CREATION OF HUF PREREQUISITE

CREATION OF HUF

A Hindu joint family consists of all persons lineally descended from a common ancestor, and includes their wives and unmarried daughters. A Hindu coparcenary is a much narrower body than a joint family. It includes only those persons who acquire by birth interest in the joint or coparcenary property, these being the sons, grandsons and great-grandsons of the holder of the joint property for the time being. Therefore, there may be a joint Hindu family consisting of a single male member and widows of deceased coparceners.

The belief that there must be atleast two male members to form a Hindu undivided family as a taxable entity also has no force. The expression 'Hindu undivided family' in the Income-tax Act is used in the sense in which a Hindu joint family is understood under the personal law of Hindus. Under the Hindu system of law, a joint family may consist of a single male member and widows of deceased male members, and apparently the Income-tax Act does not indicate that a Hindu undivided family as an assessable entity must consist of atleast two male members.

The Bombay High Court had an occasion to consider this point in Dr Prakash B Sultane v CIT ([2005] 148 Taxman 353). The facts in this case were that the assessee was a doctor by profession. His income from profession was assessable in his hands as an individual. The assessee was a member of a bigger Hindu undivided family which was partitioned on January 1, 1972. At the time of partition and right upto January 22, 1980 the assessee was a bachelor. During all these years, the income from assets on partition was assessed in his hands as his individual income.

When the assessee got married on January 22, 1980, he contended that immediately after his marriage, the income from the assets received by him on partition was required to be assessed as Hindu undivided family income, the Hindu undivided family consisting of himself and his wife.

The Assessing Officer observed that the decisions referred to by the assessee were considered in the judgment of the Madhya Pradesh High Court in CIT v. Vishnukumar Bhaiya (142 I.T.R. 357). Relying upon this judgment, he rejected the application of the assessee and continued to assess his income from the Hindu undivided family property in his individual capacity. In the above case also, the assessee had obtained his share on partition before his marriage and, on his marriage, had claimed the status of Hindu undivided family. His claim was rejected on the ground that "until a son is born the status of the assessee would continue to be that of an individual."

The Bombay High Court in Dr Prakash B. Sultane's case held that the property does not lose its character merely because at one point of time there was only one male member or one coparcener. The dictum that "once Hindu undivided family always Hindu undivided family" has been accepted all along.

On the death of Buddappa, the family which included a widow and females born in the family was represented by Buddappa alone, but the property still continued to belong to that undivided family and income received therefrom was taxable as income of the Hindu undivided family. Even in Surjit Lal Chhabda's case, the Supreme Court did not approve the theory that a joint family must have more than one male member.

Relying on the aforesaid decision, the Bombay High Court in Dr. Prakash B Sultane's case held that there was no dispute that the property obtained on partition by the assessee had all the characteristics of joint family property and continued as such, notwithstanding the short interregnum during which the assessee happened to be the sole surviving member and, therefore, assessed to tax as owner of the joint family property in his individual capacity. On the assessee's marriage, a joint family came into existence. Hence, the property became liable to be assessed as Hindu undivided family property.

To conclude, it is well settled that if property is joint family property at the relevant time, on general principles the sole male member cannot be assessed as an individual in respect of such property or its income and the assessment can only be on the joint family consisting of the sole male member and females.

• Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.
• The same tax slabs are applicable to HUF as to individual assessee. 
• You can not transfer your own assets/money into HUF.
• If you have ancestral propertyand earning some income from thisproperty, then it is better to transfer this asset to HUF and savetax up to exemption limit applicable to individual.
• You can transfer the money received on sale of ancestral property /assets into your HUF.
• The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.
• Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because as a Hindu is born as a member of the joint family.
•  Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.
•  The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 1.5 lakh. HUF will also gain from the tax slab structure of computing income tax. 
• Apart from basic exemption of Rs. 1.5 lakh, section 80C deduction up to Rs.1 lakh is also available.
• For example, if you are in 30% tax bracket, then approx tax saving by creating an HUF will be as follows:
  •   Basic exemption up to Rs. 1,50,000 = nil 
  •  Rs. 1,50,000-3,00,000 @10% = Rs. 15,000
  •  Rs. 3,00,000-5,00,000 @20% = Rs. 20,000 
  • 80C deductions Rs. 1,00,000 

HUF is created as soon as one gets married. There are no prerequisites for creation of HUF (except getting married).

Taking the cue for PRAKASH case whether it can be argued that even bechlor the propery which came after partition to him should be treated at separate HUF.