INCOME TAX: Modes of Creation of HUF (Hindu Undivided Families)

How HUF comes into existence

A Hindu male with his wife and children automatically constitutes the HUF. The HUF is a creature of Hindu Law. It cannot be created by acts of any party save in so far as by adoption or marriage, a stranger may be affiliated as a member thereof. An Undivided Family which is a normal condition of the Hindu society is ordinarily joint not only in estate but in food and worship. The joint family being the result of birth, possession of joint property is only an adjunct of the Joint Family and is not necessary for its constitution.

Who can form HUF
Any Hindu, Sikh, Jain or Buddhist man can form an HUF, provided he is married. In fact, an HUF is automatically constituted when a couple exchanges wedding vows. Still, there are a few simple formalities to be completed for the HUF to function as a legal entity (see graphic).

First step is to form a corpus for the HUF

This can be any capital asset (property, gold, jewellery, securities, deposits) or cash. This is not as easy as it may sound. You can not transfer just any asset to your family 'hotchpot'. Any personal funds or property given by an individual to the HUF will lead to clubbing provisions under Section 64 (2) of the Income Tax Act. This means the income from these assets will be treated as that of the individual, thus defeating the very purpose for which the HUF was established.

A husband and wife can form an HUF but a wife can only be a member, not a coparcener. Therefore, the HUF income will not be assessed separately. A member has equal rights but only a coparcener can demand the partition of the HUF. "Only the birth of a child will give the unit the status of an HUF for tax purposes,

Basic requirements for the existence of an HUF

Basic requirements for the existence of an HUF are as follows :

(i) Only one coparcener or member cannot form an HUF

Family is a group of people related by blood or marriage. A single person, male or female, does not constitute a family.

It was held that the word "Family always signifies a group. Plurality of persons is an essential attribute of a family. A single person, male or female, does not constitute a family. A family consisting of a single individual is a contradiction in terms of Section 2(31) of the Income-tax Act, 1961, treats a Hindu undivided family as an entity distinct and different from an individual. Assessment in the status of a Hindu undivided family can be made only when there are two or more members of the Hindu undivided family."

[C. Krishna Prashad v. CIT (1974) 97 ITR 493 (SC)]

It was held that once the sole surviving coparcener marries, a joint Hindu family comes into existence, for the wife along with the husband constitutes a joint Hindu family and there is no difference between a "joint Hindu family" and "Hindu undivided family".

[Prem Kumar v. CIT (1980) 121 ITR 347 (All)]

HUF - A separate legal entity under Indian tax law

Under section 4 of the Income Tax Act, 1961, Income-tax is payable by ‘every person’. ‘Person’ includes a ‘Hindu Undivided Family’ as defined in section 2(31). The definition of ‘Hindu Undivided Family’ is not found in the Income-tax Act. Therefore the expression ‘Hindu Undivided Family’ must be construed in the sense in which it is understood under the ‘Hindu Law’

[Surjit Lal Chhabda v. CIT (1975) 101 ITR 776 (SC)]

An HUF cannot exist with one member alone

In C. Krishna Prasad, therein, their Lordships of the Supreme Court were considering the case of a single individual claiming the status of a Hindu undivided family for purposes of tax and observed as follows (at page 497):

“In view of the above, it cannot be denied that the appellant at present is the absolute owner of the property which fell to his share as a result of partition and that he can deal with it as he wishes. There is admittedly no female member in existence who is entitled to maintenance from the above-mentioned property or who is capable of adopting a son to a deceased coparcener. Even if the assessee appellant in future introduces a new member into the family by adoption or otherwise, his present full ownership of the property cannot be affected.”

[C. Krishna Prasad v. CIT (1974) 97 ITR 493 (SC)]

A Hindu Undivided Family (HUF) is a separate legal entity as per section 2(31) of the Income Tax Act, 1961 and therefore, as long as the HUF is in existence, no individual member can be separately assessed in respect of its income.

[ITO v. Bachu Lal Kapoor (1966) 60 ITR 74 (SC)]

STRANGER can be introduced in HUF only by adoption

[CIT v. M.M. Khanna (1963) 49 ITR 232 (Bom)]

(ii) Joint Family continues even in the hands of females after the death of sole male member

Even after the death of the sole male member so long as the original property of the Joint Family remains in the hands of the widows of the members of the family and the same is not divided amongst them; the Joint Hindu Family continues to exist.

[CIT v. Veerapa Chettiar (1970) 76 ITR 467 (SC)]

(iii) An HUF need not consist of two male members- even one male member is enough

It was held that more than one male member is not necessary for constituting a Hindu Undivided Family and that on partition, share allotted to a coparcener having only wife and no son, would assume the character of Hindu Undivided family property.

[CIT V Krishna Kumar (1983) 143 ITR 462 (MP) (FB)]

Presence of another male member is not required for holding that the properties belong to Hindu Undivided Family

It was held that the properties received by the assessee at the time of partition would belong to the Hindu Undivided Family consisting of the assessee and his minor unmarried daughters. Presence of another male member is not required for holding that the properties belong to Hindu Undivided Family which has a lone male member.

[P.R. Ramasubramania Raja v. State of Tamil Nadu (1980) 121 ITR 879 (Mad)]

A father and his unmarried daughters can also form an HUF.

[CIT v. Harshavadan Mangladas 194 ITR 136 (Guj)

Further on partition of an HUF a family consisting of a coparcener and female members is to be assessed in the status of an HUF.

A single male member can constitute a Hindu Undivided family alongwith any other female member or female members

It is well settled that the existence of a female member does not in any way curtail or restrict the right of the sole surviving coparcener to alienate the coparcenary property as if it were his separate property. In the case of Surjit Lal Chhabda, the sole surviving coparcener made certain gifts of undivided share of Hindu Undivided Family property in favour of his wife and minor daughters. The donee sold the gifts and derived capital gains. It was held that the capital gains arose to the donees and could not be assessed in the hands of the Hindu Undivided Family.

[Surjit Lal Chhabda v. CIT (1975) 101 ITR 776 (SC)]

The plea that there must be at least two male members to form an HUF as a taxable entity, has no force.

[Gauli Buddanna v. CIT (1966) 60 ITR 347 (SC); C. Krishna Prasad v. CIT (1974) 97 ITR 493 (SC)

Modes of creation of HUF

A Hindu Undivided Family can be created by following ways:

(1) Creation of HUF by Blending of individual property with the family Hotchpots

HUF assets can be created by vesting of self-acquired property in the family hotchpot even where the family kitty is empty. Thus assets of a main family or branch of the family are created by a Karta or another coparcener throwing his self-acquired property into the hotchpot of the family or branch of the family to which they belong.

Blending means transfer of one’s individual property in the common hotchpots and make it a part of the common property of the HUF. There must be an intention to throw the separate property into the common stock and it is necessary to waive all separate rights of the property, which must be clearly established through a declaration. Only the coparcener is entitled to throw in HUF’s common property.

(a) Blending can be utilized for creating smaller HUF

HUF can be created by impressing one’s self acquired property with the character of HUF property by bringing in to existence an HUF comprising the person himself, his wife & children. Existence of a coparcenary is absolutely necessary before a coparcener can throw into common stock his self acquired properties.

After 01.09.2005 daughter, being a coparcener can blend her individual property into the HUF.

Conversion of self acquired property into HUF property.

A coparcener blend his self-acquired property with that of HUF

A coparcener can blend his self-acquired property with that of HUF by throwing his individual or self-acquired property into family hotchpot or by impressing such property with the character of HUF property.

Such blending of individual property with that of HUF does not require consent of other members of the family

The act of blending does not require consent of other members of the family. The act is an unilateral act and is a matter of individual volition. There is no question of family either accepting it or rejecting it. Such blending does not constitute a transfer.

Act of the coparcener blending individual property into HUF can be considered as revocable transfer

Once blending is done, it is not revocable. There is no provision for retransfer, directly or indirectly, of the whole or any part of the income or assets to the transferor. As such, there is no question of blending being regarded revocable transfer for the purpose of Income-tax Act, 1961.

A coparcener can blend his individual property into his smaller HUF wherein he is a Karta, while continuing to be a member of the bigger HUF consisting of his father, himself and his brothers

A Coparcener can be coparcener of two joint Hindu families. The blending is at his option, he may blend his property with either of the HUF’s. In that view of the matter, a coparcener can blend his individual property with his smaller HUF, wherein he is Karta, while continuing to be a member of the bigger HUF consisting of his father himself and his brother.

[CIT v. M.M Khanna (1963) 49 ITR 232 (Bom)]

(b) Applicability of Section 64(2) Of Income Tax Act, 1961
Transfer of individual property in the common hotchpot is deemed to be a gift and income from the transferred asset is deemed to be the income of individual under Section 64(2) of the Income Tax Act, 1961.

As per section 64(2) of the Income Tax Act, if any property has been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration then the income derived from such property shall be deemed to arise to the individual and not to the family and where the converted property or any part thereof is received by the spouse of that individual on partition the provisions of sub-section (1) shall apply.

(c) Rights of members of HUF do not get enlarged on throwing property into family hotchpot

Rights of members of HUF do not get enlarged on throwing property into family hotchpot, income from said property had to be treated as assessee’s individual income only. The property can change its legal incidents on the birth of son.

(d) Partition of HUF after Blending

This is for achieving distribution of immovable property among members because giving it in any other manner will require registration for effective transfer.

It was held that "a partition of the immovable properties of a joint Hindu family can be effected by an oral agreement irrespective of the value of the property".

[Popatlal Devram v. CIT (1970) 77 ITR 1013 (Ori)]

No registered instrument is necessary for blending the personal property with joint property

It was held that "no formalities are necessary for the merger of a coparceners self-acquired property into coparcenary property. No registered instrument is necessary. After such merger, such property cannot be treated as the coparceners separate property"

[CIT v. Kanhaiya Lal (1970) 75 ITR 702 (All)]

A unilateral declaration of a Hindu coparcener, whereby he throws his self-acquired property into the common stock of the joint family property, does not amount to a transfer and, therefore, such an act does not constitute a gift.

(Goli Eswariah v. CGT (1970) 76 ITR 675 (SC))

Can a female member of the family blend her individual property into the HUF

Blending is a power given only to coparceners. Since females are not coparceners, a female member of a joint family cannot blend her individual property with HUF property. However, such an act shall be considered as a gift and it shall become property of the HUF.

(Mallesappa v. Desai AIR (1961) SC 1298)

Female member cannot blend her separate property with joint family property but she can make a gift of it to the HUF

The assessee had made gift of certain amounts in favour of the HUF which consisted of herself, her husband, her father-in-law, her mother-in-law and her minor son and three daughters. The Supreme Court held that the income from the gifted amount would have to be taxed in the hands of the HUF.

[Pushpadevi v. CIT (1977) 109 ITR 730 (SC)]

A female member can also bequeath her property to the HUF,

[CIT v. G.D. Mukim (1979) 118 ITR 930 (P & H)]

Consequence if self acquired property of the member is converted into joint family property

Where an individual, who is a member of the Hindu Undivided Family, after 31.12.1969, -

(a) converts, his separate property as the property of the HUF, or

(b) throws the property into the common stock of the family, or

Ø then the income from such property shall continue to be included in the total income of the individual.

In other words, if self-acquired property of an individual is treated/ converted into joint family property without adequate consideration, the income derived by the joint family on account of such property shall be included in the total income of the individual who was the owner of such self-acquired property.

FOR EXAMPLE

Mr. ‘A’ owns a house property from which he derives an income of Rs. 6,00,000 per annum. With effect from 01.04.2015, he converts this property as the property of an HUF of which he is a member. Although the income shall henceforth be received by the HUF but it shall be deemed to be the individual income of Mr. ‘A’ and shall be included in computation of his total income under the head “Income from House Property”.

KEY NOTE

Property here includes any interest in property whether 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.

Asset need not be in its original form.

v Asset was originally self acquired property of the individual

v Such asset is transferred directly or indirectly to HUF hotchpot for inadequate consideration.

v Treatment is as under :-

Case	Income to be clubbed in hands of transferor
Before partition	The entire income from such property
After partition	Income from the assets attributable to the spouse of transferor.

KEY NOTE

Such conversion can be made by:

(a) the act of impressing such separate property with the character of property belonging to the family; or

(b) throwing it into the common stock of the family.

PROVISIONS ILLUSTRATED

Mr. ‘A’ is a member of HUF. It consists of Mr. ‘A’, Mrs. ‘A’, Mr. ‘A’s major son (Mr. X) & Mr. ‘A’s minor son (Y). On 01.04.2017, Mr. “A’ transferred his house property acquired through his personal income to the HUF without any consideration. On 01.07.2018, HUF is partitioned and such property being divided equally. Net annual value of the property for the Previous Year 2017-18 is Rs. 80,000 & that for the Previous Year 2018-19 is Rs. 1,00,000. State tax treatment for both the years.

Solution

Computation of income from house property in the hands of Mr. ‘A’ for the Assessment Year 2018- 19

Particulars	Details	Amount
Net Annual Value (NAV)		80,000
Less: Standard deduction under section 24(a)	30% of NAV	24,000
Income from house property		56,000
TAX TREATMENT FOR THE ASSESSMENT YEAR 2018-19: Since Mr. ‘A’ transferred his house property acquired out of personal income to his HUF without adequate consideration, therefore income generated from such house property i.e. Rs. 56,000 shall be clubbed in hands of Mr. ‘A’ as per provision of section 64(2).

Tax treatment for the Assessment Year 2019-20: In the previous year 2018-19, partition took place on 01.07.2018; hence the treatment shall be as under:

Particulars	Details	Amount
Net Annual Value (NAV)		1,00,000
Less: Standard deduction under section 24(a)	30% of NAV	30,000
Income from house property		70,000
Income earned till partition from April’ 2018 to June’ 2018 i.e. Rs. 17,500 [(Rs. 70,000/12) × 3] shall be clubbed in hands of Mr. ‘A’ and income earned after partition i.e. Rs. 52,500 [( Rs. 70,000/12) × 9] shall be divided among the family members. However, as per provision of section 64(2) income of Mrs. ‘A’ shall be clubbed in hands of Mr. ‘A’.

Particulars	Mr. ‘A’	Mrs. ‘A’	Mr. ‘X’	Mr. ‘Y’
Income from house property before partition clubbed in hands of Mr. ‘A’ as per section 64(2)	17,500	-	-	-
Share of Income from house property ` 52500/4	13,125	13,125	13,125	13,125
Income clubbed as per provision of section 64(2)	+ 13,125	(13,125)	-	-
Income clubbed as per provision of section 64(1A)*	+ 13,125	-	-	(13,125)
Less: Exemption under section 10(32)	(1,500)	-	-	-
Total income from house property	55,375	Nil	13,125	Nil

* It is assumed that Mrs. ‘A’ has no other income.

(2) Creation of HUF by receipts of Gifts

HUF branches and sub-branches of main HUF can come into possession of assets either through gifts or by testament (Will) specifically meant for the HUF. This is possible by :

(i) (a) female member of the HUF giving gifts from out of her separate property to the HUF of which she is a member

(b) a daughter being coparcener can vest her separate property in HUF.

(ii) a father or other relation giving gifts to HUF of his son.

(iii) a stranger may also give gift to such an HUF helping not only with the initial capital but also provide it with working capital.

The HUF can be formed with money received as gifts from relatives. But there is again a tax implication here. While there is no tax on gifts received by an individual from specified blood relatives, the HUF does not enjoy this exemption.

Gifted property will be HUF property if the gift is made to HUF

A person can give property and other assets to his son's HUF but it should be clearly specified that the asset is for setting up the HUF. Intention of donor & the character of the gifted property will depend on the construction of the gift deed. Precautions to be taken by family while accepting gifts

KEY NOTE

The best way to avoid the tax tangle is to form the HUF corpus with assets received as part of a will.

Gift of self acquired property by father to son’s HUF creates HUF of son

A father can gift his self-acquired property to his son's newly created HUF. He has absolute right of disposition over such property. He has, however, to make his intention very clear that the gift is not to the son as an individual but to him as Karta of HUF qua his sons. In such a case the smaller HUF Is created by this gift by the father.

A Mitakshara father can make a gift of his self-acquired immovable property to one of his own sons to the detriment of another and he can make an unequal distribution amongst his heirs. Therefore, it is not possible to hold that such property bequeathed or gifted to a son must necessarily and under all circumstances rank as ancestral property in the hands of the donee in which his sons would acquire coordinate interest.

However, property so gifted or bequeathed cannot become ancestral property in the hands of the donee simply by reason of the fact that the donee got it from his father or ancestor. It is essential that the gift deed should specifically mention the gift to the HUF and not to individual son.

The father is quite competent to provide expressly when he makes a gift, either that the donee would take it exclusively for himself or that the gift would be for the benefit of his branch of the family.

It was held that where a grandfather made gifts to grandsons per stripe and the donor's intention was made clear that gifts were meant for each of the grandsons as Karta of their smaller branches, then the assets belonged to smaller HUF. They held that the nature of bounty as being in favour of the branch family and not personally to F was stamped on the gift when it was made to F and he could not change its character subsequently. The shares so gifted belonged to F's joint family and not to him as individual. In this particular case the gifts were not made per capita to the seven grandsons but per stripe, i.e., each family was gifted 150 shares. Thus by this gift the grandfather created a number of family units.

[CIT v. Krishan Bans Bahadur (1974) 96 ITR 714 (Del)]

Though it is the donor's intention and not the donee's which determines the nature of the gift, the donee's attitude may shed some light in understanding the donor's intention and the precise character of the gift.

The Delhi High Court in CIT v. Gurprit Singh (1983) 139 ITR 48 (Del) observed that in a case where a gift of cash and immovable property belonging to HUF was made by Karta A to his unmarried son G, the property would belong to the HUF of G on the birth of a son to him. They held that A could not, by a purported gift, deprive the property of its original character of HUF and as soon as a son was born to G, the property would belong to HUF. Their lordships in the majority judgement were impressed with the Supreme Court's view in C. N. Arunachala Mudaliar v. C.A. Muruganatha Mudaliar AIR 1953 SC 495.

A property gifted by Karta of HUF to a coparcener would assume the character of an HUF property in his hands. Thus a new HUF can be created by a gift by the Karta of the HUF property to the coparcener and this would help in the creation of his HUF.

Intention of making a gift to HUF must be made clear in the gift deed

Thus, while considering a gift for the purpose of creation of a family unit, the intention of making a gift to a HUF has to be made clear beyond any doubt so that in future there shall not be any dispute on this aspect. The judgement in M. P. Periaknuppan Cheftiar v. CIT 99 ITR 1 (SC) has, therefore, to be kept in focus while preparing the gift deed and the intention of the donor has to be made clear.

In Jagga Row v. CIT, the father had settled in 1971 certain property on his son absolutely out of natural love and affection which he bore to the HUF taking the plea that his father intended to settle the property upon himself, his wife and his sons who constituted an HUF. During the course of assessment proceedings he filed an affidavit dated 20.01.1977 from his father stating that he clearly intended that the property should go not merely to the son but also to the members of his family.

[Jagga Row v. CIT (1987) 166 ITR 862 (AP)]

It was held that where a Hindu father divided his capital in the business between himself and his four sons equally, all the four sons under the arrangement, got the share in business as HUF property because of clear words expressed therein.

[CWT v. Narayandas Sadani (1967) 65 ITR 137 (Cal)]

However, where two of the sons were gifted property without specifying the donee as HUF, it was held that they got it as individuals and not as Karta of HUF on the construction of the gift deed. Thus gift deed has to be specific.

Clear declaration of intention through affidavit

If there are express provisions to that effect either in the deed of gift or a Will, no difficulty is likely to arise and the interest would become ancestral in the hands of the son on the terms of the grant or the bequest. The intention of the donor would have to be collected from the language of the gift deed taken along with the surrounding circumstances. Intention must be proved by some cogent evidence, documentary evidence or by conduct or connivance.

[C.N. Arunachala Mudaliar v. C.A. Muruganatha Mudaliar & Anr. AIR 1953 SC 495: (1954) SCR 243 (SC)]

Gift to be valid & genuine.

No specific bar to a gift by the father to the HUF of his son, his wife & minor children. However, for avoiding the clutches of section 64 (1)(vi) such gifts better be avoided.

[CIT v. Smt. T. Suryamani Kothavalsala (2003) 263 ITR 271 also see CIT v. S.N. Malhotra (1989) 178 ITR 380 (Cal)

Gifts to Sons and their heirs treated as individual gifts

Where a father gifted his self-acquired properties to his sons, their heirs, executors, administrators and assignees, it was held that intention of the donor was clear and gifts were to the individual and not to the families.

It was held that the words used "heirs, executors, administrators and assignees in the gift deed of 1932 indicated that the gift was to individual absolutely and there was nothing in the documents or surrounding circumstances to suggest that this object of the bounty were the sons as the head of their respective families or that interest of the sons was limited in any way. The court further held that in the deed it was not stated that donees would take the property as head of their family units and the donees had for many years been filing returns as individuals. Gift deed thus clarifies the nature of beneficiary of gift.

[M.P. Periaknuppan Cheftiar v. CIT (1975) 99 ITR 1 (SC)]

Creation of HUF by gift from Stranger

HUF is a creation of law and cannot be created by the act of parties, therefore, HUF cannot be created for the first time by a gift from the stranger. If HUF already exists, gift can be made by a stranger to such HUF. The gifted property will be HUF property if the gift is made to HUF. Intention of donor & the character of the gifted property will depend on the construction of the gift deed

A gift can be received from a stranger by the HUF but the stranger should normally be connected with the HUF by special ties of friendship or kinship etc. and the gifts should be given with proof and evidence about the genuineness thereof. This is required because there have been cases of non-genuine gifts being arranged from non-taxpayers or agriculturists in support of credits introduced in the books of accounts.

The HUF is not an individual, so it has no relatives. Any money it gets will be treated as a gift from a stranger. If the value of the assets received as gifts in a year exceeds Rs. 50,000, it will be deemed as income of the HUF and taxed accordingly.

Even so, an HUF can safely receive gifts of up to Rs. 2,50,000 in a year without incurring any tax liability because of the basic exemption available to it for assessment year 2019-20. In fact, if the HUF invests Rs. 1,50,000 in specified tax-saving instruments under Section 80C, it can receive assets worth up to Rs. 4,00,000 a year without having to pay a paisa as tax.

(3) Creation of HUF by doing joint labour for the benefit of HUF

In the cases of properties acquired with the aid of joint family property is also the joint family property. Property acquired in the course of some business carried on by the persons constituting a joint Hindu family, takes the characteristic of joint family property.

As per Hindu law, in case of properties not acquired with the aid of joint family property, it is presumed that property acquired by coparceners by working together is joint family property unless the persons concerned desire to hold it as co-owners. This is valid if the coparceners are carrying on work together and belong to the same line of ancestors. The income of joint family through joint labour is not subjected to clubbing provisions of section 64(2) of the Income Tax Act.

Members of a joint family may, by their joint iabour, earn income and acquire property:

(i) If the joint labour is done in partnership, then the profit so earned and the property so acquired will be partnership property and the share of each joint acquirer will belong to him individually.

(ii) If such a property is acquired and the profit is earned with the help of or to the detriment of joint family funds, then the property will be joint family property even though only some of the members had put in their labour and skill for earning the income.

(iii) If, however, the property is acquired without the aid of the joint family property, the presumption is that it is the joint property of the joint acquirer and will not be HUF property unless It is proved that the coparceners intended to own the property as co-owners among themselves. In that case the property will be jointly owned and not HUF property unless it is proved that the coparceners intended to own the property as co-owners among themselves.

(iv) If all the members of the HUF put in joint labour then the presumption will be that the property was acquired with the help of the joint efforts and labour of all the members is HUF property.

The Tribunal held that parallel business in pawning started by two of the members of the HUF belonged to the HUF and the two persons were only benamidars of the HUF. This finding was given on the strength of their conclusion that no funds were invested by these members out of their individual funds and one of them was in fact a minor at the time of starting the business. The books of accounts were written by the same persons who wrote the HUF books and the two members were unaware of obvious details of the business. The High Court held that the factual finding of the Tribunal was passed on appraisal of sufficient material available on records and there was no prima facie error in the inference drawn by the Tribunal.

[Ram Das Deoki Nandan v. CIT Taxation 8(3)-297 (All)]

If, however, it is acquired by joint labour of some of the members without the help of family funds, then unless it is established that it is HUF property, it will be presumed that it is jointly owned property. However, no such presumption arises where the business is carried on by only some of the members of the joint family as held in Sudarsanam v. Naraslmhulu (1901) ILR 25 Mad 149.

Two or more members of a joint family may by their joint labour acquire property and treat it as the property of their branch of the HUF. All the members of a branch or a sub-branch can form a distinct and separate corporate unit within the large corporate family and hold property as such. If the members of such a branch or sub-branch acquired property by joint labour, this would belong to their branch or sub-branch and this forms nucleus of the property of this branch creating a new HUF unit.

Thus HUF property can be acquired under Mitakshara by joint labour of the coparceners and this can be utilised as a source of creating HUF property or nucleus of a branch of HUF. Thus the creation of HUF property can be brought about by joint labour of the coparceners.

(4) Creation of HUF by Inheritance through a specific bequest under a Will

A new family unit can also be created by a Will but the intention of the bequest being for the family has to be made absolutely clear in the Will. A mother had bequeathed her properties to the joint family of her adopted son as there was no legal bar to the mother bequeathing her property to HUF of her son. The gift to HUF was proper.

Any family member or relative can thus make a Will in favour of HUF of a person and property so bequeathed would be HUF property.

No existence of HUF at the time of execution of Will

HUF need not be in existence at the time of execution of Will. Even a stranger can bring a HUF into existence by making a will in the favour of HUF of a person.

Valid Will should be there

It was held that a HUF can also be created by will of a person provided the will is valid and there is a specific bequest in favour of the HUF.

[CIT v. Ghansham Dass Mukim (1979) 118 ITR 930 (P&H).

It was held that the adopted son could legally form and in fact formed an HUF with his wife and unmarried daughter and the bequest of the mother was in favour of this HUF with his wife and unmarried daughter.

[CIT v. Ghanshyam Dass Mukim (1979) 118 ITR 930 (P&H)]

It was held that ancestral properties allotted to adoptive son by a Will were ancestral in the hands of the son even though he received it through the Will. They held that:

"Even if one were to hold that Nanak Chand got the property by virtue of the alleged Will, the property having been bequeathed to him by the sole surviving coparcener shall in the absence of any clear intention, whether express or implied, be ancestral property in his hands vis-a-vis his own issues. None of the plaintiffs ivere bom when the Will was made and therefore there was no occasion for him to convey that the grand children shall stand disinherited..."

[Nanak Chand v. Chander Kishore AIR 1982 (Del) 520]

(5) Creation of HUF by Partition of a larger Hindu Undivided Family

Partition of an existing HUF can also result in creation of many smaller HUFs. As per Hindu Law, the property does not change its character on partition. Property received by a coparcener having a family, continues to have characteristic of HUF. An unmarried coparcener receiving any property will own the property in the status of HUF until he acquires the status of HUF.

However, the partition has to be total partition because the law does not recognize partial partition as per section 171(9) of the Income Tax Act, 1961.

PROVISIONS ILLUSTRATED

To take an example the common ancestor of this HUF is H and it consists of the father H, his sons A and B, grandsons A1, A2, A3, B1 and B2 and great grandsons A1G1, A1G2, A3G1, A3G2, B1G1, B2G1 and B2G2.

H
A					B
A1		A2	A3		B1	B2
A1G1	A1G2		A3G1	A3G2	1G1	B2G1	B2G2

In the illustration given above, there can be a partition between H and his sons A and B and on the joint HUF properties being divided between them branches headed by A, and B would separate from each other and from the common ancestor H. The result would be that there would be three HUFs

(i) consisting of H, his wife and unmarried daughter, if any,

(ii) the branch headed by A and (iii) branch headed by B,

each of these three owning joint property. Therefore by a partition of main HUF, three smaller HUFs are created with separate nucleus of family property. This represents the first important step in creation of three smaller HUFs.

There can be a further partition of the HUF of A and his sons resulting in four family units:

(i) A, his wife and unmarried daughter, if any.

(iij AT and his sons.

(iii) A2 and his wife and unmarried daughter, if any.

(iv) A3 and his sons.

Similarly there can be a partition of the family B into three units:

(i) B, his wife and unmarried daughter, if any,

(ii) B1 and his son, and

(iii) B2 and his sons.

Thus the property belonging to the HUF of the common ancestor H, subject to tax as a single unit, has been distributed into 8 parts, each subject to fax in the status of HUF. Eight families have come into existence owning tangible assets.

These eight HUFs have come into existence in the normal and natural course of families splitting into nuclear or smaller HUFs, in order to meet the present day circumstances and, therefore, creation of these eight HUFs is due to normal process of living and there is neither anything un-natural or illegal in partitioning family of.

Hindu law allows a partition as soon as any coparcener demands if and therefore there can be eight smaller units by partition. In fact in modern conditions of Hindu Society, such smaller HUFs are a rule and not the exception. These 8 HUFs are created by partition.

It was held that in case of married coparceners who have no child, the property will continue with the status of HUF.

[CIT v. Krishna Kumar (1982) 10 Taxman 292 (MP)]

(6) Creation of HUF by Reunion of separated coparceners

After partition of HUF, members may re-unite to form a new HUF. However, there are certain conditions to make such reunion valid in the eyes of law.

Reunion means reconstruction of divided HUF on partition.

Essentials conditions of reunion

Even after partition of HUF, members may re-unite to form a new HUF. However, there are following conditions to make such reunion valid in the eyes of law.

(i) Reunion can take place only when there was in existence a HUF and there was total partition of such HUF.

(ii) It can take place only between persons who were parties to the original partition and to support such reunion, there must be an agreement between the parties.

(iii) To constitute a reunion there must be an intention of the parties to reunite in estate & interest and such intention is evident.

(iv) As per Mitkarsha, Dayabhaga and Smriti Chandrika, a member of a joint family once separated can reunite only with his

(a) father,

(b) brother or

The intention to reunite was to be based on the evidence in the form of subsequent conduct, or subsequent memorandum of reunion, etc. The onus Is on the reuniting coparceners to prove that they have reunited. It is not necessary that all of the coparceners reunite but any of the coparcener who reunites must bring back to the family what he had taken away or what is left out of the same with him.

No writing is necessary for a reunion. Even persons who are parties to a registered deed of partition may reunite by an oral agreement.

The effect of reunion is to remit the reunited members to their former status as members of HUF. However, a memorandum of reunion may be recorded.

Brihaspati, an ancient law giver, has stated that:

"He who being once separated dwells again through affection with his father, brother or paternal uncle is termed reunited".

Entire property existing on day of reunion have to be brought back.

[CIT v. Vaiyapuri Chettiar (1995) 215 ITR 836 (Mad)]

In the reunion of an HUF, all assets originally partitioned need not be pooled back.

[Paramanand Bajaj v. CIT (1982) 135 ITR 673 : 28 CTR 290 (kar)]

It was held that right of reunion is limited to the coparceners and the female members of the family have no right to reunite. As a daughter is a coparcener under the Amendment of the Hindu Succession Act, she has now a right or re-union.

[Pushpa Devi v. CIT 109 ITR 730 (SC)]

The Privy Council in Balabux v. Rukhmabai (1903) LR 30 IA 130 (PC) observed that:

"A reunion in estate property so called can only take place between persons who were parties to the original partition."

Similar view was expressed in the iater judgment of Ram Narain Chaudhry v. Pan Kuer AIR 1935 PC 9 when the Privy Council observed that:

"The parties to the reunion must have been parties to the original partition"

The Bombay High Court in Vishvanath Gangadhar v. Krishnaji Ganesh (1866) 3 AC 69 (Bom) held that:

"renunion must be made by the parties or some of them, who made tire separation. If any of their descendants think fit to unite they may do 'so, but such a union is to a reunion in the sense of the Hindu laxv, and does not affect the inheritance."

This view has been endorsed by the Gujarat High Court in Arvind Chunilal v. CIT 140 ITR 241 (Guj).

For reunion two things are essential : firstly that one can reunite with his father, brother or paternal uncle; in other words, the reunion is restricted to these three classes or cases only.

[Nona Ojha v. Prahbudat - AIR 1924 Pat 647]

Create HUF Deed

Creating a HUF Deed is not mandatory. However it is always beneficial to have a HUF Deed. A HUF deed is a written formal document on a stamp paper stating the name of Karta and Coparceners of HUF. The eldest male member of HUF becomes Karta of HUF. The name of members of HUF and the name of the HUF is also required to be stated in the HUF Deed at the time of creating of HUF. The name of HUF is usually the name of the Karta followed by the word HUF e.g. Ashok Kumar HUF. HUF Deed also states the capital with which the HUF has been initiated. There are various sources through which capital can be introduced in the HUF.

Requirement of Rubber stamp of HUF

A Rubber stamp of HUF will also be prepared. Rubber stamp should be Rectangular. Rubber Stamp will be affixed on all the documents pertaining of HUF to authorize the transaction.

Apply for PAN

Since HUF is a separate assessee under Income Tax Act, 1961, therefore HUF have to hold its own permanent account number. A separate application for PAN Card can be made, in Form 49A, by the Karta of HUF on behalf of HUF for allotment of PAN. On allotment of PAN, HUF is required to file separate Income Tax Return & can avail all the benefits under Income Tax Act, 1961.

Open Bank Account in the name of HUF

As regards bank account of a HUF, it should be either in the name of the HUF or in the name of the Karta of the HUF with a specific declaration that the account is that of the HUF. The members should also be careful and not deposit their personal funds in the HUF bank account as only funds belonging to the HUF can be kept in it. Normally, only the Karta is authorized to sign all cheques and operate the account on behalf of the HUF. However, he may also authorize any other member of the HUF to operate the same on behalf of the HUF.

Branches of HUF

An HUF can have several branches or sub-branches. For example, if a person has his wife and sons, they constitute an HUF. If the sons have wives and children, they also constitute smaller HUFs. If the grandsons also have wives and children, then even they will also constitute still smaller or sub-branch HUFs.

As the HUF is a creature of Hindu Law and these entities are HUFs alongwith the bigger HUF of the father or the grandfather. It is immaterial whether these smaller HUFs possess any property or not. Property can be acquired by any mode; by partition of bigger HUF or by gifts from any member of the family or even by a stranger or by will with unequivocal intention of the donor or the testator that the said gift or bequest will form the joint family property of the donee or the testate or Re-union of HUF.

An HUF can be composed of a large number of branch families, each of the branch itself being an HUF and so also the sub-branches of more branches.

[CIT v. M. M. Khanna (1963) 49 ITR 232 (Bom)]

HUF Properties are Presumed Joint Property, Unless Proved to be Self-Acquired

It was held that all assets pertaining to Hindu Undivided Family (HUF) are to be treated as joint property of the HUF, unless the contrary is proved as self-acquisition of property through valid documents.

[Adiveppa & Ors. v. Bhimappa & Anr. being Civil Appeal No. 11220 of 2017 - Order dated 06.09.2017 (SC)]

INCOME TAX

Saturday, 1 June 2019

Modes of Creation of HUF (Hindu Undivided Families)

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