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Monday, 2 January 2012

Hindu Undivided Family (HUF) - Partition and Income Tax provisions

Defination  of Partition: - Partition is the severance of the status of Joint Hindu Family, known as Hindu Undivided Family under tax laws.

Under Hindu Law once the status of Hindu Family is put to an end, there is notional division of properties among the members and the joint ownership of property comes to an end. However, for an effective partition, it is not necessary to divide the properties in metes and bounds. But under tax laws for an effective partition division by metes and bounds is necessary.

Partition under Hindu Law, can be total or partial. In total partition all the members cease to be members of the HUF and all the properties cease to be properties belonging to the said HUF.

Partition could be partial also. It may be partial vis-a-vis members, where some of the members go out on partition and other members continue to be the members of the family. It may be partial vis-a-vis properties where, some of the properties, are divided among the members other properties continue to be HUF properties. Partial partition may be partial vis-a-vis properties and members both.

Difference between partition under the Hindu Law and that under the Income-tax Act: – There is a difference between a partition under Hindu Law and a partition recognised under the Income-tax Act.

Though the concept of partition is the same under Hindu and tax laws, in two respects, recognition of partition under tax laws differs from that under Hindu Law.

For recognition of partition under Hindu Law division of properties by metes and bounds is not necessary. However, for recognition of partition under tax laws, division of properties by metes and bounds is necessary.

Again under Hindu Law partial partition is recognised. However, in view of provisions of S.171(9) of Income-tax Act, 1961, partial partitions will not be recognised for tax purposes.

Right to claim Partition: – Under the Hindu law, any coparcener can make a claim for partition.

Necessity of other coparceners to agree in order to entitle a coparcener to claim for a partition:- It is not necessary that other coparceners should agree to the partition sought by one of the coparceners.

But merely because one member severs his relations with others there is no severance between others. {CIT vs. Govindlal Mathurbhai Oza – [1982] 138 ITR 711 (Guj.)}

The other members continue to remain joint.

Partition on death of coparcener:- A partition is an act effected inter vivos between the parties agreeing to the partition. A death of partner cannot bring about an automatic partition and on such a death, the other surviving members continue to remain joint. However under the provisions of 56 of Hindu Succession Act, there is a deemed partition for a limited purpose of determining the share of the deceased co-parcener for the purpose of succession under the Act.

Right of minor to claim partition:- A minor can claim partition through his guardian.                A reference in the above regard can be made to the decision of the Supreme Court in the case of Apoorva Shantilal Shah vs. CIT as reported in [1983] 141 ITR 558 {SC}.

Eight of wife of Karta to claim partition :- As per Hindu law, the ordinary rule is that a partition can be claimed only by a coparcener and wife not being a coparcener she cannot ask for partition.

Certain States including Maharashtra have brought amendment to the Hindu Succession Act, 1956, conferring co-parcenery rights to daughters and as such they can claim partition.

Validity of partition between widow-mother and sole surviving coparcener-son: – A wife or mother has no right to claim partition, but if a partition is effected a mother or the wife gets a share equal to that of the son.

Equal distribution of Share among sons by Karta Father: - A father in his right as patria potetas or otherwise can effect a partition between himself and his son of the joint family property of HUF. However, he has to allot equal shares to the sons.

The father is expected to act bona fide and only aggrieved party can seek relief by way of appropriate proceedings. However, till such a partition is held invalid by a competent court, it must be held as valid.

Apporva Shantilal Shah vs. CIT [1983] 141 ITR 558 (S. C.)

Ownership of Property received by a member on a total partition of HUF: The property received by male member on total partition will retain its character as a joint family property. If he is single, it will be HUF property on the marriage.

The authorities in this regard are :–

[a]   CIT vs. Arun Kumar Jhunjhunwala and Sons [1997] 223 ITR 45.

A sole member can constitute a HUF on marriage.

[b]   CIT vs. Radhe Shyam Agarwal [1998] 230 ITR 21 (Pat).

Position when the wife of the karta also been allotted a separate share of property:- The property of the wife of the Karta will be her individual property. There is a difference of opinion among the Courts as to whether she continues to be a member of her husband’s HUF after allotment of a share to her on partition.

Partition is not  transfer:- The Supreme Court in the case of CED vs. Kanhlal Trikamlal [1976] 105 ITR 92, 101 (S. C.) 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 one of the sharers has an antecedent title and therefore, no conveyance is involved in the process, as confirmed of new title is not necessary. This decision is an authority for the proposition that no conveyance is required for a partition, but not for whether there is a transfer involved in a partition.

In the case of Kalooram Govindram vs. CIT [1965] 57 ITR 335 {S.C.), the Supreme Court did not give any opinion as to whether a partition constitutes a transfer within the meaning of Transfer of Property Act. But according to Andhra Pradesh High Court in the case of Dwarka Prasad vs. CED [1968] 67 ITR 281 (AP) the Supreme Court in 57 ITR 335 has given final authority that in partition there is no transfer.

Question:- If a house-property belonging to an HUF is divided (in 4 portion) and then transferred to Karta and his 3 sons, what will be the tax impact of this transaction in the hands of HUF and each of the co-parcener?

Answer:- The house property is a capital asset. Its transfer result in capital gains which is chargeable to tax under the I T Act. However, transfer of assets from HUF to its members is special case. There is express provision under the I T Act which says that the distribution of capital asset on total or partial partition of HUF is not regarded as transfer for the purpose of I T Act. The said provision contained in section 47(i) of the I T Act is as under:

“47. Nothing contained in section 45 shall apply to the following transfers :(i) any distribution of capital assets on the total or partial partition of a Hindu undivided family;”

The partition in Hindu law is effected by a definite and unequivocal indication of a coparcener’s intention to separate. Similarly, a partial partition is effected by a definite and unequivocal indication of the coparcener to partition a particular business or property of the joint family leaving the other assets as joint family property. Therefore ,it is very important to understand word “total or partial partition”. In that case only, distribution of assets is not regarded as transfer and no capital gains occur in hand of HUF. However, in individual’s hand there is no taxable income in any case on transfer of house property from HUF.

Physical division of property by way of book entries not permissible :-Where a property is capable of physical division, the partition must be made by physical division only. If the property of the HUF does not admit of physical division, the property must be so physically divided as much permits. For example, it is not expected that the utility of the property is lost by compelling a physical partition and in such a case, the property may be divided physically to the extent possible.

This is rule in section 179 to make a valid claim for recognising the partition for Income-tax purposes.

Basically, a partition can be made orally and there is no requirement in law that the partition must be evidenced by a written agreement. Even a partition of immovable property of HUF can be through an oral agreement [Popatlal Devram vs. CIT [1970] 77 ITR 1073 (Orissa).]

Entries showing division of the property in books of account may be good evidence of a partition more particularly in cases where the property may not be capable of physical division.

For example, it has been held that a business cannot be partitioned by metes and bounds. [R.B. Bansidhar Dhandhania vs. CIT [1944] 12 ITR 126 (Patna)] Therefore, where a business of HUF was partitioned by well defined shares and partnership formed was held valid.

Therefore, where credit balances in capital account in books of firm in which assessee HUF was a partner is partitioned, it was held that there was a valid partition. [Motilal Shyam Sunder vs. CIT [1972] 849 ITR 186(All).]

In the case of CIT vs. K. G. Ramakrishnier [1963] 49 ITR 608 (Mad.), the Madras High Court held that an asset which is not capable of physical division can be partitioned by making entries in books. Here, entries relating partition were passed in books of HUF and not the partnership firm where HUF was a partner. The partition was held valid.

Procedures for recognition of partition:- The HUF, which has been hitherto assessed, must make a claim to the assessing officer that the HUF properties have been subjected to total partition.

The Assessing Officer will make an inquiry in to the claim after giving notice to all members of the HUF and if he is satisfied that the claim is correct, he will record a finding that there was a total partition of the HUF and the date on which it has taken place.

Partition for conversion of family business into partnership:- A business cannot be partitioned by metes and bounds. This is the observation of the Patna High Court in the case of R.B. Bansidhar Dhandhania vs. CIT [1944] 12 ITR 126 (Patna). Here, the business of HUF was partitioned by well defined shares and partnership formed was held valid.

It may however be noted that a partition can be effected orally. Subsequent entries in the books of account are good evidence of partition. The Bombay High Court in the case of CIT vs. Shiolingappa Shankarappa Mendse and Bros. [1982] 135 ITR 375 (Bom.) had occasion to deal with a case where there was a partition of HUF and subsequent formation of a partnership firm by the erstwhile members of the HUF. Transaction of partition was evidenced by book entries. Partnership was held valid.

Where, however division of property (business) of HUF was not effected properly, the claim that business of HUF was converted into that of partnership firm was not upheld and the income from the business was held assessable in hands of the HUF itself. {Kaluram & Co. (HUF) vs. CIT [2002] 254 ITR 307 (Del.)]

Order u/s 171 not  required where a HUF has not been assessed to tax:- The wordings of section 171 show that the section has no application to a HUF, which has not been hitherto assessed. The authorities in support of this proposition are :–

CIT vs. Kantilal Ambalal (HUF) – [1991] 192 ITR 376 (Guj.)

Addl. CIT vs. Durgamma (P) – [1987] 166 ITR 776 (A.P.)

CIT vs. Hari Krishnan Gupta – [2001] 117 Taxman 214 (Del.)

Reference may also be made in this regard to the decision of the Supreme Court in the case of Roshan Di Hatti vs. ITO – [1968] 68 ITR (SC)/Sir Sunder Singh Majithia vs. CIT – [1942] 10 ITR 457 (PC).

Validity of Penalty on HUF after a total partition: The provisions of section 171[8] gives the mandate to an assessing officer to levy penalty on a HUF disrupted after partition.

The levy of such penalty has also been upheld by the Allahabad High Court in the case of CIT vs. Raghuram Prasad [1983] 143 ITR 212 {All}.

Where a coparcener with only his widow as legal heir dies, could a partition be deemed as between the surviving coparcener and the widow on his death? : . Where a deceased dies issueless leaving a widow there is no question of a deemed partition u/s. 6 of the Hindu Succession Act. This is the finding of the Gujarat High Court in the case of Bhartiben S. Jhaveri vs. CED [1999] 238 ITR 995 (Guj). The reason being there is no coparcenery with only one male.

A similar ratio was held by the Allahabad High Court in the case of CED vs. Smt. S. Harish Chandra [1987] 167 ITR 230 {All} that proviso to section 6 of the Hindu Succession Act does not come into operation where there is no coparcenary in existence at the time of the death of the male member.

Responsibility to pay Tax After partition of an HUF up to the date of partition:- As per section 171 [6], every member of the HUF before partition shall be jointly and severally liable for the tax on the income assessed of the HUF. The same section empowers the assessing officer to recover the tax due on completion of the assessment on the disrupted HUF from every person who was member of the HUF before partition.

Further, as per section 171[7], the several liability of the member shall be computed according to the portion of the joint family allotted to him at the time of the partition.

It may however be noted that joint liability of the member is personal and distinct from the personal and several liability as found by the Supreme Court in the case of Govindas vs. ITO [1976] 103 ITR 123, 132 {SC}. As such a member of a HUF before partition is not personally liable, after partition in respect the liability of HUF, ex-members liability is personal.

Also, unlike the several liability, the joint liability is not limited to the asset received by the member on partition as noticed by the Supreme Court in the case of Addl. ITO vs. A.S. Thinmaya [1965] 55 ITR 666, 671 {SC}.

Notional partition: – Under the provisions of section 6 of the Hindu Succession Act, 1956, where a Hindu male dies intestate on or after 17th June 1956, having at the time of his death an interest in a Mitakshara coparcenary property leaving behind a female heir of the class I category, then his interest in the coparcenary property shall devolve by succession under that Act and not by survivorship. The interest of the deceased will be carved out for devolution as if a notional partition had taken place before the death of the deceased. This is the concept of notional partition.

Notional partition and destruction of the family:-The notional partition only crystallises the share due to the female heir and does not disrupt the joint family.

A direct authority can be found in the decision of the Supreme Court in the case of State of Maharashtra vs. Narayan Rao Sham Rao Deshmukh, which is reported in [1987] 163 ITR 31 {SC}, wherein it was held that the purpose of section 6 is only for ascertainment of the share of the female heir and unless the share is given away, the same cannot be excluded from the assets of the HUF.

The Gujarat High Court in the case of CWT vs. Chandrasinhrao D. Gaikwad [1999] 237 ITR 875 came to the same conclusion without referring to the above decision of the Supreme Court
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