Mumbai, July 18, 2016
What is an HUF?
In the Hindu society, there is a presumption that Hindu families are living in a state of union unless the contrary is established. Members of Hindu families are ordinarily joint and undivided in estate, food and worship. The concept of a Hindu Undivided Family (HUF) as understood today, is an integral feature of the Hindu society and is one that has evolved on the basis of customs.
Coparceners and Members
A coparcener is a person who acquires interest in the joint family property by birth. The essential difference between a ‘coparcener’ and a ‘member’ of an HUF is that a coparcener canenforce partition of the HUF,while a member cannot.
Prior to the year 2005, an HUF was understood as a family with a common ancestor and all lineal male descendants together with their wives and unmarried daughters. The 2005 Amendment to the Hindu Succession Act, 1956 however brought about a vital change to the concept of an HUF.
Prior to the Amendment of 2005, only lineal male descendants were regarded as coparceners whereas daughters merely attained the status of members on birth and not coparceners.The Amendment of 2005 however has conferredequal rights upon daughters.Daughters, just as sons, become coparceners of their father’s HUFson birth,with the result that they haveequal rights as sons in the properties of the HUF.
Woman as a Karta
With daughters being granted coparcenary rights, an important question looming was whether a daughter can be a Karta of an HUF. Not being a coparcener, a woman could not be a Karta of an HUF prior to 2005. However, now that a woman is a coparcener in an HUF, there remains no reason for her not to assume the position of a Karta.
In a recent decision, the Delhi High Court[1] has provided a clear and unambiguous interpretation to the object and reasons of the Amendment of 2005 by extending the applicability of the Amendment to not only Hindu women being recognised as coparceners on equal footing with a male Hindus, but also recognising the eldest coparcenerof the HUF (even if a woman) as the Karta of thatHUF and its properties.
HUF property
Existence of joint property is not a prerequisite for constituting an HUF. The concept of HUF is not related to possession of any property by the family. AnHUF is a situation which is understood not with reference to the existence of a joint estate as an essential requisite. A family which does not own any joint property may still have the character of a Hindu joint family. This jointness is understood in terms of faith and food. The reason is that a Hindu is born as a coparcener of the joint family. In the context of the situation, it would follow as a consequence that it is not necessary that at any point of time an HUF must have connection with ancestral property. The main requirement is the manifestation of jointness and the very basic foundation that a Hindu is born as a coparcener of the family.
A coparcener in an HUF may have separate properties, which aredistinct from the properties of the HUF. Such separate propertiesmay be the coparcener’s self-acquired propertiesor may have been acquired by such a coparcener through gifts or under a bequests. A coparcener may however choose to integrate such property into the joint family property by voluntarily pooling it in the common stock of the HUF, with the intention of abandoning his/her separate claim in such property. However, to establish such abandonment, the coparcener pooling such property must express a clear intention to waive separate rights over such property.
HUF as atax planning vehicle
The Income Tax Act, 1961 regards an HUF as a ‘person’. Consequently, an HUF would be an entity separately assessed to tax, separate from its Karta and other coparceners and members. For the purposes of tax assessment, an HUF is required to have its own separate Permanent Account Number.
Unless otherwise provided in the Income Tax Act, 1961, income of an HUF is assessed in the hands of the HUF alone and not in the hands of any of its coparceners or members.
An HUF is capable of running its own business. An HUF may choose to deploy its initial corpus as also gifts that it may receive for the business that it may run. Profits generated from such business will be the separate income of the HUF.
An HUF can also hold capital assets. Capital gains that may be generated from the sale / disposition of such capital assets would be separately assessed and taxed in the hands of the HUF. An HUF is also naturally capable of earning rental income.
Individuals often use an HUF as a tax planning avenue and for succession planning.
Partition of an HUF
Severance of the joint and undivided status of an HUF can be brought about by a partition. Such a Partition can be initiated by one or all of the coparceners together. Partition of an HUF which is joint in food, worship and estate can be effected both as regards persons and properties. Such a partition could be either complete or partial.
A complete partition of an HUF would involve a partition of all of the constituents and of all of itsproperties. A partial partition, on the other hand, would entail either (a) only some constituents separating from the family and the others remaining in the common hotchpotch or (b) only some of the properties being partitioned and others continuing to remain joint.
Partition results in shares of (each or some, as the case may be) the coparceners being ascertained. Actual division of property by metes and bounds is not a necessary facet of such a partition.Division of properties by metes and bounds would involve allotment of separate properties towards ascertained shares of family members.After partition but till such time as the joint family property is divided by metes and bounds, the members of the erstwhile joint family will hold the properties as tenants-in-common. As a result, on the death of a coparcener, his/her share in the joint family property will devolve by testamentary / intestate succession, as the case may be, and not by survivorship.
Courts have observed that partition is really a process in which and by which a joint enjoyment of the property is transformed into enjoyment in severalty. Each of the sharers has an existing title and therefore no conveyance is involved in the process.
A partition does not confer title in property in favour of a coparcener. It only enables a coparcener to obtain what is his own in a definite and specific form for purposes of disposition, independent of wishes of the former co-sharers. It is not necessary that partition should be effected by a registered partition deed. Even a family arrangement is enough to effectuate a partition among coparceners and to confer right to a separate share in property and enjoyment thereof.
Complications associated with an HUF
In the zeal of constituting an HUF as a tax planning vehicle, individuals often miss out on the intricacies. Disposition of properties comprised in an HUF, in which all coparceners have equal rights, is often difficult and is possible only with the consent of each of the coparceners. The Karta of an HUF is however empowered to dispose properties of the HUFin case of legal necessities or for the benefit of the estate.
HUF is essentially a creature of customs followed by the Hindu society. Laws related to constitution, operation and management of HUFs are not codified. References for the understanding of the concept and incidences of an HUF are drawn from historical customs and judgments of various courts, which are to be read along with the provisions of the Hindu Succession Act, 1956 and the Income Tax Act, 1961. Constituting an HUF and use of HUFs as tax planning vehicles are therefore areas that need to be closely supervised by experts, unless one wants to diminish his/her own interest in self-owned property or annex additional conditions related to disposition of the same.
Mrs Sujata Sharma vShri Manu Gupta & Ors [CS (OS) 2011/2006]
Corporate Comm India(CCI Newswire)
