Transcript Inheritance, Family Settlement & HUF TAX ISSUES

Monday, 27th AUGUST 2012
SRISAILAM
Inheritance, Family Settlement & HUF
TAX ISSUES
Organized by CPE Committee of ICAI jointly with SIRC of ICAI
CA. GOPAL KRISHNA RAJU
3 Day CPE Residential Seminar - SRISAILAM
FCA, AICWA, ACS, PGDOR, PGDFM, DISA
Hosted by HYDERABAD BRANCH OF SIRC OF ICAI
Partner: M/s. K. Gopal Rao & Co.,
Chartered Accountants, Chennai
AUGUST 25th – 27th 2012
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda
1.
Introduction
2.
Coparceners and Members
3.
Creation of HUF
4.
Business Income
5.
Assessment to Income Tax
6.
Wealth Tax
7.
Gifts – to and by
8.
Tax Planning
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 1:
Introduction
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Family
•
A family consisting of parents and their children
living together as a unit has played a crucial role
in the evolution of human society.
•
A family so understood has been the basic unit of
society, primitive, feudal or tribal, ancient or
modern.
•
There are two vital difference between the family in
Hindu Society and the family as commonly
understood elsewhere.
SRISAILAM
5
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Family in Hindu Society
i.
The concept of the family has been extended to
include not only parents and their off-spring but
also many other relatives connected by blood,
more specifically those claiming descent from a
common ancestor, and
ii.
The carrying on of economic activity – agricultural,
commercial, industrial – and ownership of property
by the family as a distinct and separate unit.
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF – an institution by law
•
HUF is essentially a unit of society and not
necessarily an economic or commercial unit.
♥
It needs, therefore, to be emphasized that there
could be an HUF which does not own property
or carry on business.
•
Our tax administrators and law makers have been
viewing this institution (always) with suspicion.
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Family Relationship - Sapindaship
•
A HUF consisting of male members descended lineally
from a common male ancestor, their wives and
unmarried daughters and bound together by the
fundamental principle of sapindaship or family
relationship is an institution unique to India.
•
This is a living institution which is not going to
disappear or to be killed by legislation.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF & Direct Taxes
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF & Direct Taxes
•
Under section 4 of the Income Tax Act, 1961, incometax is payable by ‘every person’ and the word ‘person’
as defined in section 2(31)(ii) of the Income Tax Act,
includes a ‘Hindu Undivided Family’
•
Similarly, under section 3 of the Wealth Tax Act,
1957, wealth is chargeable to tax in respect of the net
wealth of every ‘Hindu Undivided Family’.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF – Legal Definition - ?!#%*
•
HUF – a legal entity under direct tax laws
•
No separate definition of the expression HUF has
been attempted in any of the direct tax laws because
the term has a definite connotation under the Hindu
Law.
•
The courts have declared that the expression HUF
must be construed in the sense in which it is
understood under the Hindu Law. [Surjit Lal Chhabda vs. CIT
101 ITR 776 (SC); CIT vs. Gomedalli Lakhsmi Narayan 3 ITR 367 (Bom)]
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Schools of Hindu Law & Sources of Hindu Law
•
There are two major schools of Hindu Law, Mitakshara
and Dayabhaga.
•
The sources of Hindu Law are the Vedas, the Srutis,
the smritis, the commentaries on the smritis and above
all custom and usage.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Schools of Hindu Law & Sources of Hindu Law
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
The essence of schools of Hindu Law
•
In Dayabhaga there is unity of possession but no unity
of ownership.
•
As Mulla has put it “The essence of coparcenary under
Mitakshara is unity of ownership. The essence of
coparcenary
under
Dayabhaga
is
unity
of
possession”.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Mitakshara & Dayabhaga
•
Sometime in the 11th century, Vijneshwara compiled
a compendium of the law as it then existed, calling it
Mitakshara.
•
Dayabhaga is a treatise written by Jimutavahana in
12th century. It is critical of Mitakshara in many ways,
but more particularly in repsect of law of inheritance
and succession.
•
Where Dayabhaga is silent, Mitakshara automatically
prevails. Dayabhaga Law is applicable to Bengal.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Primary difference between Dayabhaga & Mitakshara
•
In Mitakshara school a coparcener’s interest in the
joint family does not remain fixed and keeps
fluctuating in as much as his interest expands when
the family expands and when his family loses property
or part of the property his interest in the family property
automatically reduces.
•
In Dayabhaga school, a Hindu on the death of his
father succeeds to a definite share in the property
left by his father.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Dayabhaga (act of volition) & Mitakshara(operation of Law)
•
In Mitakshara school a person from the inception
acquired a right in the family property, in the
Dayabhaga school the property devolves on the death
of a Hindu on his heirs and successors.
•
A Hindu under the Mitakshara school becomes a
coparcener by operation of law and a Hindu
governed by the Dayabhaga school becomes a
coparcener by an act of volition.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
The Hindu Succession (Amendment) Act, 2005
9-9-2005
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Can a Female be a Karta?
•
Membership
of
a
coparcenary
is
a
necessary
qualification for managing a joint family.
•
A Hindu female was not a coparcener till the
coming into force of the amendment of the Hindu
Succession Act, 1956 in the year 2005 and thus did
not have the right to become a manager of a joint
Hindu family.
•
VMN Radha Ammal v. CIT 18 ITR 225 (Mad)
•
CIT v. Seth Govindram Sugar Mills (1965) 57 ITR 510 (SC)
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Post 09-09-2005
•
This position has, however, been modified with the
coming into force of the amendment of the HS Act
(2005) making a daughter a coparcener on birth like a
son.
•
There is thus no bar on unmarried daughter
becoming a Karta of the HUF on the death of her
father (if she has no brother)
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issues arising on a married daughter being a coparcener of his
parental family and member of the family of her husband
•
Under the amended HS Act (2005), a daughter is a
coparcener of the family in which she is born and is
entitled to all the rights of a coparcener including
becoming a Karta.
•
If on the death of the father, he is survived by an
unmarried daughter and had no son there would be no
legal bar on her becoming a Karta of the family.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issues arising on a married daughter ….
•
In case she is married and has consequently become a
member of family of her husband, a difficult problem
can possibly arise if she assumes the position of the
Karta of her Parent’s family.

Possible Solution: To avoid any conflict of interest she
may like to enter into a family arrangement giving all
rights of management of the parental family to either to
her widowed mother or in her absence to any other
suitable member of the parental family.
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Female Heirs – Class I before 9-9-2005
•
Widow
•
Daughter
•
Mother
•
Widow of pre-deceased son
•
Daughter of a pre-deceased son
•
Daughter of a pre-deceased daughter
•
Daughter of a pre-deceased son of a pre-deceased son
•
Widow of a pre-deceased son of a pre-deceased son
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Addition made to Female Heirs : post 9-9-2005
•
Daughter of a pre-deceased son of a pre-deceased
daughter (w.e.f 09-09-2005)
•
Daughter of a pre-deceased daughter of a pre-deceased
son (w.e.f 09-09-2005)
•
Daughter of a pre-deceased daughter of a pre-deceased
daughter (w.e.f 09-09-2005)
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Addition made to Male Heirs : post 9-9-2005
•
Son of a pre-deceased daughter of a pre-deceased
daughter (w.e.f 09-09-2005)
Residential Seminar - SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 2:
Coparceners and Members of HUF
“A HUF is a unit of society consisting of male members descended lineally
from a common male ancestor, their wives and unmarried daughters”
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Coparcener
•
A HUF consists of members male and female, adult
and minor.
•
Some of the members of an HUF are designated
as coparceners.
•
Only a coparcener can seek partition of the family
property and the other male members can have no
direct claim over HUF property, but can claim such
right through the coparceners.
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
A Coparcener consists of:
•
A coparcenary consists of a male ancestor and his
lineal descendants in the male line till 2005 within
four degrees including himself.
1st Degree: Holder of ancestral property for the first
time
2nd Degree: Sons and Daughters since 2005
3rd Degree: Grandsons
4th Degree: Great Grandsons
SRISAILAM
30
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Coparcenary
•
All the coparceners of family constitute what is
called a coparcenary.
•
The coparcenary is a limited body, a part of the
HUF, smaller than the membership of the HUF.
•
However, conceivably, there can be an HUF all of
whose members are also coparceners but there
cannot normally be an HUF without a coparcener
or coparceners.
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issue 1: Single male coparcener
•
A family has a single male member and no female
members at all – the male member is either unmarried or
a widower without children. Does he own the ancestral
property as an Individual or as an HUF?
•
It was held that a single person, male or female, does not
constitute a family and a family consisting of a single
individual is a contradiction in terms. [C. Krishna Prasad vs. CIT
97 ITR 493 (SC)]…..the assessee is an individual and not a
family
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issue 2: Family consisting of females only
•
Whether there can be an HUF consisting only of females,
there being no male member after the death of the sole
coparcener.
•
“Under the Hindu law it is not predicated of a Hindu joint
family that there must be a male member. So long as the
property which was originally of the joint Hindu family
remains in the hands of the widows or the members of the
family and it is not divided among them, the joint family
continues” [CIT vs. Rm.AR.AR.Veerappa Chettiar 76 ITR 467 (SC)]
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 3:
Creation of HUF
“HUF is not created, only its kitty is filled”
(Only Assets are provided to it by gift or otherwise)
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Creation of Assets of HUF
•
A Hindu male with his sons and grandsons
constitutes an HUF but this HUF need not own any
property. {A situation where the family has not
inherited any property}
•
In today’s India there are large number of men who
are entirely self-made, in trade, in industry, in
profession and in services. Yet, they constitute a
joint family not only with their children, but very
often with their brothers.
•
SRISAILAM
…
35
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Creation of Assets of HUF…pivotal question?
•
The assets acquired by different income earning members
in practice and in law, belonged either to the bigger family
of brothers or the smaller family constituted with their
children.
•
But the income from these assets, was invariably clubbed
with their individual income and subjected to tax.
•
A question, therefore, arises: How the families consisting
of a father and his sons, or of brothers, and the like, can
acquire assets?
SRISAILAM
36
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
1. Properties of HUF can be acquired by joint labour
•
Joint Labour: HUF property (movable and immovable)
can be acquired under Mitakshara by joint labour of the
coparceners and this can be utilised as a source of
creating HUF property or nucleus of a branch of HUF.
•
Joint Family funds: Even though some (or one) of the
members had put in their labour and skill for earning the
income, then the property will be joint family property.
SRISAILAM
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HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
2. Vesting of self-acquired property in family hotchpot
•
HUF assets can be created by vesting of self-acquired property
in the family hotchpot even where the family kitty is empty.
•
Thus assets of a main family or branch of the family are created
by a Karta or another coparcener throwing his self-acquired
property into the hotchpot of the family or branch of the family to
which they belong.
•
There is nothing in Hindu Law which prevents a Hindu male
from throwing his self-acquired property in the hotchpot of the
smaller unit to which he belongs while the larger unit remains
intact.
SRISAILAM
38
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
3. Section 64(2) does not bar creation of HUF…..
•
Caution: There is an erroneous impression that this provision
u/s 64(2) debars or obstructs the creation of HUF assets where
none existed before.
•
What is does is to merely ensure that the income from the
assets so transferred or gifted would be assessed in the hands
of the donor individual and not in the hands of HUF to which the
assets now belong.
•
But, this does not prevent the HUF from utilising the assets and
income there from for carrying on business or trade, the income
from which would not be caught within the mischief of section
64(2)
SRISAILAM
39
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Planning for Nucleus…
•
The Individual who transferred the asset to an HUF can be
saddled with the liability to pay tax u/s. 64(2) on income of the
assets but not on the income arising out of the investment of the
accumulated income which belongs to the HUF and the same
can be utilised or invested for expanding the coffers of the newly
created HUF.
•
For creation of Nucleus HUF, it is advisable to get gifts from
members of the bigger HUF or outsiders so as to be caught
within the mischief of section 64(2) with respect to gifted amount
from a member of the HUF.
SRISAILAM
40
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Care & Caution…
•
A newly created HUF as a unit may receive gifts from
outsiders or from father or brothers of the Karta who are
not members of the donee HUF.
•
All such gifts will result in accretion to the family fund
without attracting he provisions of section 64(2).
•
The only precaution to be taken is that none of the
debtors should be coparceners or members of the
donee HUF.
SRISAILAM
41
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Creation of new HUFs through partition of an existing
HUF
•
Partition of an HUF by dividing its assets among its
coparceners and members is a recognised method of
creating a number of smaller HUFs and thereby
distributing its income into a number of units which bear
tax at a lower rate.
•
It is thus a useful tool in tax planning.
•
The partition strategy can therefore be usefully adopted
to create smaller HUFs.
SRISAILAM
42
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Creation of HUF through reunion after total partition
•
If the circumstances of the family require partial partition
while others remain joint and continue to carry on the
business of the main HUF, the members can first have
a total partition dividing all the family assets and
liabilities amongst smaller HUFs and claim a total
partition under section 171 before the ITO.
•
The ITO will enquire and pass an order u/s. 171(1).
•
Two or more smaller HUFs so formed can then reunite.
SRISAILAM
43
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Creation of HUF through reunion …
•
It is legally permissible for the coparceners who had
originally separated, if they throw back into the joint pool
all the assets which they had been allotted in the earlier
partition.
•
This reunion will partially nullify the effect of total
partition.
•
There is no rule in Hindu Law which can prevent the
smaller HUF to reunite.
SRISAILAM
44
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Caution…
•
The intention to reunite was to be based on the
evidence in the form of subsequent conduct, or
subsequent memorandum of reunion, etc.,
•
The onus is on the reuniting coparceners to prove that
they have reunited.
•
It is not necessary that all the coparceners reunite but
any of the coparcener who reunites must bring back to
the family what he had taken away or what is left out of
the same with him.
SRISAILAM
45
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Inheritance of Self-Acquired Property…!
•
HUF nucleus is not established by inheritance and succession
after the commencement of Hindu Succession Act, 1956 as the
property inherited by a son from the father is no longer ancestral
property. [CWT vs. Chander Sen 161 ITR 371 (SC)].
•
In such cases the father, if he so desires, can bequeath his selfearned assets by will to the HUF of his son or sons and by this
will, inheritance would go to the joint family of the son.
•
Any family member or relative can thus make a Will in
favour if HUF of a person and property so bequeathed
would be HUF property.
SRISAILAM
46
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 4:
Business and HUF
“HUF can carryon business as proprietor”
SRISAILAM
47
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF and Partnership
•
Section 2(31) defines a “person” to include a HUF.
•
However, an HUF is not a juristic person for all
purposes. For instance, it cannot enter into partnership
with either an Individual or another HUF or another
Firm.
•
It is open to the Karta of an HUF to become a partner
with another person but acting on behalf of the HUF.
[Ram Laxman Sugar Mills vs. CIT 66 ITR 613 (SC)].
SRISAILAM
48
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Ownership and Management of HUF Business
•
The owner of an HUF business is the family.
•
No member of a Mitakshara Family can predict any
definite share in any asset of the family until partition
takes place.
•
The partitioned members cannot call for the rendition of
accounts from the Karta.
•
When dispute arises – Hindu Law prevails.
•
Interest paid by HUF to coparceners not deductible. [CIT
vs. Gopal Bansilal Inani (2000) 245 ITR 2 (SC)]
SRISAILAM
49
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issue 3: Criteria for determining whether income belongs
to an HUF or an Individual Member or Coparcener
•
Whether the income received by the coparcener had any real
connection with the investment of Joint Family funds.
•
Whether the income was directly related to any utilization of
family funds or assets.
•
Whether the family had suffered any detriment in the
process of realisation of income from the business.
•
Whether income was earned with the aid and assistance of
family funds.
•
SRISAILAM
[Raj Kumar Sing Hukam Chandji vs. CIT 78 ITR 33 (SC)]
50
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Remuneration to director for personal skill
•
In view of the finding of the fact that remuneration had
been paid to Mr. G as director on account of his skill
and acumen, it was not assessable in the hands of
HUF.
•
The test is whether remuneration was compensation or
whether it was in substance, though not in form, one of
the modes of return made to the family because of
investment of family funds in business.
•
SRISAILAM
[CIT vs. Gopal Narain Singh 170 ITR 72 (Pat)]
51
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF acting as partner in a firm – Legal position
•
HUF is a firm in fact but not in law.
•
HUF cannot be legally a partner in a firm. But it may,
through its Karta enter into a valid partnership with a
stranger or with the Karta of another HUF. However,
other members of the HUF, do not become partners
through Karta may be accountable to them. [CIT vs. Seth
Govind Ram Sugar Mills (1965) 57 ITR 510 (SC)]
•
A female member can represent an HUF in a firm….[CIT
vs. Banaik Industries 119 ITR 282 (Pat)]
SRISAILAM
52
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
HUF cannot directly become partner in a firm - SC
•
HUF does not act in a representative capacity in the
partnership. He functions in his personal capacity like
any other partner.
•
If there are two partner one of them is Karta of a HUF.
Upon death of Karta, the partnership stands dissolved.
In the absence of a contract to the contrary, another
member of the HUF cannot step into the shoes of the
Karta.
•
SRISAILAM
[Rashik Lal & Co Vs. CIT 229 ITR 458 (SC)]
53
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issue 4: Unique Combinations
•
Partnership between an Individual Member of an HUF
and the Karta representing the family - Is it Valid?
•
Can an HUF represented by a particular member in
partnership enter into partnership with that member
representing himself?
•
Coparcener as working partner in a firm where HUF is
represented by the Karta – Is it Valid when coparcener
contributes only labour and skill and no capital?
SRISAILAM
54
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 5:
Assessment of HUF
“HUF is a separate and distinct Tax entity”
SRISAILAM
55
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issue
•
Once a notice under section 148 and other notices
under sections 143(2) and 142(1) were issued treating
the assessee as individual then the AO cannot frame
the assessment treating the income in the hands of
HUF
•
SRISAILAM
[CIT vs. Rohtas (2009) 311 ITR 460 (P&H)]
56
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Payments for maintenance by husband or father-in-law
•
Any payments made by an HUF to a Hindu married
woman, widow, children and aged parents under the
provisions of Hindu Adoption and Maintenance Act,
1956 are exempt from tax in the hands of the recipient
u/s. 10(2)
SRISAILAM
57
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Relief admissible in respect of self occupation of HP
•
Relief for self occupation of house is admissible under
section 23 to an HUF also.
•
There is nothing in the words used in section 23(2)
which may show that they cannot apply to HUF which is
nothing but a group of individuals related to each other.
•
SRISAILAM
[ITO vs. Tarlok Singh & Sons 29 ITD 139 (Del)]
58
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Gift & Vest
•
The only difference between gift and blending is that
blending or vesting is a unilateral act and does not require
any consent of other coparceners.
•
In case of gift, however, the donee HUF must accept the gift.
•
Further a gift deed in the case of immoveable property
requires registration. In case of a gift of an immeavable
property, the same will not be valid in law if there is no
registration. However, vesting of an immovable property by
a coparcener is not governed by section 17 of Registration
Act.
SRISAILAM
59
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Conditions satisfying gift u/s. 64(2)
•
The donor is a member or coparcener of the family and
continues to be the member of the family during the relevant
assessment year.
•
If the donor is no longer a member of the family, then the
income from the gifted asset will continue to be assessed in the
hands of HUF and will not be clubbed with the income of the
donor.
Implications of section 64(2):
•
Gift by unmarried daughter of a Karta.
•
Gift by a lady to a HUF of which her betrothed is a coparcener.
SRISAILAM
60
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Loans to HUF by member – not covered by 64(2)
•
Section 64(2) covers cases of vesting of property and
gifts of HUF but does not cover cases where a
coparcener advances a returnable loan as in that case
the HUF income remains that of HUF and the only
liability of HUF is to pay the loan back to the member
concerned with or without interest.
•
Consider the case of Income from HP with the help of
funds obtained by the Karta as a Loan.
•
SRISAILAM
[Justice G. Ramanujulu Naidu vs. ITO 6 ITD 465]
61
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 6:
HUF and Wealth Tax
“HUF – A Taxable Entity for levy of Wealth Tax”
SRISAILAM
62
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Mitakshara vs. Dayabhaga
•
A Mitakshara HUF is liable to wealth-tax on the net
wealth owned by it but not a Dayabhaga family.
SRISAILAM
63
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
WT Assessment
•
For assessment of wealth-tax, HUF includes all those
families which are covered by Hindu Law and includes
Jains, Buddhists, Sikhs and also those born of mixed
marriage who have been brought up as Hindus.
SRISAILAM
64
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Single coparcener
•
When the HUF is reduced by death or partition to a
single coparcener with female members, the properties
continue to belong to HUF and are assessable in the
hands of the HUF.
•
It is not necessary that there should be at least two
coparceners to form a taxable unit.
SRISAILAM
65
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Issue
•
When an HUF on the death of Karta is reduced to a
Widow with unmarried daughter, they succeed to the
property as HUF or as Individuals?
SRISAILAM
66
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Severance vs. Physical division
•
Mere severance of status in HUF would not amount to a
partition and a physical division by metes and bounds is
required.
•
SRISAILAM
[Tatavarthy Rajah vs. CWT 225 ITR 561 (SC)]
67
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Invalid Gifts
•
Caution!
•
The value of assets gifted by HUF to members of the
family or strangers which are not treated as valid will
continue to be included in the net wealth of HUF.
SRISAILAM
68
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 7:
Gifts by HUF & Gifts to HUF
“Gift consists of the relinquishment (without consideration) of one’s own right (in property)
and the creation of the right of another, and the creation of another man’s right is
completed on that other’s acceptance of the gift but not otherwise” - Mitakshara
SRISAILAM
69
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Gift by HUF
Power to Gift
•
A Hindu father has no power to gift away ancestral or
joint property to either members of the family or
strangers except small portions of such property to
discharge moral or legal obligations or for pious
purposes up to a reasonable amount.
SRISAILAM
70
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Gift by HUF
With Love to Daughter
•
Gift by a father to his daughter of ancestral property on the
occasion of her marriage is gift in discharge of an indispensable
duty and is valid in Hindu Law.
•
Thus gift of jewellery, other presents etc., on the occasion of
marriage of a daughter is in discharge of moral and legal obligation
of the HUF.
•
Gift to minor daughters is valid. [CWT/CIT v. K.N.Shanmugha Sundaram
(1998) 232 ITR 354 (SC)]
SRISAILAM
71
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Gift by HUF
With Love to grandchildren of married Daughter
•
Gifts made to children of the married daughter of the
Karta within reasonable limits could be indispensable
acts of duty on Karta’s part and as such could not be
considered void.
•
[H.P Nanda & Sons (HUF) v. ITO 30 ITD 193 (Del.)]
•
[S.R.Kahani (HUF) v. CIT 180 ITR 141 (MP)]
SRISAILAM
72
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Gift to HUF
•
A gift can be made not only to an individual but
specifically to the HUF consisting of an Individual, his
wife and children and gift can be and is utilized for
creating a nucleus for a smaller HUF where no such
HUF nucleus existed earlier.
•
A new tax entity can thus be created.
•
Gift can be made for creating nucleus of an HUF if the
intention to gift to the Karta on behalf of his HUF is
made clear in the gift deed.
SRISAILAM
73
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Gift to HUF
•
Certain gifts received by HUF have been excluded under
proviso to section 56(2)(v)
•
Under a will or by way of inheritance; or
•
In contemplation of the death of the payer
•
Thus any sum of money (maybe in lakhs/crores) can be
received by HUF
☻ Caution: All gifts > Rs: 50,000 received by an HUF will be
assessed to tax under section 56(2)(v) as income from
other sources.
SRISAILAM
74
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Agenda 8:
Tax Planning through HUF
“Tax Planning is a Valid Exercise and is not Tax Evasion”
SRISAILAM
75
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Reunion and Tax Planning
•
Section 171(9) seeks to nullify the tax advantage that
accrued by partial partition to the coparceners and members
of HUF by providing for the clubbing of the income of the
resultant HUFs with those of the bigger HUF.
•
In this situation what the HUF can do is to go in for a TOTAL
partition of the family to seek recognition under section 171,
a recognition which the authorities cannot deny.
•
Soon thereafter, the partitioned units of the family may reunite in the permutation or combination which gives them the
desired tax benefit.
SRISAILAM
76
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Exchange of shares – Not Transfer
•
Exchange of shares in a family arrangement does not
involve transfer and does not attract capital gains tax.
•
Thus shuffling of interest in firms and companies in
consequence of a family arrangement between the
members of the family, should not attract liability to
capital gains tax as it is not a transfer.
•
SRISAILAM
[CIT vs. Kay Arr Enterprises (2008) 299 ITR 348 (Mad)]
77
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Family Settlements and Tax Planning
•
Family arrangement does not involve a transfer and
therefore section 64 of Income Tax Act is not
applicable.
•
Thus planning through family arrangement, if done,
within the limitations of law has immense possibilities.
•
[CIT vs. R. Ponnammal 164 ITR 706 (Mad)]
•
It is device to channelize and reduce the taxable wealth
and income in the hands of certain members of the
family.
SRISAILAM
78
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Renunciation
•
Under Hindu Law a coparcener is entitled to relinquish
his interest in the coparcenary but he cannot do so in
favour of any particular member of the family.
•
Such a renunciation must be definite, clear and
unequivocal (through a Deed of Renunciation – needs for an
expert here), there should be no doubt left in the minds of
any person about the fact of renunciation.
•
SRISAILAM
[CIT v. D.B.D. Krishna Kishore 9 ITR 695 (SC)]
79
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Renunciation vs. Partial Partition
•
Renunciation does not mean to amount to a partition or
partial partition and, therefore is not covered by
provisions of section 171(9)
•
Thus a coparcener may renounce his interest in the
family in lieu of a fixed maintenance allowance and this
would not require a recognition u/s. 171 by the ITO
☻ Caution: If renunciation, however, is of a unit including
his sons, it may amount in fact to a partial partition.
SRISAILAM
80
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Renunciation – Judicial views
•
Interest of a coparcener who renounces the same is extinguished
therein;
•
By release there is no division of the HUF properties and he does
not receive anything in respect of his share in the Joint Family
properties, but in a partition he takes his share in the family property
and goes out of the family; and
•
Even after such renunciation, the coparcenary continues as before,
intact and unimpaired save for the exit of the renouncing coparcener.
Whether other coparceners are also divided or continue will depend
upon their future conduct.
•
SRISAILAM
[Kantilal Trikamlal vs. CED 74 ITR 353 (Guj)]
81
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Renunciation & Tax Planning
•
As section 64(2) applies to an individual who is a member of
an HUF, the coparcener can renounce or extinguish his
interest in the HUF after vesting an asset in the HUF and
thus, cease to be a member of the HUF.
•
On such relinquishment his interest in the HUF property
ceases and, therefore, at the time of receiving the income,
the individual would no longer be a coparcener and so
income arising out of converted property cannot be included
in the hands of the vesting coparcener.
•
SRISAILAM
Helpful in circumventing the rigours of section 64(2).
82
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU
Reflections ?
Disclaimer
•
These are my personal views and cannot be construed to be the views of the
SIRC or my firm M/s. K. GOPAL RAO & Co., CAs
•
No representation or warranties are made by the SIRC or its branches with
regard to this presentation
•
These views do not and shall not be considered as professional advice
•
This presentation should not be reproduced in part or in whole, in any
manner or form, without my or SIRC’s written permission
Residential Seminar - SRISAILAM
84
HYDERABAD Branch of SIRC of ICAI
CA. GOPAL KRISHNA RAJU