Under the Income-tax Act, 1961 ("the Act") & Wealth Tax Act, 1957, a Hindu Undivided Family ("HUF") is treated as a separate person for the purpose of taxation.
The term HUF is not defined under the Act. Hindu law defined it as consisting of all members lineally descending from a common ancestor, including their wives and daughters. Daughter even after her marriage continues to remain coparcener of HUF of her father. Thus female on her marriage, is at the same time member of two HUFs i.e. HUF of her father and HUF of her husband. Even family with husband & wife without child constitute HUF. The income of a HUF would be assessed as such if there were a coparcenership. The relation amongst the members of HUF arises out of legal status and not from a contract. The HUF is a creation of Hindu Law, it exsists even without any nucleus or ancestral joint family property. The common hotch poch can be filled by partition of a larger HUF, devolution of interest in coparcenary property of a coparcener who dies intestate, inheritance through a specific bequest under a will, reounion of separated coparceners, receipt of gift, blending of individual property with the family hotchpotch, doing joint labour for benefit of HUF, etc. Gifts and wills are the most common way for activating dormant HUF. However special care need to be taken in drafting of the gift deed or the document evidencing the gift by the parent for the benefit of the said HUF. The HUFs are not recognised in the State of Kerala after the enactment of Kerala Joint Family System (Abolition) Act, 1975 with effect from 1-12-1976.
There are two schools of Hindu Law viz. Dayabhaga prevailing in West Bengal & Assam and Mitakshara applicable to all other places. Under Dayabhaga School of law, a son does not acquire any interest by birth in the ancestral property. He acquires interest only upon death of father. Father is the absolute owner of property during his lifetime. Accordingly, father is assessed as individual and not as a HUF. Further, on death of father, by operation of law son does not spontaneously, become the member of the joint family. He along with other remains co-owners with definite shares in the property left by the father unless they voluntarily decide to live as joint family. However, under the Mitakshara School of law each child acquires equal interest in the ancestral property. Hindu Law does not govern Jain & Sikh family, but for the purpose of Act such families are treated as HUF.
Residential status of the HUF would depend upon where the control and management of the affairs of HUF is situated. HUF would be non-resident where whole of the control and management of its affairs is situated outside India. As such, the income earned by HUF will enjoy all exemptions and deductions; including the basic exemption under Income-tax & Wealth-tax Acts, so far as applicable. The total income of a HUF is determined on the similar lines of that of Individual, various deductions available to the individual is also available to the HUF. Similarly, the various provisions under the Act such as advance tax, TDS, penalty, interest, fine, etc. are also applicable to HUF.
Adjustments should be made for clubbing & losses i.e. under sections 60 to 63 of the Act, income belonging to some other person, may be taxable as income of a HUF & losses of the current year as well as preceding years will be set off u/ss. 70 to 80 of the Act. After such adjustments, the total of the five heads of income is gross total income. Further, after computing gross total income, the deductions u/ss. 80C to 80U (whichever is applicable) are to be made in order to arrive at net total income. The provision of furnishing a return of Income of HUF is governed by section 139 of the Act i.e. similar to provisions as applicable to individuals.
The total income will be subject to applicable tax rates. HUF’s income may include agriculture income will be so included for rate purpose and rebate will be eligible.
Subject to the provisions of section 64(2) of the Act, any sum received by an individual as a member of HUF, where such sum has been paid out of the income of the family, or, in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is exempt from tax. Any of the coparcener can claim for the partition of the HUF. On partition, there is severance of status of HUF. In order to be acceptable partition u/s 171 of the Act, a partition should be complete with respect to all members of HUF and in respect of all properties of HUF and there should be actual division of property by metes & bounds. However, as per Hindu law partition need not be by metes and bounds. It can be total or partial. Income-tax Act does not recognise partial partition. Setting apart certain assets of HUF in favour of certain coparceners on condition that no further claim in properties will be made by them is nothing but partial partition and not a family arrangement and that is not recognised u/s 171(9) of the Act. Unequal divisions of properties knowingly made may not spell invalidity and mathematical equality may not be maintained always in a partition while, ordinarily, substantial fairness in division is shown.