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Assessment and Taxation of HUF

Under section 2(31) of the Income-tax act, 1961 Hindu Undivided Family (HUF) is treated as a 'person'. A Hindu Undivided Family is assessed to income tax as a separate independent unit. The meaning of HUF has not been defined by the Income Tax act, 1961. According to Hindu law, a Hindu Undivided family consists of all male persons lineally descended from a common ancestor and includes their wives and unmarried daughters and also a stranger adopted by the family.

The share of family members in income of family shall not be included in their total incomes for determination of their personal income tax liability. The maximum exemption limit is 2,50,000/- . Procedure of assessment is divided as before partition and after partition of HUF. For HUF Karta has to pay the tax.

The liability is joint and several. If a member gifts something to HUF then it's not chargeable to tax but if any outsider gifts something to HUF then it's chargeable if it's more than 50,000/-. For Partial integration of taxation, the HUF has non agriculture income exceeding the amount of exemption limit & the agricultural income should be exceed 5,000/-.

Introduction
HUF means Hindu Undivided family. A Hindu Undivided family is assessed to income tax as a separate independent unit. HUF has it's own PAN and Files income tax returns independent of its member. The amendment Hindu Succession Act, 2005 gives a daughter same status as of a son in the HUF.

Hindu Undivided Family ('HUF') is taken into account a 'person' under section 2 (31) of the Income-tax Act, 1961 (hereafter cited because the 'Law'). The HUF may be a separate entity for the aim of testing under the Act. Under Hindu law, the HUF may be a family composed of all persons descended from a typical ancestor and includes their unmarried wives and daughters. HUF can not be created under contract, it's automatically created within the Hindu Family.

Jain and Sikh families, although not governed by Hindu Law, are treated as HUF under the Law. HUF represents the Hindu Undivided Family where the income is for the entire family and not for somebody else. Since Revenue is formed within the hands of the entire family, this income can not be taxed at the hands of the family but is taxable at the hands of HUF.

HUF is a peculiar concept under the Hindu law which is not prevalent in any other religion. Under the Hindu law, all the assets of an HUF are collectively owned by all of its members. As the share of each member in HUF assets fluctuates with the death and birth of members in the family, so does his share in the property. For a HUF to be there has to be income either from business or property, if there is no HUF then there is no family income.

Section 64(2) of Income tax act, conversion of personal property to HUF property, in such a case income from such property to be clubbed with income of that person whose property it was initially.

Karta

Karta in a hindu joint family is the senior most male member of the family who is usually the head of the family and he is also known as the manager of the family when the family has a trading business. Karta being a manager of the hindu joint family has various powers and function in relation to the business of the family. the senior most male member of the family is considered as Karta when he fit physically as well as mentally.

Karta is not an agent or trustee of the family rather he is the head of the family and a guardian of the property as well as family affairs. His powers and positions should not be equated with any normal manager. The position of a Karta is acquired by birth regulated by seniority and subject to capacity to work. Karta is sui generis(of its own kind), Karta does not have relation like trustee or agent with the family.

Position of Karta

It is duty of Karta to look over the satisfaction of the members of HUF. The members of the HUF can take legal actions if there is failure in the fulfilment of the duty by the Karta. Hindu joint family is not only joint by estate or property but also in worship, food and in religious matters and is regulated by the Karta of the family.

Karta deals in every social legal and religious matters and the decision regarding these matters are binding on the members of the joint family and according to the case of Radhakrishna vs kuluram Supreme court held that every transactions will be dealt by Karta of the family is ordinarily binding o the members of the family.

Legal positions of Karta

Any legal suit shall be filed by the Karta of the family he shall take all the legal proceedings fo the security of the properties, business and family. The Karta should represent in all the legal proceedings and as well as in case of transactions where there is two or more Kartas each Karta have to join as the plaintiff in the legal suit but all the members shall join the suit.

Minor or any adult person of the family has no right to set aside the decree passed against the Karta of the family. And in every unpropitious order passed to deliver the possession of the estate to another person the order is binding to all the members of the family and In any type of consideration entered by the Karta in any type of arbitration issue should also be binding on all the members of the family.

Position of Karta regarding income

In the matter of income, expenditure and surplus the Karta or manager has the full control in these matters and also the Karta or the manager is not obliged to cut back or save the funds of the joint family as done by the trustee or agent of the joint family but the Karta should be liable to not to misappropriate the fund and should use it for bonafide purpose.

Position regarding accounts

In case where there is evidence of any type of misappropriation, fraudulent or unusual conversion by the manager of the joint family estate he is liable for the account on partition only for the assets which he has received and not for the assets which he is ought to receive.

Position regarding business

In case where the hindu joint family has any type of ancestral business the Karta or the manager has full power or right in any type of purchase sale, manufacturing goods, engaging employees, borrowing money, he has all the rights to to do acts and things to carry out the ancestral business the Karta can enter into partnership when the family itself carries out any ancestral business and the Karta has the right to mortgage or sell any property for the betterment of the business.

Position of Karta regarding debts

The Karta of a hindu undivided family has the power to take loan and provide loan, he also has the power to repay the debt incurred by the joint family and if the Karta incurs any type of debt in the course of business the members of the joint family are also bound to repay the debt.

Position regarding property

Movable property: the father of the joint family has power of making within reasonable limits gifts of ancestral moneable property without the consent of his sons for the purpose of performing indispensable acts or duty as prescribed in the texts of law.

Immovable property: the Karta or the manager of the HUF has the power to take rents, pay taxes, and bring any legal suit for the recovery of the propery
The position of Karta is a very practical position where it is seen that in a HUF which is very complex entity the power to control and administer is centralized to a senior most person called Karta who has all the powers and duties to carry out the business of the joint family.

Case laws:
  • In the case of S Rangaswamy Vs Ap Transco And Ors it was said that any debt incurred by the Karta after partition of the property the Karta will be individually liable for that debt
  • In the case of Dev Kishan Vs Ram Kishan where the property was alienated for the purpose of child marriage the court held that any property alienated for any unlawful purpose canned be termed as legal necessity.

Type Of Partitions Under Hindu Law And Tax Laws

Under Hindu law, if a partition is happening then either a full partition of HUF assets can take place or a partial partition can be done. All the assets own by huf are not disturbed under the Partial partition as regarded to all the members. A partial partition taken place when only a few of the HUF assets are distributed among its members but still huf is existing.

Partition of assets on the basis of the members of an HUF is called a partial partition. In case a partial partition, the members of an HUF are partitioned along specific parameters such as assets, liabilities and shareholding patterns. The members of an HUF are not partitioned along the lines of their domicile, which is the case with a full partition. The assets of an HUF are partitioned in such a way that each member is allocated a specified percentage of the total assets of the HUF.

There is no absolute restriction for partial partition under the income tax law but the law doesn't recognize a partial partition. The Income Tax law treats a Hindu Undivided Family as if no partition has taken place and income from the assets transferred continues to be taxed in the hands of the HUF though in reality the income might be enjoyed by the persons who have received the asset under partial partition.

This results in a situation where the income of a person who has not yet received any transfer of assets from the HUF is taxed in the hands of the HUF. This is a clear case of double taxation. In order to avoid such a situation, it would be better to ensure that the income of the person who has not yet received the transfer of assets is taxed in his/her own hands.

The Indian tax law has traditionally treated Hindu Undivided Family as a single tax unit for income tax purposes. This has meant that the income from assets that have been transferred to the members of the HUF has continued to be taxed in the hands of the HUF even though in reality the income might be enjoyed by the person who has received the asset under a partial partition.

This has led to a great deal of uncertainty and has not been fair to the recipients of the assets. The Income Tax Amendment Act, 2018, which was recently passed by the Indian Parliament, seeks to address this issue by treating the HUF as if it has been partitioned into its constituent members for income tax purposes.

Taxability Of Huf:

If funds of a HUF invested in a company or firm then fees earned by essentially because of the investment by the HUF then it's taxable to HUF but if earned because of service rendered in personal capacity then taxable to the individual.

Similarly for loans given, If loan given from HUF fund and interest earned then it's income of HUF. But if loan given from person fund and interest earned then it's individual income.

As per section 10(2) of Income tax act, When money given from HUF to any family members then such amount cannot be deducted from income and such amount not taxable For the member individually.

Stridhan:- it's a women property, means it's a individual property not HUF property. So it's not taxable as income of HUF.

Income earned before partition is the income of the HUF but income earned after partition is the income of the individual who is a partner.

In case K.S. Pillai vs CIT, we got to know that Depends of role of funding- if funding has minor role and income because of skill and enterprise of individual, then even if the capital is given interest fees, still income of business is of the business ( individual), and not the HUF.

Rate Of Tax
For taxed of an Individual, the slab rates applicable is also applicable on an HUF when it taxed.
An HUF is liable to pay AMT if the tax payable is less than 18.5% of "Adjusted Total Income" subject to prescribed condition, & this 18.5% also includes cess and surcharges.

Who Should file return of Income?
Every HUF has to file the return of income if his total income (including income of any other person in respect of which he is assess-able) without giving effect to the provision of section 10A, 10B or 10BA or Chapter VIA (i.e. deduction under section 80C to 80U), exceeds the maximum amount which is not chargeable to tax i.e. exceeds the exemption limits.

Due Date:
HUF whose accounts are to be audited is 30th September & all other cases 31st July.

Partial Integration Of Taxation:

Three conditions to be fulfilled for this:
  • The taxpayer is an individual, HUF, BOI, AOP or any artificial judicial person but not a company, firm or co-operative society.
  • The taxpayer has non agricultural income exceeding the amount of exemption limit.
  • The agricultural income of the taxpayer should exceed 5000/-

Then for calculation of the taxation, in step one the agricultural income is clubbed with the non agriculture income, and tax liability is calculated on the total amount. (As if the agricultural income is not exempted).

Then in step two the agricultural income is added to the first slab of income which is charged at nil rate and the tax liability shall be calculated.

Then income tax liability is difference between step one and step two. And also rebate and surcharge to be calculated then final tax liability comes. Written By: Sidhartha Mohapatra - KIIT Law School, Odisha

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