Wednesday, 20 August 2014
Monday, 18 August 2014
CAPITAL FORMATION OF HINDU UNDIVIDED FAMILY (HUF) UNDER INCOME TAX ACT
After
creating on HUF file the assessee wants to increase the capital of HUF, known
as capital formation. That too needs to be done within the parameters of law
and in the light of the principals enunciated by the Supreme Court.
Some of the modes for creating capital in HUF file are:
(1). Ancestral funds through partial
partition.
(2). gift of ancestral funds.
(3). Gift from third parties.
(4). Property received under “will” of any
party.
(5). Self- generation, i.e., earning of
income in HUF.
(6). Throwing in by a member of an HUF.
(i) Ancestral funds through partial partition
Receipt of ancestral funds through
partial partition has been very effectively used in past. Usually the
properties of an HUF where partially partitioned so that the coparcener in
whose HUF the funds are to be required is given the largest share whereas other
coparceners/members are given meager amount since unequal partition is
permissible under the Hindu law. This kind of partitions were held to be valid.
In this way the funds belonging to a greater HUF were carved out and stamped as
capital of smaller HUF, meaning there by that the funds belonging to the
father’s HUF were brought in to the son’s HUF.
However, in 1978
this planning was plugged and it was provided under s. 171, that such partial
partitions, in case of “hitherto
assessed HUF” , shall not be recognised under the Income – tax Act. Hence this
route has now become practically useless in cases where the HUF has been once
assessed to income-tax. However, it may still may be a worthwhile avenue for those
HUFs, which have never been assessed (not hitherto assessed) to income-tax.
A question may
arise whether unequal partition would result in “gift” or not? The supreme
Court in CGT vs. N.S. Getti chettiar (1972) 82 TTR 599 (SC); TC 35r. 730 has
held that unequal partition of the properties of on HUF would not fall within
the definition of “Gift” under the Gift-tax Act. Incidently the gift-Tax Act
has also been abolished from 1st October, 1998.
(vi) Receiving gift of ancestral funds
It has been held
in Narendrenath’s case [(1969)] 74 ITR 190 9 (SC): TC 65R. 557]
Those funds
which were ancestral and which are received on partition by the coparcener
would become the property of such a coparcener’s HUF. Applying this principle
if an HUF gifts reasonable amounts to the HUF of one its coparceners then the
donee coparcener would receive the amount for and on behalf of his HUF. In
other words the funds so received in gift, bearing the stamp of ancestral funds
would continue to remain so in the hands of the coparcener also, i.e., it would
be treated as ancestral funds in the coparceners HUF. Once it is ‘ancestral
funds’ in the coparceners HUF, relaying on principles laid down in surjital’s
case [1976 CTR (SC) 1470 : (1975) 101 ITR 776 (SC): TC 37R. 132] The incoming
generated from such uncestral funds would be taxed in the hands of coparcener’s
HUF and not in his individual status. Since the above –referred gift by a
bigger HUF to smaller HUF is not covered by term “partition” as defined in
Explanation under section 171, it would not be effected by the rigours of
section 171(9). Further now since the gift-tax in case of above- mentioned
gifts.
However it may
be noted that the karta of an HUF has got power only to make gifts or
reasonable amounts. This aspect of powers of Karta vis-à-vis making a gift
should be considered.
(vi) Gifts from outsiders
While
considering the issue of gift from outsider it may be noted that gift from
outsiders to an HUF is held to be a valid gift in the hands of HUF has held by
the supreme court in Pushpa Devi vs. CIT 1977 CTR (SC) 348: (1977) 109 ITR 730
(SC): TC 37R. 168. However it is important to note that the donor should in
clear term state that the gifts has been given to an HUF. There should be no
ambiguity left in this matter.
Now let as
consider a situation where on one hand we have a family, which comprises of
husband wife son and minor daughter. On the other hand we have a family, which
comprises of husband, wife and two unmarried daughter i.e., there is only one
coparcener.
In the first mentioned family composition,
where there are two coparceners the income generated from the gifted funds will
be assessed in the hands of HUF.
But if the
family has a composition of the second type viz. only one coparcener, then has
held in surjital chabda’s case (supra) through the gifted funds belongs to the
HUF, since there is only one coparcener, the income of such gifted funds would
be taxable in the hands of the solo coparcener. However there can be a contrary
view also as stated above. Does this mean that for such families the doors or
shut for formation of capital in HUF?
Let us consider
an example where the family consist of husband, wife and unmarried daughter,
which we shall refer as smaller HUF however the husband has a brother and a
father who are still surviving meaning there by the father’s family to which we
shall refer as bigger family is in existence, in the father family there is a
father, two sons and let us say the mother. Let us presume that this bigger
family has no JUF corpus if the genuine third party gift is received in the
bigger HUF i.e. fathers HUF. After the receipt of gift if an unequal partial
partition is made of the bigger HUF and substantial amount is received by the
smaller HUF and substantial amount is received by the smaller HUF then such
amount received on partial partition shall become the corpus of smaller HUF. Now
applying the principles laid down in the case of narendranath vs. CIT (supra),
since the corpus of the smaller HUF bears the stamp of ancestral property i.e.,
property owned by the bigger HUF where the husband i.e., sole coparcener of
smaller HUF will also be considered as ancestral property. This in turn would
mean that it shall not be hit by the ratio laid down in sujital’s case the
ratio laid down considering the fact that the property received in the hands of
the family did not bear the stamp of ancestral property.
However, before
resorting to this kind of unequal partition, one will have to examine whether
the bigger HUF has been hitherto assessed or not. This is because section 171(9)
of the income – tax Act 1961 provides that if an HUF is already assessed to tax
as on HUF, then if any partial partition is made after 31st
December, 1978, then such partially partition shall not be recognised by the
assessing officer and the assessment of income arising out of the partially
partitioned property shall be made in the hands of the HUF. Incidently it
should be noted that if on HUF is assessed as HUF, then unless the clime of
partial partition is recognised by the assessing officer, the income will
continue to be assessed in the hands of the HUF.the various sub-section of
section 171 provide for the machinery to assess the income and recover the tax,
interest, penalty, etc., section 171 provides a fiction where by , through
income belongs to the smaller HUF, it is deemed to bethe income of bigger HUF,
it is deemed to be the income of bigger HUF is liable to pay the Tax.
(iv)Gift to HUF under a will
Another mode for
creating corpus in the HUF is through a will. A parson can bequeath his or her
property through his or her will. In a valid will if it has been clearly
mentioned that the property shall bestow, let us say, upon the son’s HUF then
the property so received by that person, shall belong to his HUF.
(v).Earning of income in HUF
The Supreme Court
has also set the principle that if the income is generated out of the
investment of funds of HUF, it is HUF income is attributable to be the skills
and exertion and the coparcener it is to be taxed in the hands of such
coparcener.
For example
ordinary commission is paid for rendering of services. There fore, commission
is earned on account of exertion of skill labour by on individual. Thus
commission income in normal circumstance could not be said to have been earned
by HUF, where it can be established on facts, that the assets or funds of the
HUF were utilised or at stake in earning the commission income. If the
commission is earned as a DEL CREDRE agent, where the agent guarantees the
realization of sale, the funds of the agent are at stake, in such a case if the
commission agent is on HUF and HUF as sufficient funds, then the commission so
earned would have to be taxed in the hands of the HUF.
(vi) Throwing in by a member of an HUF.
The last mentioned mode viz. capital formation by throwing in or blending of personal property is no more attractive (expect in few exceptional cases) because of the clubbing provisions embedded in section 64(2) and hence it is not discussed in this article however, in given set of facts this route may still be beneficial.HUF VIS A VIS INCOME TAX ASPECTS
A.ASSESMENT
1. ‘PERSON’ INCLUDE A HINDU UNDIVIDED FAMILY
The term
‘person’ has been defined in section 2(31) in an inclusive manner to include,
inter alia, a Hindu undivided family. However, there is no definition of the
purchase “Hindu undivided family in the income tax act.
2.HUF IS A SAPERATE TAX ENTITY
The supreme court in I.T.O.v. Bachula Kapoor
[1966]60 ITR 74 (SC) held that “so long as the HUF exists, the individuals
thereof cannot separately be assessed in respect of its income . . . . . thus
HUF is a separate and a distinct tax entity and income arising to HUF can be
assessed only in it’s own hands and cannot be assessed in the hands of any
member or copercener’’
3.Basic condition for assessment as HUF
Income of a joint Hindu family may be
assessed as income of a Hindu undivided family if the following two conditions
are satisfied:
·
There should be a
coparcenership. In this connection, it is worth while to mention that once a
joint family income is assessed as that of Hindu undivided family, it continues
to be assessed as such in subsequent assessment years till partition is claimed
by it’s coperceners.
·
There should be a
joint family property which consist of ancestral property, and property transferred by its members.
ANCESTRAL
PROPERTY:- Ancestral property may be defined as the property which the man
inherits from any of his three immediate male ancestor, i.e., his father, Grand
father and grate grandfather. Therefore, property inherited from any other
relation is not treated as ancestral property. In the fallowing cases, income
of ancestral property. In the fallowing cases, income of ancestral property is
taxable as income of ancestral property is taxable as income of Hindu undivided
family:
- Family of window mother and sons (may be minor or major);
- Family of husband and wife, having no child;
- Family of two windows of deceased brother;
- Family of uncle and nephew;
- Family of two or more brothers ;
- Family of mother, son and son’s wife;
- Family of male and his late brother’s wife.
B.COMPUTATION OF TAXABLE INCOME OF HUF
In order to compute the income of a Hindu
undivided family, one has to first ascertain its income under the different
heads of income exempted under section 10, 10A and 10B.
While computing income one should keep in
mind the fallowing additional points;
§ If funds of a Hindu undivided family, one has to first
ascertain its income under the different heads of income of the family in case the
fees or remuneration is earned essentially as a result of investment of funds.
Conversely, however, if the fees or remuneration is earned essentially for
services rendered by the member in his personal capacity, it will be treated as
the personal income of the member.
§ If any remuneration is paid by the Hindu undivided
family to the karta or any other member for services rendered by him in
conducting family’s business, the remuneration is deductible if remuneration is
(a) paid under a valid and bonafied agreement; (b) in the interest of, and
expedient for, the business of family; and (c) genuine and not excessive –
jugal kishore Baladeo sahai v. CIT[1967] 63 ITR 238(SC). Similarly, if salary
is paid by the Hindu undivided family to its karta for looking after its
interest in firm in which it is paid by the Hindu undivided family to its karta
for looking after its interest in firms in which it is partner through said
karta for looking after its interest in firms in which it is partner through
said karta, such salary is allowable as deduction __ CIT v. Prakash chand
agarwal [1982] 11 taxman 55(MP).
·
The fallowing
income are not taxed as income of Hindu undivided family:
o
If a member has converted (or transferred
without adequate consideration) after December 31, 1969 his self acquired
property in to joint family property, income from such property is not taxable
in the hands of the family.
Income from
impartial estate is taxable in the hands of the holder of the estate and not in
the hands of the Hindu undivided family. Through the impartiable estate belongs
to the family, income arising there from belongs to the holder of the estate
who is the senior most male member of the family. Income from impartiable
estate is taxable in hands of the holder of the estate.
o
Personal income
of the members cannot be treated as income of Hindu undivided family.
o
As stridhan is
absolute property of a woman, income arising there from is not taxable as
income of Hindu undivided family.
o
Under the
Dayabhaga school of law, no son has any right in the ancestral property during the
life time of his father, If therefore, the father does not have any brother as
a coparcener, income arising from ancestral property is taxable as his
individual income.
Clubbing and adjustment of losses- In this
regard fallowing points should be noted-
1.
Under section 60
to 63, income belonging some other person, may be taxable as income of Hindu
undivided family transfer income without transferring the asset, such income is
taxable Under section 60 in the hands of the family.
Losses of the court year as well as
proceeding years will be set off under section 70 to 80.
After the aforesaid adjustment, the total
of the five heads of income is gross total income.
DUDUCTION FROM GROSS TOTAL INCOME – After
computing gross total income in the aforesaid manner, the fallowing deduction
are made under section 80CCC to 80U for the assessment year 2003-04 in order to
arrive at net income:
Section Nature of deduction
80D Payment
on account of medical insurance premium
80DD Maintenance
including medical treatment Of
handicapped
dependents
82DDB Expenditure on
medical treatment
80G Donation
to charitable institution and funds
80GGA Donation to
scientific research or rural development
80HHB Profit and
gains from project outside India
80HHBA Profit and gains
from Housing projects
80HHC Export turnover
80HHD Earning in
convertible foreign exchange
80HHE Profit from
export of computer software
80HHF Profit from export of films software
80-I Profit
and gains from industrial undertaking after a certain
Date
80IB Profit and
industrial undertaking other than infrastructure
Development
undertakings
80JJA Profit from
the business of collecting and processing of
Bio
degradable wast
80L Interest
on certain securities, dividend etc.
80D
Royalties from
foreign enterprises
TAX Liability calculation
The procedure and the rates of tax is the
same as of on individual.
OTHER ASPECTS CONCERNING HUF
1. Family consisting of female Members
(i) Whether a joint Hindu family can comprise of females only
A joint Hindu
family continues to exist even through at a particular time there may be no
male coparcener provided of course there is a “potential mother” in the family,
that is to say, the window of a deceased coparcener, who is capable of bringing
in a male member by way of adoption.
It was held by
Allahabad High court in CIT v. Sarwan kumar [1945] 13 ITR 361 (ALL.) that there
can be HUF consisting of female members only. They held that females are and
can be component parts of an undivided Hindu family. The court Observed “that
being so, there can be in our judgement, an undivided Hindu family consisting
of females only.
The coparcenary,
no doubt comes to an end with the disappearance of the last male member, but as
already pointed out, the existence of coparcenery is not essential for the
existence of a joint Hindu family”
Similarly, in
the case of Savitri Devi v.CIT [1976] 104 ITR 385 (Pat.) it was held that the
window and her unmarried daughter constituted a HUF even when the window had
not adopted a son.
(whether two females of a family can, by agreement constitute a joint Hindu family in regard to their individual properties
Where the
members HUF, being females, inherit something individually, they cannot
constitute a HUF by agreement by pooling up their inherited property. In this
context, a reference could also be made to the decision of the Supreme court in
the case of Puspa Devi vs. CIT 1977 CTR (SC) 348 (1977) 109 ITR 730 (SC): TC
37R. 168,
Where the
supreme court has held that it was a fundamental notion governing a joint Hindu
family that a female member of the joint family cannot blend her separate
property, even if she is the absolute owner there of, with the joint family
property. This judgement covered a case where there was already a joint family
in existence and held that, even so, a female cannot blend her absolute
property there with other females a HUF and blends the property of her absolute
ownership therewith.
However, where
there is already an HUF and its members get reduced only to females, say by
death of male members, it would continue to be assessed as a joint Hindu family
as long as there are two females, as decided in the cases referred to earlier.
2. Smaller HUF
Where the
assessee, having wife but no child, got certain property on partition of his
bigger HUF, it was held that the assessee’s claim for HUF status was valid and
had to be accepted despite the fact that the assessee did not have a son-CIT v.
Krishna Kumar [1982] 10 Taxman 292(MP).
Wednesday, 13 August 2014
Company Law Settlement Scheme CLSS-2014 Extended till 15th November 2014
The Ministry of Corporate Affairs, in order to give an opportunity to companies who have failed to file annual statutory documents (Annual Return and Financial Statements), has launched Company Law Settlement Scheme, 2014 (CLSS-2014), vide General Circular no. 34/2014 dated 12.08.2014.
The scheme gives an opportunity to the defaulting companies to enable them to make their default good by filing belated documents.
Corporates can avail the following benefits:
- Immunity from prosecution for delayed filing
- A reduced additional fee of 25% of the actual additional fees payable
- Escape for directors disqualified under section 164(2) of Companies Act, 2013
CLSS shall not apply to the filing of belated documents other than the following:
- Form 20B- Form for filing annual return by a company having share capital.
- Form 21A-Particulars of Annual Return for the company not having share capital.
- Form 23AC, 23ACA, 23AC-XBRL and 23ACA-XBRL- Forms for filing Balance Sheet and Profit & Loss account.
- Form 66- Form for submission of Compliance Certificate with the Registrar.
- Form 23B- Form for intimation for Appointment of Auditors.
Further, CLSS shall not apply in the following cases:
- Companies against which action for striking off the name under sub-section(5) of section 560 of Companies Act, 1956 has already been initiated by the Registrar of Companies or
- Where any application has already been filed by the companies for action of striking off name from the Register of Companies or
- Where applications have been filed for obtaining Dormant status under section 455 of the Companies Act, 2013
- Vanishing companies
Originally The scheme shall remain in force for a period of two months, i.e., from 15th August, 2014 to 15thOctober, 2014, how ever today Ministry of Company Affairs Company Law Settlement Scheme, 2014 has now been extended till 15th November 2014, as per the important Notices & Circulars of http://www.mca.gov.in/, which means we have one more moths time to utilize this benevolent Scheme.
You are kindly requested to disseminate the information to the corporates who have failed to file annual statutory documents, through your wide network and contacts, to utilize the benefits of the CLSS-2014, issued by the Ministry .
The CLSS-2014 is attached for your ready reference.
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