Hindu Undivided Family (HUF) under Income Tax Act of India
1. Hindu Undivided Family (HUF) is treated as separate entity for the purposes of assessment under the Income-tax Act and Wealth-tax Act. The term “Hindu Undivided Family” has not been defined under the Income-Tax Act or Wealth-tax Act. It has not been defined in any other law also.
2. HUF does not arise from a contract. HUF is a creation of law. After marriage, as soon as a child is born, HUF comes into existence. HUF consist of Father, sons and daughters. Wife is not the part of the HUF.
3. Sons and daughters and the father i.e. Karta are the co-parceners in the joint family and have a right to demand partition. Prior to amendment in Hindu Succession Act, the daughters were not co-parceners and could not demand partition. Now the daughters are co-parceners having right to demand partition and have an equal share that of a son.
4. However, mother is not a co-parcener now and cannot demand partition. However the mother has a co-parcenary interest in her father’s property.
5. The Karta can give his share in the co-parcenary property to his wife.
6. If partition of HUF is made by Courts, the courts will always award equal partition. However, the family may mutually affect partition without going to the courts and mutual partition can be unequal.
7. Partition has to be a total partition. Partial partition is not recognized under the income-tax Act and Wealth-tax Act.
8. HUF cannot make any gift of HUF property to co-parcener and non-coparceners. Any gifts made by HUF are void-ab-initio. The gifted property shall be included in the wealth of HUF and not the donee. Similarly the income from gifted properties shall be taxable in hands of HUF and not the donee
9. The provisions of computing income of HUF are the same for a normal assessee.
10. As per section 47 of the Income-tax Act, no capital gains shall arise to the HUF on distribution of assets on partition of HUF.
11. As per section 49(1) of Income-tax Act where assets are distributed on partition of HUF, then the cost of acquisition of such assets to the member shall be the cost of acquisition of such asset in the hands of HUF.
12. Also as per section 49(1), where an individual converts his self acquired property into HUF property without adequate consideration as mentioned in section 64(2), then the cost of acquisition of the converted property to the HUF shall be the cost of acquisition in the hands of the transferor individual.
13. As per section 2(42A) of the Income-tax Act, in the above two cases (point 11 and 12), the period of holding of the asset of the transferor shall also be considered for computing the period of holding of the asset in the hands of the transferee.
14. As per section 171 of the Income-tax Act, partition of HUF takes place on the date the properties are actually physically divided. There must be physical division of the properties. Physical division of income without physical division of properties does not amount to partition. Where the property is not capable of physical division, then the division should take place by metes and bound.
For example, the Supreme Court by its order dated 1.1.2013 ordered partition of HUF. The physical division of properties pursuant to Supreme Court’s order takes place on 30.6.2013. The income from properties of HUF upto 30/06/2013 shall be included in the income of HUF and not the members. As on 31.3.2013, the properties of HUF shall be included in the wealth of HUE and not the members.
15. Remuneration paid by HUF to Karta or any member of HUF:
As per Supreme Court in Jugal Kishore Baldeo Sahai v. CIT, if any remuneration is paid by the Hindu undivided family to the Karta or any other member for services rendered by him in conducting family’s business, the remuneration is deductible if remuneration is:
- paid under a justified, valid and bona fide agreement;
- not prejudicial to the interest of HUF;
- in the interest of HUF and expedient for the business of family; and
- reasonable and not excessive.