Hindu Undivided Family (HUF) is treated as a separate entity for the purpose of assessment under the Income Tax Act.
HUF does not arise from a contract. HUF is creation of law. After marriage, as soon as a child is born, HUF comes into existence. HUF consists of Father, sons and daughters. Wife is not the part of the HUF.
Sons and daughter and the father i.e., Karta are the co-parceners in the joint family and have a right to demand partition.
If partition of HUF is made by courts, the courts will always award equal partition. However, the family may mutually effect partition without going to the court and mutual partition can be unequal.
Partition has to be a total partition. Partial partition is not recognized under the Income Tax Act.
HUF cannot make any gift of HUF property to co-parcener and non-coparceners. Any gift made by HUF are void-ab-initio. Therefore, if HUF property is gifted by HUF, then such gifts are void-ab-initio. The gifted properties shall be included in the wealth of HUF and not the donee. Similarly, the income from gifted properties shall be taxable in hands of HUF and not the donee.
The provisions of computing income of HUF are the same for a normal assessee.
As per section 47 of the Income Tax Act, no capital gains shall arise to the HUF on distribution of assets on partition of HUF.
As per section 49(1) of Income Tax Act, where assets are distributed on partition of HUF, then the cost of acquisition of such assets to the member shall be the cost of acquisition of such assets in the hands of HUF. Period of holding of asset in hands of HUF shall be considered in hands of member.
As per section 171 of the Income Tax Act partition of HUF takes place on the date the properties are actually physically divided. There must be physical division of the properties. Physical division of income without physical division of properties does not amount to partition.
Any remuneration is paid by the HUF to the Karta or any other member for services rendered by him is conducting family's business, the remuneration is deductible if remuneration is:
- Paid under a valid bona fide agreement;
- In the interest of and expedient for the business of family; and
- Reasonable and not excessive.
There can be two types of partitions:
- Total Partition
- Partial Partition
Total Partition: Where all the properties of the family are divided amongst all the constituents of the family, and the family ceases to exists as HUF, it is known as total partition.
Partial Partition: If some members of the HUF go out, other remains together, or some property is divided, and balance remain joint, it is known as partial partition. Partial partition is not recognized in Income Tax Act,1961.
If there is a partial partition of HUF, then it shall be deemed that no partition has taken place and the income from the property distributed on partial partition shall be assessed in the hands of HUF as if no such partition has taken place.
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