All About Partition of a Hindu Undivided Family (HUF):

 

·       Legal Framework: Section 171 of the Income Tax Act, 1961 provides the legal framework for the partition of a Hindu Undivided Family (HUF) and governs the assessment procedures following such partition.

 

·       Distinct from Hindu Law: It is important to note that the partition of an HUF is recognized under the Income Tax Act rather than Hindu Law. While the rights of the parties are regulated by Section 6 of the Hindu Succession Act, for income tax purposes, Section 171(1) of the Income Tax Act, 1961, is the governing provision.

 

·       No Partial Partition: Tax laws do not acknowledge partial partition of property or individuals after March 30, 1978, due to the insertion of sub-section (9) in Section 171 of the Income Tax Act. This restriction was introduced to prevent the misuse of creating multiple HUFs.

 

·       Asset Distribution during HUF Partition: Upon a complete partition of an HUF's assets, all coparceners receive their respective shares in the property. It's worth noting that, following the 2005 amendment to Section 6 of the Hindu Succession Act, daughters are also recognized as coparceners.

 

·       Physical Division Required: Partition, as defined in the Explanation to Section 171 of the Act, involves a physical division of the property when such division is possible. Merely splitting the income without dividing the underlying property physically does not constitute a valid partition.

 

·       Modes of Partition: The partition of HUF property can be executed either through a family settlement or a partition deed. Family settlements are exempt from stamp duty and registration requirements, while partition deeds are subject to stamp duty and must be registered.

 

·       Recognition Procedures: The steps for obtaining recognition of an HUF partition are as follows: (a) The HUF must inform the assessing officer that the HUF properties have undergone total partition. (b) The assessing officer will then conduct an inquiry into the claim after notifying all HUF members. (c) If satisfied with the claim's validity, the assessing officer will record a finding of complete partition and specify the date on which it occurred.

 

·       Section 171 Does Not Apply to Unassessed HUFs: Section 171 explicitly does not apply to an HUF that has not been previously assessed. A case law example is CIT v. Hari Krishnan Gupta (2001) 117 Taxman 214 (Del.).

 

·       Non-Taxable Distribution: The distribution of HUF assets during a partition does not trigger capital gains tax liability as it does not constitute a transfer. Additionally, there is no income clubbing under Section 64 of the Income Tax Act as there is no direct or indirect transfer involved in this process.