----- Original Message -----From: Sanjeev BediSent: Sunday, February 24, 2008 10:50 PMSubject: {Brainstormers -CA} Re: Benefits and creation of HUFHi everyone,
Here are my two pennies on the topic of HUF:
The Hindu Undivided Family has its roots in the ancient Hindu law
like the Manu Smriti, compiled by a male chauvinist Hindu "Scholar"
called Manu, who lived around 200 BC; the Yajnavalikya Smriti
compiled by Yajnavalikya and Narada in 100 and 200AD (it merely
embellished what had already been laid down by Manu); and Mitakshara
codified by a guy called Vijneshwara somewhere around the year 1100
AD. Mulla, the foremost authority on Hindu law, has described the
Mitakshara as "the quintessence of the Smriti law, its precepts and
injunctions". Later in the 12th century, there came along another
variation of the Hindu law called the Dayabhaga written by one
Jimutavahana. The Dayabhaga challenged and deviated from the
Mitakshara law in some ways, particularly in relation to succession
and inheritance.
Under the Dayabhaga system, the father is the sole owner and the
exclusive possessor of the joint family property. No member can
enforce the partition of the HUF so long as the father lives. But
the Mitakshara law stipulates that the property vests in the HUF
itself and not in any individual member of the family and therefore
can be partitioned within the lifetime of the father.
The Dayabhaga law is prevalent in West Bengal and Assam. Hindus in
the rest of the country are governed by the Mitakshara law.
Actually, there are a few more variations of these laws prevalent in
some parts of the country. But for the sake of this discussion, I
have restricted myself to the exposition and practice of the
Mitakshara law only.
Manu, as I said earlier, was a sexist. In Manusmriti he wrote that
the husband had full dominion over his wife's body and soul and that
she was his goods and chattel. It is sad but true that the modern
Hindu family laws have their roots in what this MCP wrote more than
2200 years ago. Manusmriti completely forbade women to have a share
in the family property. The modern Indian government embarrassed by
these antediluvian, anachronistic laws has sought to bring them in
line from time to time with the egalitarian values of 21st century.
On 9th September 2005, the Hindu Succession Act, 1956 was amended to
provide that a daughter too could be a coparcener i.e. joint heir,
like her brother to the joint family's assets and she too could
enforce the partition of the family property to claim her individual
share. She continues to be the coparcener in her father's HUF even
after she gets married and forms another HUF with her husband.
So gender bias has largely been taken out of the HUF laws. Or has
it? Some enlightened opinion had questioned the wisdom of this
apparently benign amendment in the HS Act. They argued that
unscrupulous and dowry-hungry in-laws of a married girl may harass
her to press her father to partition the family property and claim
her share.
A coparcener is one who has a right to demand that the family
property be divided and they be handed over their share in the
property (or whatever assets the HUF has) in case he or she decides
to part ways with the HUF. Not all members of the HUF are its
coparceners. The coparcenery extends to four degrees down the family
hierarchy in the following manner:
1st degree : Holder of ancestral property for the first time.
2nd degree : Sons and daughters (09.09.2005).
3rd degree : Grandsons.
4th degree : Great grandsons.
The most frequently asked question about HUF is: How does it come
into being?
To form an HUF, all you have to do is Get Married. The HUF gets
created as soon as you complete the seven (or four, whatever)
circles round the holy fire and become Man and Wife. There have to
be a minimum of two people to constitute a family. The husband and
wife together make up a family. They don't have to wait till they
have a baby to constitute their HUF.
Someone asked "Can an unmarried man create an HUF?" No, he cannot,
if you mean an HUF of which he seeks to be the Karta himself. He can
very well be the member of the HUF of his father or grandfather, but
to create his own HUF he has to wait till he ties the nuptials.
Come to think of it, "Creation of an HUF" is an oxymoron—-a
contradiction in terms. Only orphan-and-unmarried Hindus don't
belong to an HUF. Every Hindu becomes a member of an HUF the moment
she ejects out of her mother's womb, mode of delivery--C-section or
Normal--notwithstanding. Till the time the HUF has an empty kitty,
it is like a balloon that no one has yet blown air into. A balloon
can rightfully be called a "ball"oon only when it swells up with air
inside it. Without the air the balloon is inert, dormant. An HUF too
is inert and dormant without funds.
The Karta, which in Hindi means the Doer, is usually the Father, the
paterfamilias of the family. He has immense powers over the affairs
of the family, more than any other coparcener can wield. Can a
female be the Karta? The answer can't be No in the light of the
amendment in the HS Act in 2005. An unmarried daughter, in the
unfortunate event of her father passing away, will become the Karta
of the HUF if she has no brother. This also answers another
question: Can there be an all-female HUF? Yes, there can be. Where a
couple has only one issue—-a daughter—-and the husband passes away,
the mother-daughter duo can continue the HUF (although a problem may
arise after she gets married and becomes a member of her husband's
HUF). It has been held by the Allahabad High Court in CIT v. Sarwan
Kumar 13 ITR 361 (All) that there can be an HUF consisting of female
members only
The Karta can enter into partnership with a firm on behalf of the
HUF. But the HUF itself, being not a legal person, can never be a
partner in a firm. The fact that Income Tax law grants a PAN to it
and treats it as an assessable entity does not bestow upon it the
status of a person under the general laws. This has been held to be
so in numerous cases. In Ram Laxman Sugar Mills v. CIT 66 ITR 613
(SC), the Supreme Court said that "an HUF is undoubtedly a person
within the meaning of the Indian Income Tax Act, It is however, not
a juristic person for all purposes and cannot enter into an
agreement of partnership either with another undivided family or
individual".
This has again been unequivocally reiterated by the Apex Court in
the case of Rashik Lal & Co v. CIT 229 ITR 458 (SC).
The Karta may have deployed the HUF's money into a partnership
business, introducing it as his capital. He may be liable to his HUF
in case he burns his fingers in the firm's business. But it's
between him and the HUF; the partnership firm has got nothing to do
with it. The firm recognizes the Karta in his individual capacity
only. The creditors of the firm can't go after the assets of the HUF
in case the firm goes bankrupt and hasn't got funds to repay its
debts.
So while conducting bank audit, in case you come across a loan file
where the HUF is shown to be the partner, raise an objection.
As chartered accountants, we are primarily concerned with exploring
how the HUF can be used to save taxes for the assessee. So in the
remaining paras, we shall look at the HUF as an Income Tax assessee
with a PAN.
The million-dollar question indeed is: How to blow funds into the
HUF and turn it into a balloon that floats?
A member of the HUF throwing his money into the common pool, or to
use that overused cliché' the family hotchpot, is out of the
question, thanks to Section 64(2) which would tax the income earned
by the HUF on that money in the individual member's hands only. But
the clubbing provisions can be bypassed if the HUF invests the money
in instruments yielding tax-free income. The tax-free income can
then be reinvested to earn even taxable income--income on income is
out of the clubbing provisions. Strangers can make gifts but only
upto Rs 50000 (Section 56). And you will have a hard time explaining
the benevolence of strangers if you have a number of them
contributing Rs 50000 each.
A way-out is to receive gifts from members of bigger HUFs, who
though your relatives, aren't members of your smaller HUF. A father
may make a gift of money to his son's newly-created HUF, clearly
specifying in the Gift Deed that the gift is to his son's smaller
HUF and not to the son himself. This will keep both Section 64(2)
and Section 56(2) at bay. Some other people, who aren't members of
the HUF but are relatives in terms of Section 56(2) can also be
found out.
After the HUF has a nucleus of its own and gets going, care has to
be taken to keep the HUF's affairs completely distinct from the
individual members' affairs. Where the members of the HUF carry on
their individual businesses, as they normally do, the distinction
between what constitutes the individual's income and what is HUF's
income may get blurred. There have been cases where the courts have
held that businesses started by individual members after borrowing
funds from the HUF were assessable in the HUF's hands, especially
where the HUF is already engaged in the same business. So think
twice before letting the HUF lend any money to its members and vice
versa. In CIT v. Gopal Bansilal Inani (2000) 245 ITR 2 (SC), the
Supreme Court disallowed the interest paid to coparceners on the
loan the HUF had taken from them as a business expenditure u/s 37
(1).
Can an HUF pay remuneration to its Karta? Yes, in Jugal Kishore
Baldev Sahai v. CIT 63 ITR 238 (SC), the Supreme Court held that "if
a remuneration is paid to a Karta of the family under a valid
agreement which is bona fide in the interest of and expedient for
the business of the family and the payment is genuine and not
excessive, such a remuneration must be held to be an expenditure
laid out wholly and exclusively, for the purpose of the business and
must be allowed as an expenditure under section 10(2)(xv)
[corresponding to the present-day Section 37(1)] of the Act".
There is also the issue of Partition of the HUF. Although the
Mitakshara and other Hindu laws do not forbid partial partition of
the HUF, the Income Tax law frowns upon it. Under the Hindu law, you
may have eliminated the HUF by partioning the property (or whatever
assets) of the HUF, but the taxation authorities have invested
themselves with powers u/s 171 of the I T Act to continue to treat
the defunct HUF as an assessee liable to pay tax unless the
partition is effected in strict keeping with the manner laid down in
that section. The law wants to dissuade assessees to smash up their
bigger HUFs into smaller ones just to create more files to bring
down their tax liabilities.
Total partition in the context of the I T Act means partition by
metes and bounds. "Metes and Bounds", an Anglo-French term, means
the boundaries or limits of a tract of land. If the HUF property is
physical, it isn't difficult to divide it up, delineating the share
of each member. But a non-physical property will have to be divvied
up amongst the members in such a manner as to comply with
Explanation (b) below Section 171(9). Care must be taken that
erstwhile coparceners don't simply end up becoming co-owners in the
property. For example an FD held by the HUF being partitioned can't
be converted into a joint FD of members after partition; if it is,
interest on it will continue to be assessed in the HUF's hands. The
FD can continue only in one member's name; he can cough up some cash
to the other members to compensate them for loss of FD.
What a metes and bounds partition does is deflate the balloon of the
HUF. The Income Tax law will recognize its demise (for want of a
better word, since a divided Hindu family can be reunited again),
only when the HUF is stripped naked of each and every layer of the
clothing of property—-tangible or intangible, movable or immovable--
it had. It has to get back into its birthday suit again to be truly
partitioned.
I have tried to cover the relevant aspects of HUF as it concerns us.
Unfortunately, there isn't a great deal of literature available on
HUF in the market. There is a book titled "Formation & Management of
HUF along with Tax Planning" by authors S R Kharbanda and Prem Nath
published by Commercial Law publishers. Though repetitive and
redundant at times, it's a good one.
Thanks,
CA Sanjeev Bedi
--- In ICAI_CIRC_MEERUT_CA@yahoogroups. , "vijay_as2003"com
<vijay_as2003@...> wrote:
>
> Dear esteemed members,
> everyone in the group can see that the queries regarding creation
of
> HUF are coming in large numbers. in fact we have studied a lot in
the
> text boks regarding this, but practical knowledge is not
widespread
> (as i presume). I humbly request the senior members to please
throw
> some light that how a huf is created ? how it can benefit the
> individuas in craetion of wealth and availing benefit of
taxation ?,
> what are the precautions, pros and cons ? and finally how to
maintain.
> Members who are practicing and advising some good huf's can easily
do
> so. This will put this topic to an end and other active members
can
> learn a lot.
> Thanks
> Vijay
>
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