Introduction and Creation of HUF and some general points

INTRODUCTION

HUF known as “Hindu Undivided Family” is recognized as a separate and distinct unit of Taxation. Basically HUF is already formed when a person gets married. Only the legal documentation is left. Unlike formation of Companies, it does not require much procedural compliances. Formation of HUF is no more a cumbersome process for any individual. Forming HUF can help you save taxes to an extent if properly planned. Many people are not aware about the creation of HUF which I am explaining it in this article. First let us get a basic knowledge about HUF

BASIC DEFINATIONS

HUFs – Hindu Undivided Families are the form of organizations that has separate legal entity for the purpose of tax assessment under Income Tax under the provisions of Section 2(31) of the Income Tax Act.. It has been defined under the Hindu law as a family, which consists of male lineally descended from a common ancestor and included their wives and unmarried daughters. The relation of HUFs arises from the status and not from legal contracts. HUF consist of Karta and co-parcerners.

Karta – A Karta is the person who manages the affairs of the family. It is not necessarily required that the senior most member should be the Karta of an HUF. Any other male member of the family can be the Karta with the consent of the other members of the family.

Coparceners – The person who acquires by birth the interest in the family property. The coparcener enjoys the right to enforce partition. Adopted child can become the member but he cannot become the coparcener. Long back only the male members of the HUF were regarded as coparceners of HUF. Coparceners are actually those member of the HUF who can enforce partition of HUF and ask for their share. However The Hindu Succession Amendment Act 2005 removed the gender discriminatory provision and provided that daughter can be coparceners just like son of a family. But since wife cannot enforce partition of the HUF and accordingly cannot become coparceners.

Additional Information:- As far as daughter is concerned, post-amendment, she becomes member of the HUF on birth, and for all practical purposes, is to be regarded as a coparcener in her own right in the same manner as the son and shall have the same rights under the coparcenery property as she would have had, if she had been a son; inclusive of the right to claim by survivorship. She shall be subject to the same rights and disabilities in respect thereof as a son. As per the tenets of Hindu Law, on death of Karta the HUF is not disrupted and does not become non-existent. The eldest coparcener of the family steps into the shoes of the deceased Karta. Thus, after the amendment, upon the death of the father, the unmarried major daughter, if she is the eldest surviving coparcener, will become the Karta of her father's HUF even if her mother is alive, as her mother would never be treated as a coparcener. General rule for daughters after getting married is that married daughter is not a member of the father's family, she cannot become Karta of her father's HUF even though she can have all other coparcenery rights in her father's HUF.

Schools/System of Hindu law under HUF

Two schools of law are there in order to create a HUF:

a)  Dayabhaga – It is prevalent in West Bengal and Assam. As per this school of law, the son acquires the right in the family property only after the death of his father. That is why in the father’s life-time, the income from ancestral property is assessed as the income of an individual except when the father himself is a member if co-parcenery consisting of himself and his brother or brothers.

b)  Mitaakshara – It is prevalent in rest of India under which, the son acquires the right in the family property right from his birth. On the death of the father or any other member, there is no change in the position except that the eldest son becomes the manager of the family in place of the deceased father. However, when there is only one male member (or a female member) with no other member in the family then he or she will be assessed as “Individual” till another member comes into the family. For eg: When son gets married then in such a case the husband and wife will become HUF in respect of ancenstral property.

Creation of HUF

For being considered as a Hindu Undivided Family under the Acts, it must satisfy the condition that the minimum no. of members required is two who can be a husband and wife. Both the spouse can create a family and constitute a HUF. They don’t have to wait till they have a child to constitute their HUF.

The procedure is as follows :-

1)  Capital and members – For an HUF to be created the major requirements is the capital and persons. Capital can be in the form of ancestral property, assets gifted by relatives and friends, or received by the HUF through a will. Members as discussed above, minimum requirement is two.

2)  Select a suitable name – The HUF to be created should have proper name. Select a proper name for the HUF and the name should not violate the laws or have any negative impact. The members can choose a suitable name before starting a HUF business form.

3)  Form a Deed – Formation of HUF should be embodied in a deed which provides that a proper legal deed or agreement is required before creating a HUF. The agreement/ deed should have all the details, including the name of Karta, co-parceners, address and source of funds in the corpus. Deed will facilitate that the business or the formation of HUF is valid and true.

4)  Apply for PAN – Application for PAN (Permanent Account Number)(Form 49A) is also an important step to be undertaken while forming a HUF. After executing the deed, the Karta is required to obtain a permanent account number PAN for the HUF. Obtaining PAN is a mandatory requirement as all financial transactions shall carry PAN.

5)  Open a Bank Account – After PAN has been allotted, the Karta is required to open a Bank a/c in the name of the HUF.  It is also advisable to get some stationery printed for official communication. The HUF is now ready to function. The Karta will have to invest in tax saving instruments and file tax returns on behalf of the HUF. Only the money related to the business of HUF shall be invested in such Bank accounts.

REPRESENTATIVE OF HUF IN PARTNERSHIP FIRM

A HUF can become partner in partnership firm. The Karta or the member of the HUF can represent HUF in a firm. A female member can also represent HUF in a firm.

REMUNERATION TO KARTA OR MEMBER FROM FIRM

Where remuneration was received by a member of HUF from a firm, where he was partner on behalf of HUF for managing firms business such remuneration was his individual income, CIT v. G. V. Dhakappa 72 ITR 192 (SC); Premnath v. CIT 78 ITR 319 (SC). However, income received by a member of HUF from a firm or company is taxable as the income of the HUF, if it is earned detriment to or with the aid of family funds, otherwise it is taxable as the separate income of the member, P.N. Krishna v. CIT 73 ITR 539 (SC).

Some Important points:-

• The HUF continues to exist in the hands of the female members after the death of the male member. Case Law:- CIT v Veerapa Chettiar, 76 ITR 467(SC)
• The daughter after her marriage ceases to be a member/coparcener of her father’s HUF. After marriage she becomes the member of her husband’s HUF.
• A widow cannot be the Karta of the HUF as she is not the coparcener.
• HUF is a separate entity for income tax purposes
• Huf is taxed on the same slab as is applicable for individual. Further deduction under SEC 80C is also applicable upto Rs 1,00,000/-

      
  Few Questions and Answers:-  

 Q. Is a HUF necessarily resident in India?

Ans : No. Section 6 of the Income-tax Act, 1961 clearly contemplates a situation where a HUF can be non-resident also. In fact, HUF can also be Not Ordinarily Resident. A HUF will be considered to be resident in India unless, during the previous year, the control and management of its affairs is situated wholly outside India. In such a case, it will be treated as non-resident HUF. Moreover, in case of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the previous year or has, during the seven previous years preceding that year, been in India for a total 729 days or less, such HUF is to be regarded as Not Ordinarily Resident within the meaning of the Income-tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.

Q. An HUF is having all the properties in India. The Karta of the HUF is residing outside India permanently and the female members are staying in India and are managing the affairs of the HUF. What would be the status of such HUF?

Ans : As discussed in the earlier answer, the test is not where the Karta resides, the test is where the control and management of the affairs of HUF is situated. Even if a part of control and management is situated in India, such HUF will be treated as resident in India. Though, generally, Karta is supposed to manage the affairs of HUF, it is not an absolute rule and, by consent, the power of control and management may be delegated to other members of the family, either fully or partially.As such, in this case, the status of HUF would be resident in India.

Q. What will be the position if the son is the sole male coparcener without any female members?

Ans : In such a case, there will not be any HUF. However, upon marriage of such son, automatically, HUF will come into existence.

Q. Can a son being a member of HUF consisting of his father, himself and his brothers, form an HUF consisting of himself, his wife and minor son?

Ans : Under Hindu law, there can be a HUF within a HUF. Therefore, a son can have his own smaller HUF while he continues to be a member of his father’s HUF. In his father’s HUF, he is a mere member and in his own HUF, he is Karta.

 Q. Can shares be registered in the name of HUF in the company?

Ans : Shares cannot be registered directly in the name of HUF but it can be registered in the name of "A" as karta of the HUF.