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Taxation of Hindu Undivided Family - Income Tax - Ready Reckoner - Income TaxExtract Taxation of Hindu Undivided Family Hindu Undivided family (HUF) is treated as a separate entity for the purposes of assessment under the Income-tax Act. 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 coparcener of the HUF, but she is the member of HUF. Such married female has a coparcenary interest in her father's property. Sons and daughters and the father i.e., Karta are the co-parceners in the joint family and have a right to demand partition. If partition of HUF is made by Courts, the court will always award equal partition. However, the family may mutually effect partition without going to the courts and mutual partition can be unequal. Partition has to be a total partition. Partial Partition is not recognized under the Income-Tax Act. HUF cannot make any gift of HUF property to co-parceners and non-coparceners. Any gifts made by HUF are void-ab-initio. Therefore, if HUF property is gifted by HUF, then such gifts are void-ab-initio. The gifted property shall be included in the wealth of HUF and not the done. Similarly, the income from gifted properties shall be taxable in hands of HUF and not the donee. The provisions of computing income of HUF are the same for a normal assessee. 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. Period of holding of asset in hands of HUF shall be considered in hands of member. 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. 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 deduction If remuneration is: Paid under a valid and bona fide agreement. In the interest of and expedient for the business of family; and Reasonable and not excessive. Total Partition: Where all the properties of the family are divided amongst all the constituents of the family, and the family ceases to exist as HUF, it is known as total partition. Following methods or devices may prove useful in reducing the tax incidence in the case of HUF : By increasing the number of assessable units through the device of partition of the HUF; By creation of separate taxable units of HUF through will in favour of HUF or gift to HUF; Through family settlement / arrangement; By payment of remuneration to the Karta and other members of the HUF; By use of loan from HUF to the members of the HUF; Through gift by HUF to its members specially to the female members; Through other methods / devices; Branches of HUF A HUF can have several branches or sub-branches. For example, if a person has his wife and sons, they constitute A HUF. If the sons have wives and children, they also constitute smaller HUFs. If the grandsons also have wives and children, then even they will also constitute still smaller or sub-branch HUFs. As stated above, the HUF is a creature of Hindu Law and these entities are HUFs alongwith the bigger HUF of the father or the grandfather. It is immaterial whether these smaller HUFs possess any property or not. Property can be acquired by any mode; by partition of bigger HUF or by gifts from any member of the family or even by a stranger or by will with unequivocal intention of the donor or the testator that the said gift or bequest will form the joint family property of the donee or the testatee. A HUF can be composed of a large number of branch families, each of the branch itself being a HUF and so also the sub-branches of more branches. Joint Family Property : The following types of properties are generally accepted as joint family property : Ancestral property; Property allotted on partition; Property acquired with the aid of joint family property; Separate property of a co-parcener blended with or thrown into a common family hotchpot. The provisions of Sec. 64 (2) of the Income Tax Act, 1961 have superseded the principles of Hindu Law, in a case where a co-parcener impresses his property with the character of joint family property. A female member cannot blend her separate property with joint family property but she can make a gift of it to the HUF. Manager of HUF or Karta : The person who manages the affairs of the family is known as Karta. Normally the senior most male member of the family acts as Karta. However a junior male member can also act as Karta with the consent of the other member. However, in view of the present social mores and needs of the modern progressive society this decision of the Supreme Court needs to be revised / reviewed. Besides the same person can be taxed as both individual and Karta of an HUF . The individual and the HUF are two different units of taxation i.e. two different assesses. Note:- Income includes loss. For the purpose of Section 64 income includes loss. Therefore, under all the provisions discussed above, where the income arising to one person is to be clubbed in the hands of another person, in the relevant loss, the loss shall be taken into account in computing the income of such person. Karta in his individual capacity and Karta representing HUF are two distinct entities. HufF can sublet its contract to Karta in his individual capacity. Income earned by Karta in his individual capacity from such contract cannot be assessed in the hands of HUF. [ Vijay Prakash Toshniwal and others versus Commissioner of Income-Tax - 2005 (11) TMI 45 - Rajasthan High Court ] On partition of HUF the mother, i.e. wife of Karta takes a share equal to the sons and daughters. However, they can mutually decide to take unequal shares. As per section 47 of the act, no capital gain shall arise to HUF on distribution of assets on partition of HUF. A complete partition with unequal shares may be agreed between the parties is not illegal and can be final. However, an unequal partition between karta as the sole adult member and the minor children may be challenged at the instance of the minor children on attaining majority or having a partition reopened by the court. Such a reopening however, will only be permitted if the division is unjust and unfair.
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