FOLLOWING METHODS OR DEVICES MAY PROVE USEFUL IN REDUCING THE TAX INCIDENCE IN THE CASE OF HUF : (i) By increasing th...
FOLLOWING METHODS OR DEVICES MAY PROVE USEFUL IN REDUCING THE TAX INCIDENCE IN THE CASE OF HUF :
(i) By increasing the number of assessable units through the device of partition of the HUF;
(ii) By creation of separate taxable units of HUF through will in favour of HUF or gift to HUF;
(iii) Through family settlement / arrangement;
(iv) By payment of remuneration to the Karta and other members of the HUF;
(v) By use of loan from HUF to the members of the HUF;
(vi) Through gift by HUF to its members specially to the female members;
(vii) Through other methods / devices;
The aforesaid methods / devices are discussed in detail below as follows :
a. PARTITION OF HUF
In the case of certain HUFs, the tax liability can be reduced by partition of the HUF. This can be easily done in a case where the partition results in separate independent taxable units. Suppose an HUF consists of father and two sons and there are two business establishments, a house property and other sources of income with the HUF. If the members of the HUF have no other sources of income then partition of the HUF can be done by giving one business establishment to each of the sons, house property to the father and dividing the other sources in such a manner so as to make the partition equitable. Such a partition of HUF will reduce the tax liability considerably.
The position may, however, be different in a case where the members of the HUF have got high individual incomes. In such a case it is not advisable to break or partition the HUF. The HUF should be allowed to continue as a separate taxable unit.
Then there may be a case where the HUF has got only one business establishment which does not admit of a physical division. For the sake of partition the business may be converted into a partnership firm or a company. At present, rate of firm’s tax and the rate of tax in case of a company, is 30% flat, therefore conversion of HUF business into a partnership or a company is not advantageous. The incidence of, in such a case, can be better reduced by payment of remuneration to the members of the HUF.
Partial partition of HUF is also a very effective device for reducing its tax liability. Partial partition is recognized under the Hindu Law. However partial partition of an HUF has been de-recognised by the provisions of sec. 171(9) of the Income Tax Act, 1961 according to which any partial partition effected after 31.12.1978, will not be recognized.
The provisions of sec. 171(9) have been declared ultra-vires by the Madras H.C. in the case of M.V.Valliappan v. ITO, 170 ITR 238. The Supreme Court has granted S.L.P. and stayed the operation of the above decision of Madras H.C. as reported in 171 ITR (St.) 52. The Gujrat H.C. has, however, held the ITAT justified in following the aforesaid decision of Madras H.C., CIT v. M. M. Panchal HUF, 210 ITR 580 (Guj.)
Notwithstanding the provisions of sec. 171(9) partial partition, can still be used as a device for tax planning in certain cases. An HUF not hitherto assessed as undivided family can still be subjected to partial partition because it is recognized under the Hindu Law and such partial partition does not require recognition u/s. 171 of the Income Tax Act,1961. Thus a bigger HUF already assessed as such, can be partitioned into smaller HUFs and such smaller HUFs may further be partitioned partially before being assessed as HUFs. Besides any HUF not yet assessed to tax can be partitioned partially and thereafter assessed to tax.
The following legal aspects in respect of partition of HUF, should also be kept in mind while the partition of HUF which are as under:-
(i) Distribution of the assets of an HUF in the course of partition, would not attract any capital gains tax liability as it does not involve a transfer.
(ii) On the basis of the same reasoning distribution of assets in the course of partition would not attract any gift tax liability, and
(iii) There would be no clubbing of incomes u/s. 64 as it would not involve any direct or indirect transfer.
b. CREATION OF HUFS AS SEPARATE TAXABLE UNITS BY WILL IN FAVOUR OF OR GIFT TO HUF :
It is now well settled law that there can be a gift or will for the benefit of a Joint Hindu Family. It is immaterial whether the giver is male or female, whether he or she is a member of the family or an outsider.
The HUF can receive gifts from anybody i.e. from a coparcener, non-coparcener and even stranger. CIT V/s K Satyendra Kumar (1998) 232 ITR 360 (SC)
What matters is the intention of the donor or testator that the property given is for the benefit of the family as a whole. “Doner should clearly indicate that he is donating to the HUF. CIT V/s Maharaja Bahadur Singh & others (1986) 162 ITR 343 (SC).
Suppose there is an HUF consisting of Karta, his wife, his two sons, daughter-in-law and grandchildren. A gift or will can be made for the benefit of the two smaller HUFs of the sons. The bigger HUF will continue as a separate taxable unit even after the death of the Karta.
There may also be a case where the father or mother has got self-acquired properties. They have a son and his family but there is no ancestral property as a corpus of their family. Then, father & mother or both can leave their property for the benefit of their son’s family, through their will (s).
Similar result can be obtained by means of a gift for the benefit of a joint family. It may be pointed out here that an HUF cannot be created by act of parties but a corpus can be created for an already existing HUF through the medium of a gift or will etc.
c. THROUGH FAMILY SETTLEMENT / ARRANGEMENT :
Family settlements / arrangements are also effective devices for the distribution of ancestral property. The object of the family settlement should be broadly to settle existing or future disputes regarding property, amongst the members of the family. The consideration for a family
settlement is the expectation that such settlement will result in establishing or ensuring amity and goodwill amongst the members of the family. Ram Charan Das v. G.N.Devi, AIR 1966 SC 323 and Krishna Beharilal v. Gulabchand, AIR 197 SC 1041. Such an agreement is intended to avoid future disputes and to bring about harmony amongst the members of the family . Sahu Madho Das v. Mukand Ram, AIR 1955 SC 481. Briefly stated though conflict of legal claims, present or future is generally a condition for the validity of family arrangement, it is not necessarily so. Even bonafide disputes, present or possible in future, which may not involve legal claims, will also suffice to effect a family arrangement.
As family arrangement does not involve a transfer, there would be no gift and capital gains tax liability or clubbing u/s. 64.
By a family arrangement tax incidence is considerably reduced or it may even be nil. Suppose a family consists of Karta, his wife, two sons and their wives and children and its income is Rs. 12,00,000/-. The tax burden on the family will be quite heavy. If by family arrangement, income yielding property is settled on the Karta, his wife, his two sons and two daughter-in-law, then the income of each one of them would be Rs.200,000/- which would attract no tax & if the assessment year is 2013-14, then the tax liability would be reduced form Rs. 1,95,700/- to nil.
d. By payment of remuneration to the Karta and / or other members of the family :
The other important measure of tax planning for an HUF is to pay remuneration to the Karta and / or other members of the HUF for services rendered by them to the family business. The remuneration so paid would be allowed as a deduction from the income of the HUF and thereby tax liability of the HUF would be reduced, provided the remuneration is reasonable and its payment is bonafide. There is no legal bar against payment of remuneration to the Karta or other members of HUF for services rendered to the family in carrying on the business of the family or looking after the interests of the family in a partnership business. Jugal Kishore Baldeo Sahai v. CIT 63 ITR 238 (SC). The payment must be for service to the family for commercial or business expediency. Jitmal Bhuramal v. CIT 44 ITR 887(SC). Remuneration paid to the Karta or other members of the HUF should be under a valid agreement. The agreement must be valid, bonafide, on behalf of all the members of the HUF and in the interest of and expedient for the family business. Further the payment must be genuine and not excessive. J. K. B. Sahai v. CIT, 63 ITR 238 (SC).
Agreement with whom to be entered:
The agreement should be between the Karta and other members of the family. The agreement need not always be in writing. An agreement to pay salary / remuneration can also be inferred from the conduct of the parties. CIT v. Raghunandan Saran, 108 ITR 818 (All.). However, it would be better if the agreement to pay remuneration is reduced in writing.
For A.Y. 2013-14, if the total income of an HUF is Rs. 10,00,000/- then income tax on HUF would be Rs.1,33,900/-. If salary is paid to four members @ Rs.2,00,000/- net income of HUF would be Rs. 10,00,000 - Rs.8,00,000 ( 4 x 2,00,000 ) = Rs.2,00,000/-, tax on it would be Rs. NIL. The income of each member would be Rs.2,00,000/-. Therefore tax on members would be NIL. Thus the tax saving would be of Rs.1,33,900/-.
The distinction between ordinary and specified HUF’s has been done away w.e.f. 1.4.1997 i.e. A.Y. 1997-98. For Assessment Year 2013-14 the rate of tax on all HUF’s would be the same as in the case of an individual. This change in the rates of tax has brought a lot of relief to specified HUF’s i.e. the HUF’s with one or more members having taxable income. After the aforesaid amendment whereby the concept of specified HUF’s has been done away with, w.e.f. A.Y. 1997-98 this method of tax planning will be much easier and it will bring more tax relief to the HUF’s.
e. By loan to the members from the HUF :
If the business, capital or investment of the HUF is expanding then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given.
Where property was purchased by members of HUF with loan from the HUF, which was later on repaid the income from such property would be assessable as individual income of the members
L. Bansidhar and Sons v. CIT 123 ITR 58 (Delhi).
Where after partition of an HUF, two members became partners in three firms on behalf of their respective HUFs and they also became partners in a fourth firm, the funds were obtained by means of loans from other three firms, the share incomes of the members from the fourth firm was assessable as their individual income only.
CIT v. Champaklal Dalsukhbhai, 81 ITR 293 (Bom.).
f. By gift of movable assets of the HUF to its female members:
The Karta of an HUF cannot gift or alienate HUF property but for legal necessity, for pious purposes or in favour of female members of the family. Gift of immovable property within reasonable limits, can be made by a Karta to his wife, daughter, daughter-in-law or even to a son out of natural love and affection.
Therefore, if the HUF has excess funds or property, then, the Karta can make gift of movable assets to his wife, daughter or daughter-in-law at one go or over a period of time.
COMMISSIONER OF INCOME TAX VS. BANSHILAL NARSIDAS [2004 137 TAXMAN 358] MP HC
Section 5(1)(viii) of the Gift-tax Act, 1958 - Exemptions - Whether ‘karta’ of HUF can make out a gift within reasonable limits even without consent of other coparceners - Held, yes - Whether, therefore, gift made by a karta to his wife out of HUF’s assets is entitled to exemption under section 5(1)(viii) - Held, yes
JANA VEERA BHADRAYYA V. CGT  59 ITR 176 (AP HC) CGT V. HARI CHAND  95 ITR 308 (P&H HC)
‘Karta’ of a Hindu undivided family can make a gift of certain joint family property to his wife and that there is no obstacle or impediment in the way of applicability of section 5(1)(viii) of the Act.
M.S.P.RAJAH V. CGT  134 ITR 1 1 (MAD. HC)
"It may be seen from the facts as found by the Tribunal that the jewellery, which were the subject-matter of gift, were owned by the HUF of which M.S.P. Rajah, the father, was the karta and he gifted them to his wife. The AAC held that having regard to the total wealth of the HUF, the value of the jewels gifted to the wife of the karta who was a member of the family was within reasonable limits and within the powers of the father-karta of an HUF. On these facts, therefore, the question for consideration is, whether the donor can be considered to be undivided Hindu family and not the father-coparcener in favour of his wife in his individual capacity.
However, it may be noted that with effect from 1.10.98, the applicability of Gift Tax is no more in force. Therefore, no Gift Tax will be payable by a person making the gift from on or after 1.10.98. However, w.e.f. 1.10.2009 Gift received from other than relatives exceeds Rs.50,000/- then that amount is liable to Income Tax u/s. 57 of Income Tax Act, 1961. It may be remembered that gift for marriage or maintenance of daughter(s) is not liable to Gift Tax. Further clubbing provisions of sec. 64 would not be applicable if the gift in validly made in accordance with the rules of Hindu Law. Besides, if a gift made to the minor daughter of the Karta is valid then the provisions of sec. 60 of the Income Tax Act would not be attracted. CIT v. G. N. Rao, 173 ITR 593 (AP). Whereby, section 60 relates to transfer of income where there is no transfer of assets.
HUF can give gift to his member within reasonable limit. Even though HUF is not covered under the meaning of ‘relative’ in definition of relative given in explanation (e) to Section 56(2)(vii) but also judicial authority considered that HUF is a plural form of relative and thus, the amount is not taxable in the hands of members in individual capacity.
Vineetkumar Raghavjibhai Bhalodia VS. ITO [2011 11 TAXMANN.COM 384]
“From a plain reading of Sec. 56(2)(vi) along with the application to that section and on understanding the intention of the legislature from the section, it could be seen that a gift received from “relative” irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax under the provisions of section 56(2)(vi) as a group of relatives also falls within the Explanation to section 56(2)(vi). It is not expressly defined in the Explanation that the word “relative” represents a single person. And it is not always necessary that singular remains singular. Sometimes a singular can mean more than one, as in the case on hand. In the instant case the assessee received gift from his HUF. The word “Hindu Undivided Family” though sounds singular unit in its form and assessed as such for income tax purposes. Finally at the end a “Hindu Undivided Family” is made up of “a group of relatives” Thus, a singular word/words could be read as plural also according to the circumstance/situation.
Therefore, the “relative” explained in Explanation to section 56(2)(vi) includes “relatives” and as the assessee received the gift from his “HUF” which is a “group of relatives”, the gift received by
the assessee from the HUF should be interpreted to mean that the gift was received from the “relatives”, therefore the same was not taxable under section 56(2)(vi).
g. Through other Methods / Devices :
There are other methods / devices which may be used to reduce the incidence of taxation in the case of an HUF, e.g. :
a. Vesting of individual or self-acquired property in family hotchpots. But take care the provision of section 64.
b. Family reunion after partition.
c. Through inheritance by succession – Bequests by Will, now recognized by sec. 30 of Hindu Succession Act, can also be utilized for tax-planning.
By CA VIMAL PUNMIYA
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