TAX PLANNING THROUGH HUF

	HINDU UNDIVIDED FAMILY (HUF), AS A TAXABLE ENTITY, CAN BE USED AS A TOOL IN TAX PLANNING :
	In spite of the efforts of the legislature to render this tool as ineffective as possible by the spate of the amendments in the past, it has not lost all its efficacy. Indeed it cannot, for as long as Hindu society is governed by Hindu Law, a Hindu would have the right to own separate property as an individual, as a member of a bigger HUF of his father and the smaller HUF of his own. He can, have properties over which he has substantial control, distributed over the said taxable entities .The properties of the said three entities and consequently their income can further be distributed in a manner most beneficial to him by partition of the families.
	As per section 2(31) of the Income Tax Act, 1961 the definition of a person includes a HUF and, therefore, HUF is an assessee within the meaning of section 2(7). Section 10(2) further provides that no liability to income tax shall be attracted or imposed on any member of a HUF in respect of any sum received by him/her as a member of the family wherever such sum has been paid out of the income of the family.   This is, however, subject to the clubbing provision of section 64(2) under which the income of the family is sought to be clubbed with the total income of an individual in specified cases. The Supreme Court in I.T.O. v. Bachulal Kapoor 60 ITR 74(SC) held that “So long as the HUF exists , the individuals thereof cannot separately be assessed in respect of its income ....thus HUF is a separate and a distinct tax entity and income arising to HUF can be assessed only in its own hands and cannot be assessed in the hands of any member or coparcener”.
	PAYMAENT RECIEVED BY MEMBERS OF HUF IS EXEMPT :
	As per section 10(2) of the Income Tax Act any sum received by an individual as a member of HUF is exempt, where such sum has been paid out of the income of the family or income of the impartible estate belonging to the family.Thus, if an individual receives in his capacity as member of HUF a sum out of the income of the family or of holder of impartible estate, such a sum would be exempt from tax even if the HUF or impartible estate has not paid tax on the income out of which the sum has been paid- C.I.T. v. Maharaja Visweswar Singh 3 ITR 216 and in C.I.T. v. Musammat Bhagwati 15 ITR 409 (PC).
	Under section 18 and 20 of the Hindu Adoptions and Maintenance Act, 1956 any allowance secured by a will , decree or contract deed will be exempt from tax. The Allahabad High Court in Maharaj Kumar of Vizianagaram 2 ITR 186 held that if the assessee is entitled to be maintained by his father , the allowance will be as a member of the HUF. The same view was endorsed in C.I.T. v. Gyan Manjuri Kuari 13 ITR 55 (Pat). However , the allowance must be paid out of the income of the HUF. If the regular payment received is not as a member of HUF or out of income of the HUF, then the exemption under section 10(2) cannot be claimed as decided in Raja Raghavendra Singh v. State of Punjab & Ors. 102 ITR 40 (P & H).
	CREATION OF HUF :
	For considering tax planning through a HUF, the emphasis is to be given to creation of a family nucleus or creation of a smaller HUF while the bigger HUF is in existence.This can be done by -
	1.	Creation of family nucleus through gifts,
	2.	Creation through Will,
	3.	Through inheritance by succession,
	4.	Family arrangements or family settlements,
	5.	Creation through joint labours of family coparceners,
	6.	Partial partition,
	7.	Total partition,
	8.	Vesting of individual or self-acquired property in a family hotch-pot.
	BLENDING SELF ACQUIRED PROPERTY WITH HUF CHARACTER:
	So far the creation of HUF by impressing one’s self acquired property with the character of HUF property is concerned , there was no problem regarding such transfers made upto 31.12.1969. Though according to Hindu law there is no problem in creating the HUF in such manner even after 31.12.1969, the only problem which needs to be considered is the clubbing provision of section 64(.2) of the Income Tax Act and corresponding amendments in Gift Tax Act and Wealth Tax Act. In certain cases it may be still useful to create HUF in this manner, even after clubbing provisions.
	Section 64(2) of the I.T. Act, reads as under :-
	“Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family otherwise than for adequate consideration . the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971:-
	a)	the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;
	b)	the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family;
	c)	where the converted property has been the subject matter of a partition .whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the provisions of sub-section.1) shall, so far as may be, apply accordingly.
	Provided that the income referred to in clause .b) or clause .c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse of the individual."
	It has also been explained that for the purpose of above section, “income” includes loss and “property” includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property.
	Due to section 64(2) the income generated by the blended or impressed assets has to be clubbed in the individual income of the member who has blended his asset with the HUF character. But the interesting point to be noticed is that such income remains with the HUF and may be invested by the HUF. Any income generated from this income will be assessed in the hands of HUF. That means clubbing provision will attract only in respect of income generated from the amount originally blended by the individual with HUF character. For example, if Mr. X transfers or blends his individual cash amount of Rs.30,000 with the HUF character and the HUF invests this money in fixed deposit with bank, then assuming the interest rate at 10% p.a., a sum of Rs.3,000 being the income on the amount blended by Mr. X will be clubbed in his individual income. However, if the amount of interest of Rs.3,000 is invested further and the HUF gets an interest of Rs.300 on the same, it will be assessed as income of HUF.
	It may also be pointed out that a female member is not eligible to blend her personal property into HUF but she can make a gift to HUF -Pushpa Devi v. C.I.T. 109 ITR 730 (SC).
	Gift tax is also attracted as per section 4.2) of the Gift Tax Act in respect of the amounts blended to the extent of the share of coparceners other than the transferor himself. For example, if a father has four sons and blends his personal property valued at Rs.50,000 with the HUF character, making a declaration to that effect. In such a case four fifth of the blended amount i.e. Rs.40,000 will be treated as gift to the HUF. Therefore, while deciding the amount to be blended, the gift tax exemption limit should be kept in mind.
	However gift made on or after 1.10.98 are not subject to gift tax as gift tax has been abolished w.e.f. 1.10.98.
	For the purpose of tax planning,in certain cases it may be useful for a member of the HUF to blend or transfer his own shares of any company with the HUF character. If, later on, bonus shares are issued in respect of the shares so blended with the HUF property, such bonus shares will be treated as the property of the HUF. Consequently, the dividend in respect of original shares will only be clubbed with the income of the transferor member of HUF and the dividend on bonus shares will be assessed in the hands of HUF.In this regard one may rely on the decision of Madras High Court in the case of CIT v. T. Saraswathi Achi 133 ITR 315. It becomes more useful as the dividends from Indian Companies referred to in section115-O, is now totally exempt under section 10(33) w.e.f. 1.6.1997. So consideration of dividend in the hands of individual will have no tax impact.
	GIFTS FOR HUF FROM OTHERS:
	The Supreme Court has held in the case of Pushpa Devi v. CIT 109 ITR 730 (SC) that the HUF can accept gift from a person who is not a coparcener.The decision of the Madras High Court in the case of Satyendra Kumar v. CIT 140 ITR 840 (Mad.) is also relevant on this issue. In this case the donor provided gifts to the donee with the clear intention of benefitting the family. The donee kept the gifted amount as nucleus of the HUF and there was no evidence that the donee intended at any point of time to hold the said property as his individual property. The Court held that once the intention of the donor to donate the funds for the joint family was conceded,the presence of the basic nucleus of the joint family was established.
	In C.N.Arunachala Mudaliar v. C.A. Muruganatha Mudaliar [1954] SCR 243,it was held that the Court would have to collect the intention of the donor from the language of the document taken along with surrounding circumstances in accordance with the well known canons of construction.
	Therefore, while making any gift to the HUF the rulings of the Courts should be kept in mind .The point that the gift is being made to the HUF and not to the Karta in his individual capacity should be clearly indicated by the donor by way of an affidavit. To avoid various complications it is advisable that gifts to HUF should be preferred from the uncles, brother-in-law, grand parents and other relatives who are not the members of the HUF and in whose case the transfer by way of gift does not attract the clubbing provisions of section 64.
	INTERESTING POINTS ON CREATION OF HUF THROUGH WILL:
	The creation of HUF through Will has been upheld by various High Courts following the Supreme Court decision in the case of Surjit Lal Chhabda v. C.I.T. [1975] 101 ITR 776  (SC)
	A Will can be made in favour of a HUF,which is not in existence at the time of the execution of the Will or which does not have HUF nucleus, as decided by Punjab & Haryana High Court in the case of C.I.T. v. Ghanshamdass Mukim 118 ITR 930(P&H). In the said case a Will was left by the mother of Ghanshamdass providing therein for passing of certain properties to the HUF of his son who had only wife and a daughter at that time. The Will in favour of HUF was held valid and the contention of revenue that no HUF could be created by Will was rejected. It was observed that joint family is the normal condition of Hindu society and there is no restriction to bequeathing property to a joint Hindu family, therefore the Court held that the pre-existence of HUF was not necessary for bequeathing property to HUF through a Will.
	JOINT LABOUR AS A MEANS FOR CREATION OF HUF:
	According to Hindu law a property is treated as joint family property if it has been acquired in business by persons constituting a joint Hindu family by the joint labour unless the acquirer’s intention is to hold the property as co-owners individually. It may be further noted that ancestral nucleus is not necessary for creation of HUF by joint labour of coparceners. However, the coparceners should be engaged in carrying on work together and they should belong to the same line of ancestors. For the purpose of Income Tax it would be advisable that such coparceners should declare the intention in writing stating that the income earned through their joint labour will be the income of the joint family and such income or any assets acquired out of it will neither belong to them nor their legal heirs or successors in individual capacity.
	The income of joint family through joint labour is not subjected to clubbing provisions of section 64(2) of the Income Tax Act.
	PARTITION OR PARTIAL PARTITION OF HUF :
	A HUF can be partitioned and as such smaller HUFs can be created,each enjoying the benefit of threshold limit under the Income Tax Act as well as Wealth Tax Act.It may however be noted that the partial partition is no more useful after 31.12.78 due to insertion ofsection 171(9) because even in case of partial partition taking place, such family shall continue to be liable to be assessed under the Income Tax Act as if no such partial partition had taken place.
	FAMILY CONSISTING OF FEMALE :
	1.	Continuation of HUF on death of Karta, leaving no male coparcencer. It has been held by the Supreme Court in the case of CIT v. RM.AR.AR. Veerappa Chettiar 76 ITR 467 (SC) that on death of Karta, the property would continue to be held by the three widows as members of HUF, even if there is no surviving male member. The Court observed that “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 of the members of the family and it is not divided among them, the joint family continues.”
	2.	It was held by Allahabad High Court in CIT v. Sarwan Kumar 13 ITR 361(All.) that there can be a HUF consisting of female members only. They held that females are and can be component parts of an undivided Hindu family “. The Court observed "That being so, there can be, in our judgment, an undivided Hindu family consisting of females only. The coparcenary, no doubt comes to an end with the disappearance of the last male member, but as already pointed out, the existence of coparcenary is not essential for the existence of a joint Hindu family”.
	3.	Similarly in the case of Savitri Devi v. CIT 104 ITR 385 (Pat.) it was held that the widow and her unmarried daughter constituted a HUF even when the widow had not adopted a son.
	4.	The Nagpur High Court in Mst. Pannabai v. CIT 11 ITR 154 (Nag.) was concerned with the problem where a widow was left as the only surviving member of HUF after Karta’s death. She adopted a son who later died and the family then was left with only the widow and the son’s widow. It was held that the two ladies could not constitute a HUF on son’s death. It was held that the son’s widow was the sole owner of the property which devolved on her husband’s death notwithstanding the fact that the ownership was subject to the right of maintenance of her mother-in-law.
	HUF PROPERTY RECEIVED AND HELD BY HUSBAND & WIFE HAVING NO SON :
	1.	In Pannalal Rastogi v. CIT 65 ITR 592 (Pat.), the High Court held that 'A' and his wife constituted a HUF in respect of the assets and the property they got on partition. They stated that safer test would be, as pointed out in the case of Attorney General of Ceylon v. Arunachalam Chettiar [1957] A.C. 540 whether there is a potentiality of a coparcener being brought into existence either by law .i.e. adoption) or by nature .birth by wife). So long as the potentiality is there, the property must be held to be that of a HUF. Such a potentiality exists in the case of a sole surviving coparcener because he may be getting a son or adopt a son.
	2.	Gujarat High Court pronounced in Bharat Kumar Chinubhai v. CIT 71 ITR 1 (Guj.) “where an assessee has only a wife or unmarried daughter and no son, the property received by him in respect of his share in the joint family properties on partition belongs to the HUF consisting of himself and his wife or unmarried daughter and is liable to be assessed as property of the HUF and not his individual property.” Similar decision was in the case of CIT v. Beni Prasad Tandon 71 ITR 322 (All.).
	3.	In Pratap Narain v. CIT 63 ITR 505 (All.) 'P' received certain properties on partition of a HUF. He had a wife but no children. It was held that he constituted a HUF with his wife and was assessable as such. The Court observed “It is not correct to say that the share of the property upon partition constitutes the separate property of the co-parcener and that it is only subsequently when a son is born that the property becomes ancestral property or HUF property. The birth of a son does not alter the nature of the property. Property all along continues to be coparcenary property”.
	4.	As decided in the case of CWT v. Harshadlal Manilal 97 ITR 86 (Guj.) the property received by the assessee on the death of his father became the property of the HUF which at the valuation date consisted of the assessee, his wife, his daughter and his mother.
	HUF CAN CONTINUE EVEN WITH ONLY ONE MALE :
	1.	The Supreme Court in case of L. Hirday Narain v. ITO 78 ITR 26 (SC) had an occasion to consider the case of L. Hirday Narain Karta of HUF who, after partition from his sons on Nov. 19, 1949 was left as a single male member of the HUF consisting of himself and his wife. A son was born to him later. The Court held that income earned after partition would be that of a HUF even before the birth of another son as “Under the Income Tax Act it is not predicated of a HUF as a taxable entity that it must consist of two or more male members."
	2.	The Punjab & Haryana High Court in Kundan Lal v. CIT 129 ITR 755 (P&H) held that after separation of the three sons of K, the property left in the hands of K was not his separate property as K, his wife and unmarried daughter continued as an HUF and the property did not change its character, merely because all the sons left the coparcenary. They observed that : “The Income-tax Act does not indicate that HUF as an assessable entity must consist of at least two male members. It is, therefore, obvious that the property of a joint family does not cease to belong to the family merely because the family was represented after the three sons of K got separated, by K, his wife and an unmarried daughter”.
	3.	In P. Pavanasa Nadar v. CIT 87 ITR 552 (Mad.) it was held, following Narendra Nath’s case [74 ITR 190 (SC)] that the income from assets allotted to the assessee was taxable in the hands of HUF consisting of himself, his mother, his wife and daughter.
	4.	The Calcutta High Court in Bhupatrai Hirachand 109 ITR 97 (Cal.) was dealing with the case of an individual Hindu being succeeded by his widow and son B. It was held that there was no bar for a widow to be member of a HUF. Therefore, B and his mother constituted an HUF in respect of business. However, the house property was owned half by the widow under section 3.1) of the Hindu Women’s Right to Property Act, 1937.
	RECEIPT OF HUF ASSETS ON PARTITION BY AN UNMARRIED MALE :
	In CIT v. Vishnu Kumar Bhaiya 142 ITR 357 (M.P.) the Court held that in the case of receipt of assets on partition by a coparcener who was unmarried at the time of partition, the income from the assets received by him was to be assessed in his hands as an ‘individual’. They held that, in such a case, the property was received by the single member who was unmarried and did not constitute a family. His status was that of an individual and the fact of his marriage did not alter the position and in the absence of a son the personal law would regard him as the owner of the property and resultant income as his income. This property was received by him on partition as a single member and had not devolved upon him as a sole surviving coparcener without disrupting the HUF. The High Court followed the judgment in the case of Surjit Lal Chhabda 101 ITR 77 (SC) and C. Krishna Prashad 97 ITR 493 (SC). However, this case does not appear to have been correctly decided in as much as the facts were very different from Surjit Lal Chhabda’s case.
	It is respectfully submitted that the decision in Vishnu Kumar Bhaiya’s case was given on 10.1.83 without noticing Full Bench judgment of the same Court in CIT v. Krishna Kumar 143 ITR 462 (M.P.) (F.B.) decided on 16.2.1982 wherein it was held that under Hindu Law it is not necessary for constituting a HUF that there must be more than one male member and that such a family may consist of a male member and his wife or daughters. Hence although he had no son but the property having been received on the partition of bigger HUF by HUF consisting of himself and his wife was ancestral. The status was of HUF. In fact the Full Bench had followed Supreme Court judgments in Gowli Buddanna 60 ITR 293 (SC) and N.V. Narendranath v. CWT 74 ITR 190 (SC)
	GIFTS OF COPARCENARY PROPERTY :
	The coparcenary property belonging to a HUF is joint property and the same can be transferred or alienated or gifted away only under certain specific circumstances, some of which are discussed hereunder :
	a)	A Hindu father, being the Karta, has a right to make a gift of ancestral movable property, within reasonable limits, without the consent of his sons, for the purpose of support of the family, relief from distress, affection and other indispensable acts of duty. Such a gift may be made to a wife, to a daughter and even to a son, within reasonable limits. However, gift of whole of such property would not be within reasonable limits.
	b)	For pious purposes a Hindu father has power to make a gift of ancestral immovable property also but it should be within reasonable limit.
	c)	Gifts of reasonable amount can be made from the HUF property at the time of marriage of any family member apart from incurring normal expenses on marriage.
	What amount should be termed reasonable, will depend upon the circumstances of each case depending upon the quantum of HUF properties, the number of family members, responsibilities of maintaining the family, expenses required to be incurred by the HUF on marriage, education and other purposes etc.
	JUDICIAL VIEWS ON GIFTS OF HUF PROPERTY :
	In this context it would be relevant to refer the following observation made by the Supreme Court in the case of Ammathayee alias Perumalakkal v. Kumaresan alias Balakrishnan AIR 1967 SC 569, which was also referred to in Gangadhar Narsingdas Agarwal v. CIT 162 ITR 320 (Bom). - "Hindu Law on the question of gifts of ancestral property is well settled. So far as movable ancestral property is concerned, a gift out of affection may be made to a wife, to a daughter and even to a son, provided the gift is within reasonable limits...... But so far as immovable ancestral property is concerned, the power of gift is much more circumscribed than in the case of movable ancestral property. A Hindu father or any other managing member has power to make a gift of ancestral immovable property within reasonable limits for "pious purposes" .see Mulla's Hindu Law 13th Edn. para 236, p. 252). Now what is generally understood by "pious purposes" is gift for charitable and/or religious purposes, but this court has extended the meaning of the "pious purposes to cases where a Hindu father makes a gift within reasonable limits of immovable ancestral property to his daughter in fulfilment of ante-nuptial promise made on the occasion of the settlement of the terms of her marriage, and the same can also be done by the mother in case the father is dead".
	It has also been held that a father has no power to make gift of ancestral immovable property to his wife to the prejudice of his minor sons- CGT v. Tej. Nath 86 ITR 96 (P & H).
	As decided in the case of Tatoba Ganu Mohite v. Tarabai Kedari Tambe AIR 1957 Bom 280 and also followed in the case ofGangadhar Narsingdas Agarwal v. CIT .as referred above) -
	It is not open to the Karta of HuF to gift ancestral movable property to his relatives, who are strangers to the HuF except for pious purposes. It was also held by the full bench in CGT v. Tej Nath 86 ITR 96 (P & H) that relatives of the Karta other than members of HuF must be regarded as strangers as far as the joint family is concerned.
	In view of the above decisions, any gifts made from HuF funds or property to strangers of HuF will be void and gifts to the members of the family is permissible within reasonable limits and/or for pious purposes.
	Recently the Supreme Court dealt the case of Addl. CIT v. Maharani Raj Laxmi Devi [1997] 224 ITR 582 (SC), in which the facts were that Maharaja P.P. Singh of Balarampur was being assessed as an individual up to and including the assessment year 1964-65. He had no issue of his own. On December 28, 1963, he adopted Maharaja Dharmendra Pratap Singh, who was a minor, as his son. After the said adoption, the status of Maharaja P.P. Singh was taken as that of a Hindu undivided family. Maharaja P.P. Singh died on June 20, 1964. Thereafter, the Hindu undivided family consisted of his widow, Maharani Raj Laxmi Devi, and the minor son. For the assessment year 1966-67, the Maharani filed a return on behalf of the family declaring a total income of Rs.28,935. Subsequently, she filed a revised return showing the total income at Rs.25,288, having excluded the one-sixth share belonging to the minor by virtue of section 6 of the Hindu Succession Act, 1956, under which, the one-third share of the late Maharaja in the family property devolved on his two heirs, the minor son and the Maharani. The Income-tax Officer held that in the absence of an order under section 171 of the Income-tax Act, 1961, accepting a claim of partition, the Hindu undivided family continued.
	The Supreme Court held that though for the purpose of the Hindu undivided family, section 6 of the Hindu Succession Act, 1956, would govern the rights of the parties, in so far as income-tax law was concerned, the matter had to be governed by section 171(1) of the Income-tax Act. Therefore, the one-sixth share of the minor son of the late Maharaja could not be excluded from the income of the Hindu undivided family.