Mukesh Patel.in
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CAN THE HUF SUN RISE WITHOUT A SON?

Courts have held that two male members are a must to constitute an HUF is a myth that must be dispelled!

Under the Direct Tax Laws in our country, a Hindu Undivided Family (HUF) has been granted the status of an independent tax entity. Thus, an HUF has assumed a useful role in personal tax planning.

No doubt, it is true that to constitute an HUF, there should be atleast two members and there cannot be an HUF consisting of a single member, male or female. However, the myth or misconception, that there must be atleast two male members in the family to constitute an HUF as a taxable unit needs to be dispelled.

Courts and Tribunals have categorically held that such profit or income arising from any properties held by an HUF cannot be taxed in the hands of the individual Karta on the ground that he does not have a son in the family. It would be interesting to review the ratio and reasoning of some landmark judicial pronouncements on the subject.

As held by the Supreme Court in the case of ‘Gowli Buddanna vs. CIT’ 60 ITR 293(SC), under Hindu Law, a joint family may consist of a single male member and the Income-tax Act also does not indicate that the HUF as an assessable entity must consist of atleast two male members.

 Moreover, in the case of ‘CIT vs. Veerappa Chettiar’ 76 ITR 467(SC), the Supreme Court has held that even when a joint family is reduced to female members only, it continues to be an HUF, since there is a potential coparcenary as any widow by adoption can induct a coparcener into the family.

The Gauhati High Court in the case of ‘CIT vs. Arvind Jhunjhunwalla & Sons’ 223 ITR 45(Gau.) has held that an HUF gets constituted immediately upon the marriage of an individual. The High Court also rejected the contention of the Income-tax Department that until there was the birth of a son in the family, the income of the HUF would be liable to be assessed in the individual case of the Karta.

Similarly, the Madras High Court Full Bench in the case of ‘CIT vs. M. Balasubramanian’ 182 ITR 117(Mad.) and the Punjab High Court in the case of ‘CIT vs. Ghanshyamdas Mukim’ 118 ITR 930(P&H) have held that where the donor or testator has given a gift or property under a Will with the clear intention that it would belong to an HUF, the income arising from such property would be liable to be taxed in the hands of the HUF.

The Ahmedabad Bench of the Income-tax Appellate Tribunal has in the case of ‘Jagdish H. Choksi vs. Income-tax Officer’ 46 ITD 195 (Ahd.), following the ratio of the above referred Madras High Court judgment, held that the incomes attributable to the gifts given by the taxpayer’s father to the taxpayer’s HUF comprising of himself, his wife and his daughter(s) should be assessed in the hands of HUF and not in the hands of Individual.

 AUGMENTING PROPERTY FOR AN HUF

The existence of an HUF is dependent on the principles of Hindu Law. Since HUF is a creature of law, the term ‘creation of HUF’ is a misnomer. It may quite often happen that an existing HUF may not own any property. In order to avail benefits of tax planning it is necessary for such an HUF to augment its own property. In fact the term colloquially used as ‘creation of HUF’ refers to ‘creating or augmenting funds for an existing HUF.’

The most popular mode for augmenting property in case of an HUF is by receiving gifts. In this context it must be borne in mind that if any member of the HUF gives a gift to his/her HUF, the income derived by the HUF from such gifted property is liable to be clubbed with the total income of the member. Similar provisions in regard to clubbing of wealth have also been provided. The clubbing provisions referred to above are applicable only in the case of gift by a member to his/her own HUF.

However, it is possible for an outsider, who is not a member of the HUF, to give a gift to the HUF declaring his/her express intention that such gift is to be held by the HUF. Such a gift can be accepted by the Karta on behalf of the HUF and the income arising out of such gifted funds will be treated as separate income of the HUF for tax purposes.

When such a gift is received by the HUF, the provisions of Section 56(2)(vii) need to be borne in mind. As per the said provisions, any gifts exceeding Rs.50,000 received in a financial year are treated as taxable income in the hands of the HUF.  

Moreover, funds can also be augmented for an HUF by making appropriate provisions in favour of the HUF under a Will or settlement of a trust or through partition of a bigger HUF. In such cases, the provisions of Section 56(2)(vii) are not attracted and no liability to income-tax would arise.

 

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