All tax implications of Assessment of HUF are described in this page in details because HUF is a separate and a distinct tax entity. The income of an HUF can be assessed in the hands of the HUF alone and not in the hands of any of its members, unless specifically provided by law.
Under the Income-tax Act, a Hindu undivided family is treated as a separate entity for the purpose of assessment. The term “Hindu undivided family” has not been defined under the Income-tax Act. The expression is, however, defined under the Hindu law, as a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. The relation of a Hindu undivided family does not arise from a contract but arises from status.
However, any sum received by an individual as a member of an HUF, where such sum has been paid out of the family or income of the impartible estate belonging to the family shall be exempt in the hands of the member of the HUF as per section 10(2).
The liability of income-tax in case of HUT also depends upon its residential status in India. HUF can be (a) resident and ordinarily resident in India; (b) Resident but not ordinarily a resident of India; or (c) Non-resident in India.
HUT cannot make any gift of HUF property to any coparcener or any other person. Any gifts made by HUF are void-ab-initio.
However, the karta of an HUF has power to gift out of joint family property for certain approved purposes provided that gift amount is reasonable. For detail see case studies at the end of this Chapter.
Coparceners are only allowed to claim partition of HUF. However, if any partition takes place in HUF, there should be complete partition of HUF. Partial partition of HUT is not recognized by Income Tax and Wealth Tax Act.
On partition of HUF, the mother, i.e., wife of karta takes a share equal to the sons and daughter. However, they can mutually decide to take unequal shares. As per section 47 of Income Tax Act, no capital gain shall arise to HUF on distribution of assets on partition of HUF.
1. Hindu Coparcenary –
A Hindu Coparcenary includes those persons who acquire by birth an interest in joint family property. Previously, it was limited to male descendents only. With the introduction of Hindu Succession (Amendment) Act, 2005 from September 6, 2005, daughters also are given coparcener status. Hence, Hindu Mitakshara Coparcener includes daughters of the Hindu Undivided Family in addition to sons, grandsons and great-grand sons. One of the important tests of coparcenary is that a coparcener enjoys the right to enforce partition. This right is given to daughters also with effect from September 6, 2005.
2. Different Schools of Hindu Law –
There are two schools of Hindu law — Dayabhaga and Mitakshara. Dayabhaga school of law prevails in West Bengal and Assam. Under this school of law a son does not acquire any interest by birth in an ancestral property. Son acquires such interest only after the death of his father. Therefore, under this school of law, the son does not enjoy right to demand partition during the lifetime of his father. In view of this, the father enjoys an absolute right to dispose of the property of the family according to his desire. It can, therefore, be said that there is no coparcener in Dayabhaga school of law till the death of father. During the lifetime of the father, father is assessed as an individual, and not as Hindu undivided family. After the death of father, sons become coparceners in respect of property left by father and income arising therefrom is taxable as income of Hindu undivided family.
Mitakshara school of law applies to the whole of India except West Bengal and Assam. Under this school of law and with the introduction of Hindu Succession (Amendment) Act, 2005 with effect from September 6, 2005 both son and daughter acquire by birth an equal right in the ancestral property along with their father. The coparcenary under this law, is therefore, a fluctuating body which is enlarged at the time of each birth and reduced at the time of each death of a coparcenary child.
3. Jain and Sikh Families –
Though Jain and Sikh families are not governed by the Hindu law, such families are treated as Hindu undivided families for the purpose of the Income-tax Act.
4. The Basic Conditions for Assessment of Hindu Undivided Family
Income of a joint Hindu family may be assessed as a Hindu undivided family if the following two conditions are satisfied:
- There is a coparcenership. In this connection, it is worthwhile to mention that once a joint family income is assessed as Hindu undivided family, it continues to be assessed as such in subsequent assessment years till partition is claimed by its coparceners.
- There is a joint family property which consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members. Ancestral property, in this connection, may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e., his father, grandfather and great-grandfather. Therefore, property inherited from any other relation is not treated as ancestral property.
5. Computation of Total Income of HUF
Before discussing the steps for computation of total income of HUF, the following points should be considered:
(i) As per section 64(2), income from the transfer of a self-acquired asset, without adequate consideration or conversion of the same into joint family property, shall not be treated as the income of the HUF. It shall be continue to be taxed in the hands of the transferor who is the member of the HUF.
(ii) Similarly, income from an impartible estate is taxable in the hands of the holder of the estate and not in the hands of the HUF.
(iii) Any fee or remuneration received by a member of the HUF as a director or a partner in a company or firm which is as a result of the investment made in such concern out of the funds of the HUF, shall be treated as income of the HUF. However, if such fee or remuneration is earned by the member as a director or partner for services rendered purely in his personal capacity because of his personal aptitude to the business of the concern, it shall be treated as the income of the individual and not the HUF. In a case decided by the Supreme Court it has been held that remuneration and commission received by the Karta of HUF on account of his personal qualifications and exertions and not on account of investments of the family funds in the company cannot be treated as income of HUF.
(iv) If remuneration is paid to the Karta of an HUF or any other member of HUF:
(a) under a valid agreement which is bona fide
(b) is in the interest of, and expedient for, the business of the family, and
(c) the payment is genuine and not excessive,—
such remuneration paid wholly and exclusively for the business of the family, shall be
allowable as an expenditure while computing the income of the HUF and such salary shall be taxable in the hands of karta/member as his individual income.
(v) As already discussed above, the son is not a coparcener in Dayabhaga School of law. Therefore, if the father does not have a brother as a coparcener, income arising from ancestral property is taxable as his individual income.
|Karta in his individual capacity and Karta representing HUF are two different entities. HUF can sublet its contract to Karta in his individual capacity. Income earned by Karta in his individual capacity from such contract cannot be assessed in the hands of HUF.|
Steps for Computation of Income-Tax of HUF
The Gross Total income of HUF, like any other person, shall be computed under four heads of income, on the basis of their residential status. There can be no income under the head ‘income from salaries’ in the case of HUF.
Sections 60 to 63 relating to income of other person included in the assessee’s total income are applicable in case of HUF but section 64 is not applicable to HUF as it is applicable in case of individual assessee only.
Set off of losses is permissible while aggregating the income under different heads of income.
Carry forward and set off of losses of past years, if permissible, is allowed.
The income computed in steps 1 to 4 is known as gross total income from which the applicable deductions under sections 80C to 80U will be allowed.
The balance income after allowing the deductions is known as Total income which will be rounded off to the nearest Rs.10.
Compute the tax on such total income at the prescribed rates of tax, i.e., at special rates and normal slab rates.
Add surcharge wherever applicable.
Health and education cess @ 4% on the tax plus surcharge if any, shall be levied.
Deduct the TDS, advance tax paid for the relevant assessment year and double taxation relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded off to nearest 10 and must be paid as self-assessment tax before submitting the return of income.
|It may he observed that in computing the income under the head ‘Capital gains’, the HUF is also entitled to the following exemptions:
(i) Capital gain on sale of property used for residence [Section 54].
(ii) Capital gains on transfer of agricultural land [Section 54B].
(iii) Capital gain on compulsory acquisition of lands and buildings [Section 54D].
(iv) Capital gain on transfer of long-term capital assets [Section 54EC].
(v) Capital gain on transfer of certain capital assets where investment is made in a residential house [Section 54F].
(vi) Capital gain on transfer of assets on shifting of an industrial undertaking from urban area [Section 54G].
6. Alternate Minimum Tax (AMT) on all Persons other than Companies [Sections 115JC to 115JF]
Where the regular income-tax payable for a previous year by a person (other than a company) is less than the alternate minimum lax payable for such previous year, the Adjusted Total Income shall be deemed to be the total income of such person and he shall be liable to pay income-tax on such total income at the rate of 18.5%. [Section 115JC (1)]
However, in case of a unit located in an International Financial Service Center and which derives the income solely in convertible foreign exchange, the alternate minimum tax under section 115JC shall be charged @ 9% instead of 18.5% [Section 115JC (4)]
|(i) “Adjusted total income” shall be the total income before giving effect to provisions of sections 115JC to 115JF as increased by the deductions claimed under sections 80-IA to 80RRB other than section 80P included in Chapter VI-A and deduction claimed under section 10AA [Section 115JC (2)].
(ii) “Alternate Minimum Tax” means the amount of tax computed on adjusted total income, —
(1) in case of an assessee being a unit referred to in section 115JC (4), at a rate of 9%;
(2) in any other case, at a rate of 18.5%. [Section 115JF(b)]
(iii) “regular income-tax” shall be the income-tax payable for a previous year by a person other than a company on his total income in accordance with the provisions of the Act other than the provisions of Chapter XII-BA. [Section 115JF(d)]