bonding through HUF?

XII. Salient Features of HUFs and Landmark Rulings: 1. A single member cannot be treated as HUF. C. Krisnaprasad 97 ITR 493 (SC) 2. HUF may consist of single male and widows of deceased males, A single male, his wife and daughters. Gowli Buddana 60 ITR 293 (SC) 3. Family may be formed by partition though not be survivorship. N.V. Narendranath 74 ITR 190 (SC)

4. On partition of bigger HUF, a coparcener and his wife can constitute HUF. Soth Tulsidas Bolumal 170 ITR 1 (AP) Krishnakumar 143 ITR 462 (MP) 5. It is possible to constitute HUF on marriage of an individual male, if he has received asset on inheritance or partition. Premkumar 121 ITR 347 (ALL) 6. Took a contrary view to (5) above. Vishnukumar 142 ITR 357 (ALL)

7. Individual property of father who dies after Hindu Succession Act came into force (17-6-56) devolves on sons As individuals. Even the property held by a father received on partition, on death of father, on second partition, is Son’s separate and individual property. Chander sen 161 ITR 370 (SC) 8. For Right of a surviving female relative, Sec. 6 of H.S. Act (Explanation) lays down that there will be deemed partition. Gurupada Khandappa Madgam Vs. Hirabai 129 ITR 440 (SC)

9. But HUF even then continues- Explanation: - merely helps to identify the share of female members and their Legal heirs. State of Maharastra Vs. Narayan Rap 163 ITR 31 (SC) 10. On death of sole male member after HS Act (17-656) females heirs receive property as their absolute property. Smt. Nagarathnama 76 ITR 352 (MYS) Knatilal Manilal 90 ITR 289 (GUJ) 11. HUF can consist of husband and wife only C.I.T. vs. Arunkumar Jhunjhuwala 138 CTR 63

Blending of Individual Property to HUF – Court Rulings 1. When individual throws his personal property with joining family character, there is no transfer- mere declaration unstamped, even if it is immoveable is Sufficient-conduct has to be seen. Goli Eswarisash 76 ITR 675 (SC) R. Subramania 28 ITR 352 (Mad) Lale Knnaiyalal 75 ITR 702 (ALL) 2. A sole male member on conversion shall continue to be, assessed as IND., Surjitlal Chhabds 101 ITR 776 (SC)

4. A female cannot convert her individual property into HUF property. It would amount to transfer. (Is this different after amendment to HS Act?) Pushpa Devi 109 ITR 730 (SC) Note: - Tax advantage of conversion has since been lost by insertion of Sec. 64(2) in IT Act, 4(IA) in WT Act

Creation of HUF by Will or Gift – Court Rulings By unequivocal intention of donor or testator, a beneficiary can take gift/ legacy as a karta of HUF M.P. Pariakaruppam 99 ITR 1 (SC)

Partition – Court Rulings 1. Severance of HUF takes place on the date unequivocal intention is made. A Raghavamma AIR 1964 SC 136 2. The date of suit for partition is the date of severance of status of HUF. Bijoy Kumar 84 ITR 71 (CAL) 3. Date of arbitrator’s award is the date of severance. Ratanchand 4 ITR 189 (ALL)

4. Entries in the books will be sufficient in case of business. A. Kuppiah 63 ITR 522(M) Bhimraj 26 ITR 185. 5. Partition can be unequal No Gift tax is payable because there is no transfer. N.S. Getti Chettier 82 ITR 599 (SC) 6. There can be partition between Father and Minor Sons. Apoorva Shantilal 141-ITR-558 (SC) 7. There can be no partition if there is one male member. V.V.S. Natarajam 111-ITR-539 (M) T.G.K. Menon 140-ITR-876 (M)

Partial Partition – Court Rulings Partial partition derecognized- A partition (total) though valid under Hindu Law, it has to be within the meaning of Sec171 (9) i.e. by metes and bounds, or such other mode. Kaloomal Tapeshwar 133-ITR-690.

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