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Inheritance, Family Settlement & HUF TAX ISSUES

Monday, 27 th AUGUST 2012 SRISAILAM. Inheritance, Family Settlement & HUF TAX ISSUES. Organized by CPE Committee of ICAI jointly with SIRC of ICAI. Agenda. Introduction Coparceners and Members Creation of HUF Business Income Assessment to Income Tax Wealth Tax Gifts – to and by

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Inheritance, Family Settlement & HUF TAX ISSUES

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  1. Monday, 27th AUGUST 2012 SRISAILAM Inheritance, Family Settlement & HUFTAX ISSUES Organized by CPE Committee of ICAI jointly with SIRC of ICAI

  2. Agenda • Introduction • Coparceners and Members • Creation of HUF • Business Income • Assessment to Income Tax • Wealth Tax • Gifts – to and by • Tax Planning

  3. Agenda 1: Introduction

  4. 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.

  5. Family in Hindu Society 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 The carrying on of economic activity – agricultural, commercial, industrial – and ownership of property by the family as a distinct and separate unit.

  6. 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.

  7. 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.

  8. HUF & Direct Taxes

  9. HUF & Direct Taxes Under section 4 of the Income Tax Act, 1961, income-tax 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’.

  10. HUF – Legal Definition - ?!#%* HUF – a legal entity under direct tax laws No separate definitionof 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)]

  11. 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.

  12. Schools of Hindu Law & Sources of Hindu Law

  13. 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”.

  14. 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.

  15. 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.

  16. 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.

  17. The Hindu Succession (Amendment) Act, 2005 9-9-2005

  18. 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)

  19. 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)

  20. 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.

  21. 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.

  22. 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

  23. 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)

  24. 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)

  25. 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”

  26. 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.

  27. 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

  28. 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.

  29. 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

  30. 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)]

  31. Agenda 3: Creation of HUF “HUF is not created, only its kitty is filled” (Only Assets are provided to it by gift or otherwise)

  32. 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. …

  33. 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?

  34. 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.

  35. 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.

  36. 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)

  37. 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.

  38. 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.

  39. 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.

  40. 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.

  41. 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.

  42. 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.

  43. 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 self-earned 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.

  44. Agenda 4: Business and HUF “HUF can carryon business as proprietor”

  45. 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)].

  46. 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)]

  47. 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. [Raj Kumar Sing Hukam Chandji vs. CIT 78 ITR 33 (SC)]

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