Hindu Undivided Family & Hindu Joint Family property in view of the Hindu Succession Act, 1956
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This Blog is written by Harsh Sonbhadra from Vivekananda Institute of Professional Studies (VIPS), Delhi. Edited by Saumya Tripathi.
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INTRODUCTION
The expression “Hindu undivided family” (HUF) is not defined under the Income Tax Act, 1961 or any other statute. When we dissect – following are found to be necessary:
- A Hindu, Jain, Sikh and Buddhist is considered Hindu but not Muslim or Christian;
- There should be one family i.e. group of individuals – more than one and
- They should be undivided i.e. living jointly and having equality between them.
All three essential items are cumulative. It is a man who is normally a descendant of a common ancestor and includes his wives and unmarried daughters, living together, combined in food, property, etc. The daughter, upon her marriage, ceases to be a member of her father’s HUF and becomes a member of her husband’s HUF. However, after the Hindu Succession Amendment Act, 2005, the daughter married or unmarried, is a coparcener [1] like a son.
The concept of joint family under Hindu law as well as the HUF in the Income Tax Act, 1961 is broadly the same. The HUF is purely a creature of law and cannot be made by an act of the parties (except in the case of adoption and reunion). A HUF is a fluctuating body, its size increases with the birth of a member in the family and decreases upon the death of a member of the family. The female joins or leaves a HUF on marriage. If the family is the nucleus, then under the Income Tax Act, there is no need to have more than one male member to make a Hindu undivided family as a taxable entity. In the Income Tax Act the expression “Hindu undivided family” is used in the sense in which the Hindu joint family is understood under the personal law of the Hindus. Under the Hindu system, a joint family can consist of a single male member and widows of deceased male members, and the Income Tax Act does not imply a Hindu undivided family as an assessable institution that includes at least two male members.
A joint Hindu family is not a corporation. It has no separate legal entity and is distinct from those who are its members. It is not a juristic person either. It is a unit and in all cases it is represented by the Karta or head. No outsider within its fold, except by adoption, may be admitted by agreement or otherwise. It confers a status on its members which can be acquired only by birth in the family or by marriage to a male member. [2]
Comparison between Hindu Undivided Family (HUF) property and Hindu Joint Family (HJF) property
1) One of the basic presumptions under Hindu Law is that every Hindu Family is presumed to be a Joint Hindu Family until the contrary is proved but there is no such assumption for HUF in taxation law rather is the main point of contention.
2) In HJF there is presumption of jointness but there is no presumption that it owns joint family property whereas the concept of HUF under taxation law is linked only with the property. The concept of HUF is meaningless without property.
3) In HJF a son in the womb of his mother in many aspects is treated as equal to a son in existence. However, under HUF, for the purpose of taxation, such child is not taken in cognizance until he is actually born.
4) The very purpose for which the expressions HJF & HUF is taken by these two legal branches viz. the revenue authorities and Hindu law is different. The fact is that for the purpose of tax a person will be granted/ allowed a larger exemption if he is taxed as the Karta [3] of HJF than if he is taxed as an individual.
5) HUF has a narrow object for taxation law only whereas the concept of HJF under Hindu law is the starting point to a fully developed separate branch of law altogether. HJF opens the understanding of Hindu ownership and devolution of ancestral property, the rights and obligations of its various members, survivorship, partition and ascertainment of share in the property.
What is a HUF property?
Property owned by HUF is HUF property. A HUF can acquire assets from various sources viz., on partition, by way of gift, through will, accretion to the existing properties, blending, by joint labour, etc. The concept of paternal property is quite thin, as there is now a clear demarcation between the personal property and HUF property of a Hindu male. The self-acquired property of a Hindu male will go to his legal heirs according to the rules of succession and the legal heirs will inherit the property as personal property. Hence also the share of the deceased co-parcener in the HUF, which otherwise devolves by survivorship to other co-parcener goes by succession to legal heirs, which they hold as separate property, if such co-parcener has left certain class of female relatives or a male relative who claims through such female relative, specified in Class I of the first schedule to Hindu Succession Act, 1956.
Hindu Undivided Family: The Tax Benefits of Togetherness
Income from HUF (Hindu Undivided Family) is one way in which someone who has inherited some income can reduce his taxes. Members of a HUF are called co-parceners. According to Section 2 (31) of the Income Tax Act, a Joint Hindu Family is treated as a separate entity and its income taxed separately from that of an individual. The family is the assessee, and not the individual co-parceners.
A HUF is a creature of personal law and cannot be created by acts of parties or contracts of any kind. It is governed by the uncodified customs and usages law. A HUF includes all persons lineally descended from a common ancestor, including their wives and unmarried daughters.
Any Hindu who has a son can create a HUF. “Actually even a husband and wife can create a Hindu Joint Family, but this gets converted into a HUF when a son is born. A HUF is legally a sounder proposition,” says lawyer Rajesh Mahna. Daughters born in the family are members until marriage and married women in the family are equally members of an undivided family.. “As per the doctrine of ‘sapindaship'[4], on the day of her marriage, a girl leaves the father’s family and creates a join Hindu family with her husband’s family,” adds Mahna. [5]
Generally, the father of the family or the senior-most male member of the family manages the property and is called the Karta. The tradition of a Hindu undivided family is also mentioned in our smritis. The age-old Indian tradition of a male living under the same roof with his wife and children is nothing but HUF.
HUFs themselves can buy and sell assets, earn income and enter into contracts with others. So an effective and widely practiced tax planning practice is to legally transfer certain sources of income to HUFs and small HUFs of sons. The basic logic is to create more assessees so as to divide the tax burden.
A HUF can be created by the receipt of a gift. Any person who is not a co-parcener can make a gift to HUF. For example, a father may gift his self-acquired property to his son’s HUF provided there is a clear and unequal declaration that the gift is being made for the benefit of his family and not just for the son. Gifts can also be accepted from grandparents, uncles, brothers-in-law, other relatives and friends.
These gifts can also be through someone’s wish. The HUF is not required to exist at the time of the execution of the will, but the HUF can be created by the will.
A specified HUF is one in which any member has taxable income from any other source as well. A non-specified one is where no member has taxable income from any other source. The tax rate charged for a specified HUF was higher than for an unspecified HUF. However, from the assessment year (AY) 1997–98, the tax rates have been uniformized and now levied for private individuals.
HUFs are liable to pay tax on incomes exceeding Rs.50, 000 at the rates applicable to individuals. HUF funds can be invested in any source of income such as shares, partnerships (through Karta), real estate and the like. Deductions from the gross total income of HUF are generally available in the case of an individual.
A person can be a member of more than one HUF, from which his income can be estimated under different assessments.
The only disadvantage in creating a HUF is that the HUF property cannot be bequeathed and vests on its undivided family – all members of the family jointly own until it is divided between them. “A person’s personal property (which he himself has created) devolves on his legal heirs upon his death, while the HUF property belongs to the HUF and no one can refrain from giving a share of the property and income to any cousin or relative who is entitled to it according to the HUF relationship,”says chartered accountant VK Lala.
Judgements
V.D. Dhanwatey v. CIT [6]
It was held that the general principle of Hindu law is that the property acquired by the karta or the coparcener by the aid or assistance of joint family property is affected by the character of joint family property. To put it differently, it is an essential feature of self-acquired property that it should be obtained without the help or assistance of joint family property. The test of self-acquisition by the karta or coparcener is that it should be without detriment to ancestral property. It is therefore clear that before the acquisition can be claimed to be a separate property, it must be shown that it was created without any help or assistance from ancestral or joint family property.
Surjit Lal Chhabda vs. Commissioner of Income Tax [7]
In this case the father had an undivided family during his lifetime and the undivided family did not end with the father’s death. The same undivided family continued even after the father’s death, with the son, his mother and his wife as its members. The effect of the father’s death was only that the son became the manager of the joint family instead of the father. The income from paternal property was the income of the joint family during the father’s lifetime and after his death it remained a self-joint family income. The only change that came was that a link in the chain was killed. But the death of a member of the joint Hindu family does not normally disrupt the joint family.
The Bombay High Court therefore held that the income of paternal property should be assessed in the position of a son as the manager of an undivided family and not in his personal capacity. When Lakshminarayan’s case appeared before the Privy Council in appeal, it regarded itself as bound by the interpretation put in Kalyanji’s case on the expression “Hindu undivided family” as employed in section 55 of the Indian Income-tax Act and observed that the facts of the case were not materially different from the facts of Kalyanji’s case. The Privy Council responded to the question by holding that “the income received by right of survivorship by the sole surviving male member of a Hindu undivided family can be taxed in the hands of such male member as his own individual income for the purposes of assessment to super-tax under Sec. 55 of the Indian Income Tax Act, 1922.”
Narendera Nath v. Commissioner of Wealth Tax [8]
The Supreme Court held that the expression ‘Hindu undivided family’ in the Wealth Tax Act is used in the sense that a Hindu joint family is understood in the personal law of Hindus and a joint family may include a male member and his wife and daughters and there is nothing in the scheme of the Wealth Tax Act to suggest that a Hindu undivided family as assessable unit must include of a least two male members.
Commissioner of Income Tax v. Gomedalli Lakshminarayan [9]
In this case there was a joint family consisting of the father, his wife, his son and his daughter, the son being the present assessee. On the death of the father, the question arises as to whether the assessee is to be assessed as an individual or as a member of a joint Hindu family, it is held that the son’s right over the property is not absolute as two females in the family has right of maintenance in the property, therefore the income of the assessee should be taxed as the income of a Hindu undivided family.
Gowli Buddanna v. Commissioner of Income-Tax, Mysore [10]
In this case a family consisting of the father, his wife, his two unmarried daughters and his adopted son. After the father’s death, the question arises whether the only male Hindu joint family surviving coparcener, his widowed mother and sisters constitute a Hindu undivided family within the meaning of the Income Tax Act?
It was held by the court that the property of a joint family does not cease to belong to the family merely because the family is represented by a single coparcener who possesses rights which an owner of property may possess. The property which earned income originally belonged to a Hindu undivided family.
Conclusion
The institution of a joint Hindu family is very ancient. It has evolved from an ancient patriarchal family that can be described as the earliest unit of human society. In simple terms, a joint Hindu family is linked together by kinship and marriage ties and descended from a common ancestor. This includes children, children’s children down the line, spouse. A united Hindu family is usually united in worship / kitchen / business. Even daughters-in-law / widowed daughters who have returned to their parents are part of a Hindu joint family. A joint family can encompass countless generations.
The expression “Hindu undivided family” in the Income Tax Act is used in the sense in which a Hindu joint family is understood under the personal law of the Hindus. When we dissect – these are found to be necessary (1) A Hindu, Jain, Sikh and Buddhist is considered Hindu but not Muslim or Christian; (ii) There should be one family i.e. group of individuals – more than one and (iii) They should be undivided i.e. living jointly and having equality between them. It places a position on its members which can only be attained by birth in the family or by marrying a male member.
The existence of joint assets is not a prerequisite for the formation of a HUF. The concept of HUF is not related to the possession of any property by the family. A HUF is a condition that is not understood in the context of the existence of a joint asset as a necessary requirement. A family that does not have any joint property may still have the character of a Hindu joint family. This connectedness is understood in terms of faith and food. The reason is that a Hindu is born as a coparcener of a joint family. In terms of the situation, it would be as a consequence that it is not necessary that a HUF should have a relationship with the ancestral property at any given time. The main requirement is the expression of connectedness and the very basic premise that a Hindu family is born as a coparcener.
The Income Tax Act, 1961 considers a HUF a ‘person’. As a result, a HUF will be an entity that is assessed separately for tax, separate from its karta and other coparcener and members. For purposes of assessment, a HUF is required to have its own separate Permanent Account Number. Unless otherwise provided in the Income Tax Act, 1961, the income of a HUF is assessed in the hands of the HUF alone, and not in the hands of any of its coparcener or members.
A HUF is capable of running its own business. A HUF may also choose to deploy its initial corpus as a gift that it can receive for the business it can run. The profit generated from such business will be HUF’s separate income. A HUF can also hold capital assets. Capital gains arising from the sale / disposal of such capital assets will be separately assessed and taxed in the hands of HUF. A HUF is also inherently capable of earning rental income. Individuals often use HUF for planning avenue and succession planning.
References
[1] A person who shares equally with others in the inheritance of an undivided estate or in the rights to it.
[2] Ram Kumar v. Commissioner, Income Tax, 1953 All. 150.
[3] Manager of joint family and joint family properties.
[4] Sapinda is a term used in context of cousin marriages in Hinduism. The subject is to be counted as first generation, and the common ancestor defining sapinda limit is to be within sapinda limit.
[6] AIR 1968 SC 683.
[7] 1976 AIR 109, 1976 SCR (2) 164.
[8] 1970 AIR 14, 1969 SCR (3) 882.
[9] (1935) 37 BOMLR 692, 159 Ind Cas 424.
[10] AIR 1966 SC 1523.