huf and family setllement kanpur tax bar dec 13

HUF & FAMILY SETTLEMENT- TAX PLANNING

ASHOK SETH, LucknowB. Sc, FCA, DISA (ICA)

[email protected]

mailto:[email protected]

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. 14th Dec 2013 CA Ashok Seth, Lucknow 20

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. 14th Dec 2013 CA Ashok Seth, Lucknow 23

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

[email protected]

35CA Ashok Seth, Lucknow14th Dec 2013

THANK YOU

mailto:[email protected]

36

Have a good day

CA Ashok Seth, Lucknow14th Dec 2013