Key aspects of Hindu Undivided Family Law

The concept of Hindu Undivided Family (HUF) is unique to Indian tax law and the general subject is quite complicated and involved. Last year around this time we had run a three part series on HUF taxation. In response to that, over time, we had received a few queries from readers seeking clarifications. As the resolutions to these queries would be of general interest to readers, we have consolidated and reproduced the same hereunder. Gifts to Members Gift of coparcenary property by a Karta of an HUF to coparceners or to outsiders is not allowed. Such a gift was not liable to gift tax since it is no gift within the meaning of Sec. 2(xii) [CGT v Tej Nath 86ITR96]. Even after abolition of gift tax, this case law has significance since the income arising from the gifted corpus is treated as income of the HUF. Some issues based on this judgments and others delivered by the leading courts of the country, are1. Gifts given by the Karta to rank outsiders are void ab initio. However, reasonable gifts made to members of the family are not void. What is reasonable and unreasonable is a question of fact to be decided on the merits of each individual case. [V. Janakamma v CGT (1967) 66ITR255 (AP)]

2. Both under the Hindu Law and the Hindu Adoptions and Maintenance Act, the father is under a legal as well as a moral obligation to give some property to his daughter on the occasion of her marriage. Thus, when the karta, in the role of the father, settles certain HUF properties on unmarried daughters of the family, it was held in CGT v Bandi Subba Rao’s (1987), 167ITR66 (AP) that no gifting is involved. This principle extends even to a married daughter so long as the daughter is unable to provide for her maintenance herself.

3. In B. K. Aditya Vikram Birla’s case [137ITR72 (Cal)], it was held that expenses incurred by the HUF at the time of the marriage of a daughter of the family would not fall within the ambit of the term ‘gift’ as defined in Sec. 2(xii).

4. A distinction should be made between a gift and a family arrangement. A family arrangement is essentially an agreement entered into by a member of the family, including members of HUF, who wish to prevent and avoid possible disputes and maintain peace and goodwill amongst the members of the family. The existence of an agreement is vital in order to constitute a family arrangement.

5. When a coparcener takes a lesser share on partition than what he is legally entitled to, it cannot be treated as a gift since the shares of the members of an HUF are indeterminate during the existence of the HUF [CGTvNS Getti Chettiar, (1971) 82ITR599 (SC)].

The ITO may assess the income earned on the gifted corpus in the hands of the HUF in case he finds that the gifts are unreasonable. Gifting v Impressing There is a subtle difference between blending and gifting. In the case of blending, the Karta or coparcener is deemed to have made a gift of so much of the converted property as the members of the family (other than the donor himself) would be entitled to if the partition of the converted property had taken place immediately after such conversion.

Only a coparcener, whether male or female, has the right of blending his/her property with HUF. They can also give a gift to HUF as per the amendment by the recent FA12. Subsequently, the provision of clubbing the income from the gifted corpus comes into play and here the difference will have its impact. Gifting v Spending The Karta of an HUF can utilise the income as well as the corpus of the HUF in any manner he desires, as long as such actions are not detrimental to the interest of the family. HUF can give a gift to its members within a reasonable limit. However, a Karta can freely cater to the expenses of the members. Do you read this clearly? Investment in Member’s Name The Karta of a HUF is authorised to make investments of funds of the HUF. While the MF schemes permit direct HUF investments, many other avenues, particularly shares of Indian companies do not accept investments from HUF. We strongly protest. When HUF is recognised as a legal entity, can it not invest in shares?

All that we can say is that the law is an ass. However, there is a way to get around this difficulty. You may purchase shares, or any other financial assets in the name of Karta or even one of your HUF member, female or male, by applying funds of HUF. As long as the source of application of funds can be traced to HUF and as long as the incomes emanating from such assets are enjoyed by the HUF and not appropriated by the Karta or the member for personal use, the Department should accept the income as that of HUF. The same principle is applicable to PPF. In the case of ELSS, HUF can claim deduction in respect of contributions made by it for itself but not for one of its members. Creation of HUF An HUF always exists. It is the hotchpotch that needs to be filled up with some assets. There are only three ways of achieving this objective : 1. Partition of a larger HUF. 2. Inheritance by a Hindu on succession of property from a male ancestor. 3. A Hindu impressing his self-acquired property with the character of a joint family property. Females do not have a right to stamp their self-acquired property as a joint family property. 4. Receive a gift or bequest from an outsider clearly indicating that the donee should hold the gifted property not as an absolute owner but as his HUF.

There was yet another way. As per Hindu law, HUF partition can be partial or total. Where only certain members separate from the family or only certain assets of HUF are distributed, it is considered as a partial partition. A partial partition was very useful tool in view of the fact that it can give rise to several smaller HUFs. If such partitions were allowed to take place, it was possible that soon we may have more HUFs than Hindus. To restrict unabated use of this device, FA81 derecognised partial partitions retrospectively w.e.f. 31.12.78 by introducing Sec. 171(9) in ITA and Sec. 20(A) in WTA. Unless the partition takes place by metes and bounds, the income earned by the recipients, as individuals will be deemed to be that of the parent HUF.

However, once the partition takes place by metes and bounds, some of the members of the erstwhile HUF can join hands and form a smaller HUF. An individual can be a member of more than one such small HUFs.

The authors may be contacted at wonderlandconsultants@yahoo.com