Taxability of Transfers Between HUF Members and the HUF

 The taxation of transactions within a Hindu Undivided Family (HUF) is governed by specific provisions under the Income Tax Act, 1961. This article examines the tax implications of transfers from HUF members to the HUF and vice versa, focusing on income derived, gifts, and the treatment of HUF partition.

Income Derived as a Member of an HUF

Under Section 10(2) of the Income Tax Act, income received by a member from the HUF is exempt from taxation under the following circumstances:

1.       Share of Profits: If the income or profits distributed to a member arise from the total income generated by the family, it is tax-exempt.

2.       Impartible Property: Income derived from business activities linked to impartible properties owned by the family is also exempt.

3.       Taxable Interest: However, any interest earned by the member on such exempt income is taxable. For instance, if a member deposits their share of HUF income in a savings account, the interest earned is subject to tax.

Gift from Members to HUF is Not Taxable

Gifts received by the HUF are subject to Section 56 of the Income Tax Act. Here's how the taxation rules apply:

1.       General Rule: If a gift (money or property) is received without consideration and its value exceeds ₹50,000, the amount is taxable in the hands of the recipient HUF.

2.       Exception for Relatives: Gifts received from "relatives" are exempt from taxation. For an HUF, any member of the family is considered a relative, ensuring that gifts from members to the HUF are not taxed.

Partition of HUF

The tax treatment of HUF partition varies depending on whether the partition is partial or total.

1. Partial Partition

The Finance (No. 2) Act, 1980, under Section 171(9), does not recognize partial partitions for tax purposes. After 31st December 1978, income or assets attributed to a partial partition are still treated as belonging to the HUF.

2. Total Partition

A total partition, recognized under the Income Tax Act, involves the complete division of HUF assets among its members. Legal precedents highlight the non-taxable nature of such partitions:

• Supreme Court Judgment: In Maturi Pullaiah v. Maturi Narasinham (AIR 1966 SC 1836), the court held that family arrangements during a total partition do not involve the "transfer" of assets, and therefore, no capital gains tax liability arises.
• Karnataka High Court Ruling: In CIT v. R. Nagaraja Rao, it was established that the term "transfer" does not encompass partition or family settlements. Hence, partitions are not taxable under the definition of transfer.

Conclusion on Total Partition

Total partitions are exempt from capital gains tax, as they do not constitute a "transfer" under the Income Tax Act.