Huf and family setllement kanpur tax bar dec 13

HUF & FAMILY SETTLEMENT-
TAX PLANNING
ASHOK SETH, Lucknow
B. Sc, FCA, DISA (ICA)
as@sethspro.com

Tax planning- Relevance
 Low rates of Taxation. Average rate
14% on Income of 10 Lacs
 No Gift Tax, Estate Duty, and limited
Wealth tax
 Planning- actual family circumstances
and not solely to save tax. Sometime
too much tax planning becomes
troublesome in actual partition among
the family members later on
14th Dec 2013 CA Ashok Seth, Lucknow 2

Tax Planning- Scope
 McDowell’s case 154 ITR 148 (SC)
 Playworld Electronics, 184 ITR 308 (SC)
“It is true that tax planning may be
legitimate provided it is within the
framework of the law. Colorable devices
cannot be part of tax planning and it is
wrong to encourage or entertain the
belief that it is honorable to avoid the
payment of tax by dubious methods

HUF
 A single male individual cannot be
assessed as HUF as long as he is
unmarried.- C. Krishna Prasad vs. CIT
97 ITR 493 (SC)
 After the death of the last male
member, the HUF may consist of female
members only, like widowed mother,
widowed daughter-in-law and unmarried
sister CIT vs RM AR. AR Veerappa
Chettiar 76 ITR 467 (SC)

HUF
 Property held by a sole surviving
coparcener, when there is no widow in
existence who has power to adopt; will
be his Individual. (C. Krishna Prasad vs.
CIT 97 ITR 493 (SC).
 Self-acquired property of a father
inherited by his son after the death of
the father (after 17.6.1956), cannot be
treated as ancestral property in the
hands of son. (CWT-vs-Chander Sen
161 ITR 370 SC)

Partial Partition
 Partial partition was de-recognised
with amendment in the s. 171(9) of
the I. Tax Act wef. 31.12.1978
 In Union of India & Ors. V M V
Valliappan & Ors. Etc. 238 ITR 1027
SC observed that creation of multiple
HUFs was part of tax planning.
 Applies only to HUF hitherto
assessed. 192 ITR 376 (Guj)

Tax Planning Through HUF
 Through complete but not equal
partition of HUF assets. Apoorva
Shantilal Shah V. Commissioner of
Income-tax, Gujarat. 141 ITR 0558
(SC)
 Creation of New HUF ?. Efforts can be
made to increase the income yielding
property of the HUF.

Gifts to HUF
 HUF can receive gift Sukhlal Bhanwar
Lal 226 ITR 513 (MP), 517, 518 but
the declaration for gift to HUF should
be categorical that the gift is for the
benefits of the family 99 ITR-1 (SC).
 The property can also be received in
HUF through “will” of the deceased.
But there should be categorical
declaration.

Precaution in Partition
 The SC in CIT V. Venugopal Inani 239
ITR 514 held that partition to be
recognised under IT Act: -
 must lead to physical division of joint
properties-which are capable of division.
 This case had observed that those
properties which can be physically
divided must be divided physically
e.g. moneys deposited in banks etc.

Gifts to HUF
 In the case of Pushpadevi vs. C.I.T.
109 ITR 730 (SC), the SC has held
that any person, other than a
coparcener, can validly make a gift to
the HUF.
 The conversion of self-acquired
property into HUF hotchpotch does
not involve ‘transfer’

Gifts to HUF
 SC in Surjitlal Chabda vs. CIT 101
ITR 776 (SC) held that a gift of
separate property can be made by a
male member to his HUF even if there
is no ancestral property of HUF.
However, the Supreme Court has also
held in such a case till a son is born
property income to be assessed in
individual status only.

Precautions
 Applicability of Sec 64(2)
 Applicability of Section 56(2)(vii)
w.e.f from 1st Oct 2009 on gifts
received by HUF from other than any
member.

Multiple HUFs
 By Reunion of Old partitioned HUF- can be
created as per the need by reuniting
different combinations of smaller families
(Bhagwan Dayal Reoti Devi AIR 1962 SC
287, 304)
 Express agreement to re-unite
 Is no t transfer. (CGT vs. P. Gopinathan
204 ITR 324 Ker.)
 Renunciation by coparcener does not
amount to partition (Choudhury
Raghuvans Narain Singh vs. State of U.P.
AIR 1972 S.C. 2096)

Family Settlement
 It has been evolved out of necessity
and has received recognition by the
judges of the Highest Court. It is
essentially a compromise for
resolving disputes among members of
a family. Such a dispute could have
actually arisen or could be plausible
or possible. It need not have reached
a court of law.

Family Settlement
 Halsbury’s Laws of England defines a
family arrangement as follows: -
 “A family arrangement is an
arrangement between members of the
same family, intended to be generally
and reasonably for the benefit of the
family either by compromising doubtful
or disputed rights or by preserving the
family property or the peace and
security of the family by avoiding
litigation or by saving its honour. “

Applicability
 The concept of family arrangement is
not only applicable to Hindus but to
other communities in which there is a
common unit, common mess and joint
living Muslims can also validly execute
family arrangements.
 Ziauddin Ahmed vs. CGT 102 ITR 253 (Gau)
 Bibijan Begum vs. ITO 34 TTJ 557 (Gau.)
 CGT v S.N. Zaman and SM Elahi 221 ITR
842 (Gau.)

Essentials
 Should be for benefit of the family in
general.
 Must be bona fide, honest and voluntary
and it should not be induced by fraud,
coercion or undue influence.
 To resolve present or possible family
disputes and rival claims not necessarily
legal claims by a fair and equitable
division of the property amongst various
members.
Contd.

Essentials- Contd.
 The parties must have antecedent title,
claim or interest. Even if a possible claim in
the property which is acknowledged by the
parties to the settlement will be sufficient.
 The consideration for entering into family
arrangement should be preservation of
family property, or peace and honour of the
family and avoidance of litigation. Kale vs.
Deputy Director of Consolidation (AIR 1976
SC 807)

Precaution
 Purely a voluntary act of giving up
one’s right without compelling
circumstances will not be a valid
family arrangement. But where the
person have no and cannot have any
claim or possible claim against the
transferor cannot be regarded as
family arrangement CED v Chandra
Kala Garg 148 ITR 737 (Alld) & The
CIT v Ponnammal 164 ITR 706 (Mad).

Ram Chandra Dass v Girja
Nandini Devi AIR 1966 SC 323
 “The transaction of a family
settlement entered into by the parties
who are members of a family bona
fide to put an end to the dispute
among themselves, is not a transfer.
It is not also the creation of an
interest.
Contd.

Contd.
 Every party who takes benefit under
it need not necessarily be shown to
have, under the law, a claim to a
share in the property. All that is
necessary to show is that the parties
are related to each other in some way
and have a possible claim to the
property or a claim or even a
semblance of a claim on some other
ground as, say, affection.

Family
 the word 'family' is not to be
understood in a narrow sense of
being a group of persons whom the
law recognizes as having a light of
succession or having a claim to a
share in the disputed property. (Ram
Chandra Dass v Girja Nandini Devi
AIR 1966 SC 323)

Agreement
 “The agreement may be implied from
a long course of dealing, but it is
more usual to embody or to
effectuate the agreement in a deed to
which the term ‘family arrangement’
is applied. (Halsbury’s Law of
England)
Contd.

Agreement
 SC in Tek Bahadur Bhujil vs. Debi Singh Bhujil
AIR 1966 SC 292 held that family arrangement
can be arrived at orally. Its terms may be
recorded in writing as a memorandum of what
had been agreed upon between the parties
 In Sahu Madho Das vs. Mukund Ram (AIR 1955
SC 481) the SC held that the family arrangement
can as a matter of law be inferred from a long
course of dealings between the parties even
though there may not be a specific family
arrangement agreement in writing

Maturi Pulliah v. Maturi Narasimham,
AIR 1966 SC 1836
 "Briefly stated, though conflict of legal claims is
praesenti or in future is generally a condition for
the validity of a family arrangement, it is not
necessarily so. Even bona fide disputes, present or
possible, which may not involve legal claims will
suffice. Members of a Joint Hindu family may, to
maintain peace or to bring about harmony in the
family, enter into such a family arrangement. If
such an arrangement is entered into bona fide and
the terms thereof are fair in the circumstances of
a particular case, courts will more readily give
assent to such an arrangement than to avoid it."

Section 17(1)(b) of the Indian
Registration Act
 Where document merely records the
terms and recital of the family
arrangement after the family
arrangement had already been made
which per se does not create or
extinguish any right in immovable
properties, such document does not fall
within the ambit of Section 17(1)(b) of
the Act and so it does not require
registration. This is supported by the
judgment of SC in Kale V Deputy
Director AIR 1976 SC 807

Registration
 Distinction has to be made between a
document containing the terms and
mere memorandum prepared after
the family arrangement had already
been made for the purposes of record
or for information of the court for
making mutation etc. Govt of A.P. &
Others v M Krishnaveni & Ors 2006
(7) SCC 365 also CWT v Santokh
Singh 252 ITR 707 (Del)

Taxation and Family Settlement
 The provision of section 171 of the Act, which
places restriction on a partial partition do not
apply to a family settlement
 there is no transfer of property by one
member of the family in favour of another
member of the family under a family
arrangement, for each member takes the
share of family property by virtue of his or her
independent title, admitted by the other party.
Hiran Bibi v. Sohan Bibi AIR 1914 PC 44, Sahu
Madho Dass v Mukund Ram AIR 1955 SC 481

No Transfer
 In a latest case held that Family
arrangement and settlement cannot
be termed as transfer. The word
'transfer' does not include partition or
family settlement as defined under
section 2(47). Therefore, there was
no capital gain on transaction of
family arrangement. -Vide CIT v. R.
Nagaraja Rao (2012) 207 Taxman
236 (Karn.)

Compensation received
 In CIT v Ashwani Chopra (2013) 85
DTR 40 (P&H High Court) held that
“Compensation received to equalise
inequalities in family settlement is not
taxable as “Income””

Sec 64 Not Applicable
 CWT v H.H. Vijayaba, Dawager Maharani
Saheb of Bhawnagar and Others 117
ITR 784 (SC)
 The family settlement is for a valuable
consideration and as such section 64
should also not be attracted. The family
peace, family integrity, happy relation,
winding up of the litigation amongst the
family members are considered as
valuable consideration for family
settlement.

Period of Holding Sec 49(1)
 In Asstt CIT v Baldev Raj Charla & ors
(2009) 18 DTR (Del) (Trib) 413 and
Shanthi Chandran 241 ITR 371 (Mad)
it was held by Delhi Tribunal that
Family settlement is analogous to
partition attracting section 49 (1)

Last but not the least
 Family arrangement or settlement
cannot have as its object that of
saving tax. It then becomes a fraud.
The sole object of family arrangement
is preservation of family dignity, unity
and peace. So if one targets family
settlement or arrangement as the tax
saving device that would certainly
cast a cloud on the bona fides of the
whole transaction.

If you wait for happy moments,
you will wait forever.
But if you start believing that you
are happy,
you will be happy forever.
Good Day!
CA Ashok Seth, Lucknow 3414th Dec 2013

Please mail your comments to
as@sethspro.com
35CA Ashok Seth, Lucknow14th Dec 2013

36
Have a good day
CA Ashok Seth, Lucknow14th Dec 2013

Huf and family setllement kanpur tax bar dec 13

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Huf and family setllement kanpur tax bar dec 13