Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020

HINDU UNDIVIDED FAMILY AND TAX: AN APPRAISAL Bhimanapati Deepthi* Abstract The family that consists of members lineally descended from a common ancestor including their mothers, wives, unmarried daughters are known to be a Hindu Undivided Family†. HUF found its acknowledgment in the late 19th century. There is a general presumption that every Hindu family is considered as a joint Hindu family. However, under the taxation laws for a Hindu family, there is no such presumption. In Adiveppa v. Bhimappa‡, the Supreme Court held that every Hindu family is believed to be a Hindu joint family except when the contrary is proved. The origin of the Hindu undivided family essentially lies in the Hindu Succession Amendment Act, 1937. This dual nature of the Hindu Undivided Family shaped its legal status as a unit of business and taxation. In CGT v. B.K. Sampangiram§, the Court held that HUF cannot be created by mere acts of the parties and a stranger can be made part of a Hindu Undivided Family only through adoption. Even in Bhagwan Dayal v. Reoti Devi**, the Supreme Court has held that coparcenary is created by law but not by the mere agreement of parties. However, adoption is an exception to the same.

CHAPTER I - INTRODUCTION

The Hindu Undivided Family is laid on the principle of inheritance under the Mitakshara School of Hindu Law. In Sundarsanam Maistri v. Narasimhulu Maistei††, the Court observed that the doctrine of joint family property as in Mitakshara is found by the existence of a family as a corporate body. The liability of the members of HUF is limited. The coparceners are liable to the extent of the share of property or business. It is considered a limited liability. The head of HUF i.e., Karta has unlimited liability. The eldest male member of the family is known as Karta. He is also known as the Manager. The controlling power lies with the head of HUF though he may take advice from the coparceners but has the power to make his own decisions, which will be legally binding on all members of the family.

Though the Hindu undivided family and Hindu joint family are synonyms, there are slight differences. For a Hindu joint family, there is no presumption of owning a joint property,

* The author is a student at Symbiosis Law College, Hyderabad † Surjit Lal Chhabda v. CIT, (1975) 101 ITR 776 ‡ (2017) 9SCC 586 § (1986) 160 ITR 188 (Karn.)] ** AIR 1962 SC 287 †† (1902) ILR 25 Mad 149 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 whereas the Hindu Undivided Family is insignificant without the property. The approach for a Hindu Undivided Family and a Hindu Joint family is different for the purpose of taxation.

Under Mitakshara law, every son will acquire an equal interest in the joint family property upon his birth and upon the death of the father he shall take over the property through survivorship but not as an heir‡‡. Under the Dayabhaga law, the son does not acquire any kind of interest in the property of his family upon his birth. His rights shall only arise upon the demise of his father. Under this law, the son shall take over the property as an heir but not survivorship. It can be understood that the rule of survivorship applies to the joint property and the succession rule applies only to separate property§§.

The essence of a coparcenary under the Mitakshara School of Hindu law is a community of interest and unity of possession. No member of the joint Hindu family has a definite share in the coparcenary property. However, he has an undivided interest in the property that is liable to be enlarged by death and decreased by the birth of any member in the family. An interest in the coparcenary property accrues to a son from the date of his birth. His interest will be equal to that of his father.***

Under the Mitakshara Hindu law there is continuity of ownership and unity of possession in the joint family property among all the members of the coparcenary, whereas, in a coparcenary governed by Dayabhaga law, there is no unity of ownership in coparcenary property with the members. Each coparcener in Dayabhaga law takes a defined amount of share in the property and he shall be the owner of that share. It is also well known that females can also be the members of a Hindu joint family.††† According to the Mitakshara School of Hindu law, the father has the power to divide ancestral property among his sons, and the partition made by him shall be binding by his sons when the power is exercised with bona fide intention and in accordance with the law‡‡‡. This power on the part of the father is recognized in textbooks on Hindu law§§§.

‡‡ Mayne Hindu Law and Usage 364 §§ Taxman, Student’s guide to Income Tax including GST, Chapter 14 – Hindu undivided families – Computation of taxable income, p. 504 *** Thamma Venkata Subbamma v. Thamma Rattamma, (1987) 3 SCC 294 at page 298 ††† Commissioner of Income Tax v. Smt. Meera Prem Sundar, 2005 SCC OnLine All 1941: (2006) 280 ITR 360 ‡‡‡ Apoorva Shantilal Shah v. CIT, (1983) 2 SCC 155: 1983 SCC (Tax) 111 at page 161 §§§ Kandasami v. Doraisami Ayyar [ILR (1978-80) 2 Mad 317: 5 Ind Jur 352] Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020

CHAPTER II – MEANING AND CONCEPT OF HUF

As mentioned above, lineally descend members from a common ancestor constitute Hindu Undivided Family**** . For the formation of such a family, there must be at least two male members in the family along with the inheritance of ancestral property by the members††††. The principle of Hindu law mentions that when a Hindu takes by succession his father's property, his son acquires in its interest and it becomes the ancestral or HUF property.‡‡‡‡ All the members present in the family enjoy an equal share in the property. There is no prerequisite for an agreement to be a member of HUF. Any child taking birth in that family becomes a member of the HUF. “A single person, male or female, cannot constitute a Hindu Undivided Family. An individual, who has obtained a share on the partition of a joint family, has potentialities of creating a joint family; but until he marries, he alone cannot be considered as a joint family§§§§.” "The share which a coparcener obtains on partition of ancestral property is ancestral property as regards to his male issue. They take an interest in it by birth, whether they are in existence at the time of a partition or are born subsequently. As regards other relations, it is separate property."*****

A joint Hindu family business is a type of business that is owned and jointly carried on by the members of HUF. This type of business is also called a Hindu Undivided Family Business. The eldest member of the family who controls the overall business is called as 'Karta'†††††. The liability of Karta in the business is unlimited. The Karta has absolute control over the HUF business.‡‡‡‡‡ Though he can take advice from the members of the family, he is not bound to abide by it. The position of Karta is terminable by means of resignation and is not indefeasible.§§§§§

On the other side, all the members of HUF who own an equal share of ownership over the property are known as 'co-parceners’. Their liability is limited to the extent of their interest in the property. All the members who constitute coparceners are collectively called ‘coparcenary’. Only

**** Bhagwati v. CIT, 1941 –I.T.R 31.38. I.L.R. 941 All 43: AIR 1941 All 83 affirmed in C.I.T v. Bhawati 1947 I.T.R. 409 (P.C.); A.I.R. 1947 P.C. 143, lately reiterated in Gowli Buddanna v. C.I.T. (1966) 60 I.T.R. 293 9S.C); (1996) 3 S- C †††† M.N. Srinivasan’s Hindu Law,(5th Ed., Delhi Law House), Part V ‡‡‡‡ Ancestral Property After the Hindu Succession Act, 1956-Joint Family Property, or Separate Property? A Muddle Under Tax Cases, 25 JILI (1983) 1 at page 4 §§§§ Ibid ***** Mulla's commentary on Hindu Law, Article 223 (4) page 294 15th edition ††††† Suraj Bansi Koer v. Sheo Parsad, (1880) 5 Cal 148 ‡‡‡‡‡ Union of India v. Sri Ram Bohra, AIR 1965 SC 1531 §§§§§ Ranganath Misra and Vijender Kumar, (rev.), Mayne, “Treatise on Hindu Law and Usage”, 16th ed; 2008, p. 759 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 a male member of HUF can become a coparcener. The minor member also has a managerial position in HUF****** . However, the membership of HUF will be given to both males and females. The members have an interest in the joint family property. The coparceners are entitled to claim the right of partition. On the other hand, the members are not entitled to any such direct claim from the HUF property. In CIT v. MM Khanna††††††, the Court held that a stranger could be made a member of HUF only by adoption.

The rule of Hindu law is well settled that the property which a man inherits from any of his three immediate paternal ancestors, namely, his father, father's father, and father's father's father is ancestral property as regards his male issue, and his son acquires jointly with him an interest in it by birth. He holds such property in coparcenary with his male issue, and the doctrine of survivorship applies to it.‡‡‡‡‡‡

However, a Hindu, even if he is a member of a joint Hindu family, may possess separate property. Such property belongs exclusively to him. No other member of the coparcenary acquires any interest in it by birth. He may sell it or he may make a gift of it, or bequeath it by will, to any person he wants. It is shall not be subject to partition, and, upon his death intestate, it passes by succession to his heirs, and not by survivorship to the surviving coparceners.§§§§§§ The joint family does not have a corporate existence.*******

The Hindu Undivided Family will be sustained perpetually. After the death of the Karta, the eldest member of the family will be considered as Karta. In CIT v. Seth Govindram Sugar Mills†††††††, the Supreme Court held that co-parcenership is a necessary qualification for acting as Karta of HUF. The Hindu Undivided Family can be dissolved on mutual agreement of the members. All the minor members have a right to be the coparcener in the family and such a right can be obtained by the virtue of birth or adoption. All the coparceners will have equal rights along with the share in the property. But under the Hindu Succession Act, 1956 the female relative of the deceased coparcener is entitled to obtain some share out of his coparcenary interests. A woman is considered to be part of the husband as well as father’s HUF. Even

****** Sarda Prasad v. Umeshwar Prasad, (1963) Pat 274 †††††† (1963) 49 ITR 232 (Bom)] ‡‡‡‡‡‡ Id. at 266. D.F. Mulla's Hindu Law 245 (13th ed. 1966) §§§§§§ Mulla's Hindu Law: [Art. 222] ******* Lalitha Kumari v. Rajah of Vezinagaram, AIR 1950 Mad 19. ††††††† [1965] 57 ITR 510 (SC) Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 though a woman has no right to start another account, as the husband is the Karta she has the right to be a co-partner in the HUF. It is easier to establish a Hindu undivided family business, as there are no legal formalities to establish the business. Hindu undivided family business is considered to be one of the oldest forms of businesses in the world.

As per the provisions mentioned under the Partnership Act, the coparceners of the Hindu Undivided Family are not considered as partners‡‡‡‡‡‡‡. Partners are bound by the contract to share profits, whereas there is no contract binding the coparceners in the Hindu joint family. The position of a coparcener is created by status and operation of law. The Karta has the power to enter into partnerships with other persons. He will be eligible to initiate contracts; give receipts or discharge claims incidental to the HUF business.§§§§§§§ The Karta can enter transactions on behalf of the family members.********

The status of the Hindu joint family can be acquired either by birth or adoption, but not by an agreement. The joint family business will not be dissolved by mere death of the Karta. The person claiming the share in the property of the Hindu undivided family is called as a coparcener. A coparcenary in the Hindu family is only a member who can acquire an interest by birth and have a right in claiming such property. The joint Hindu family can enter into a partnership with a stranger but it does not become a partner as a unit. The membership of the coparcenary is not static. It is dynamic as there will be continuity of the chain due to the addition of births and also the links will be detached due to death††††††††.

The daughters in the HUF cease to be a member of HUF after marriage. The presence of a joint estate is not necessary to constitute a joint family. A HUF can comprise a single male member including the widows of the deceased male members of the family. The HUF is neither created by law nor by means of a contract. It is a result of status.

In CIT v. Purshotamdas K. Panchal‡‡‡‡‡‡‡‡, an individual who receives an ancestral property during a partition and subsequently acquires family, but has no male member, then such property will be held as the property of the family. As per the Hindu law, the wife of the coparcener is considered as a member of the family. The person who is governed under any of the Hindu Law

‡‡‡‡‡‡‡ Section 5 of the Partnership Act §§§§§§§ Acharya Shuklendra, Hindu Law 631 (Modern Law House 1st ed. 2002) ******** Radhakrishna v. Kuluram, AIR 1967 SC 574 †††††††† Yenumula v. Ramandora (1870) 6 MCHR 94; Tirumal Rao v. Rangadani (1912) ‡‡‡‡‡‡‡‡ [2002] 257 ITR 0096 [Gujarat] Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 schools, the basic aspect of membership of Hindu undivided family is the same. Hence, in order to constitute a joint family, there does not have to be two male members. The property of HUF will not lose its characteristics due to the existence of a single male member or a single coparcener.§§§§§§§§

CHAPTER II – TAX BENEFITS

Generally, there are two ways in which a family controls the structure and ownership of business groups. The first one is through the legal provisions of corporate governance, which are expedited for registered corporations like partnerships, private limited companies, etc. The second avenue is by the use of Hindu Undivided family as a legal tax entity that is separate and distinguished from individuals who are recognized by tax law.*********

Under the Income Tax Act, 1961 the Hindu Undivided family is treated as a person.††††††††† HUF as a legal entity in Indian tax law is defined based on the personal law. In the Wealth Tax Act, 1957 also the Hindu Undivided Family is given recognition as a separate entity. It is also considered to be a separate entity for the assessment of tax. Under both the Acts i.e., the Income Tax Act, 1961 and Wealth Tax Act, 1957 the tax for a Hindu Undivided Family is assessed as a separate unit and the income arising out of the relationship with other companies and firms will not be taken into account for calculating the tax liability of the Hindu Undivided Family.‡‡‡‡‡‡‡‡‡ The Income Tax Act, 1961 has also considered it as a subordinate corporate body.

The difference between an individual and a Hindu Undivided Family was also mentioned under the Business Profits Tax Act, 1947. The Companies Act, 1956 also recognized HUF as a legal entity in India giving it the right to be part of ownership and as well as control corporate entities. The interlinking between HUF and corporate governance will be at the discretion of the Karta. The Karta has a dual role to play in such instances – Karta of HUF and an individual.

§§§§§§§§ Dr. Prakash B. Sultane v. CIT, (2005) 148 Taxman 353, Attorney General of Ceylon v. Arunachalam Chettiar, (1958) 34 I.T.R. (E.D.) 42 P.C ********* GUPTA, CHIRASHREE DAS. "The Tenacity of the Hindu Undivided Family: Gender, Religion, and Tax Concessions." Economic and Political Weekly, vol. 48, no. 40, 2013, pp. 73–75. JSTOR, www.jstor.org/stable/23528408. ††††††††† Section 2(31) of the Indian Income Tax Act, 1961 and section 3 of the Wealth Tax Act, 1961 ‡‡‡‡‡‡‡‡‡ Varma, S.P. “OWNERSHIP RIGHTS OF A SOLE SURVIVING COPARCENER AND TAX LIABILITY.” Journal of the Indian Law Institute, vol. 13, no. 2, 1971, pp. 234–260. JSTOR, www.jstor.org/stable/43950272.. Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020

The term ‘Hindu Undivided Family’ is not defined under the Income tax Act, 1961, but it takes the same meaning as mentioned under the Hindu Law. Under Hindu law, the joint family can also consist of a single male member and widows of deceased male members, whereas the Income Tax Act, 1961 does not direct any such conditions. In CIT v. Arun Kumar Jhunjhunwala§§§§§§§§§, the Supreme Court opined that the meaning of Hindu undivided family should be construed in the same sense as done under the Hindu Law. Despite the Hindu Law not governing Jains and Sikhs, they are treated as Hindu Undivided Family under the Income tax Act, 1961.

Every person shall pay income tax and the expression ‘person’ ********** includes ‘HUF’ as mentioned under Section 2(31) of the Income Tax Act, 1961. In Surjit Lal Chhabda v. CIT††††††††††, the Supreme Court reiterated that the term HUF is construed in the same manner as done under the Hindu Law.

The tax is assessed as the income of the Hindu joint family for income tax purposes. There are two main essentials for the income to be assessed under the Hindu Undivided Family: • existence of coparcenership and • a joint family property that comprises of ancestral property, acquired a property with the help of ancestral property and property transferred by its members. Ancestral property is the property that is inherited from the three immediate male ancestors.‡‡‡‡‡‡‡‡‡‡

Once the income of the business is assessed as a Hindu Undivided Family, then it continues to be so until the claim of partition by the coparceners. The assessment after the partition is provided under Section 171 of the Income Tax Act, 1961. The income incurred until the date of the partition will be treated as HUF and the income earned from property afterward will be assessed as an individual income of the members. In Sudha V Iyer v. ITO§§§§§§§§§§, the Court mentioned that the amount received from his share as a coparcener after partition will not be considered during the assessment of the tax of the HUF. The partial partition is not recognized under Section 171 (9) of the Income Tax Act, 1961. However, after the partial partition, the

§§§§§§§§§ (1997) 223 ITR 45 (Gau) ********** Section 4 of the Income Tax Act, 1961 †††††††††† 101 ITR 776 (SC) ‡‡‡‡‡‡‡‡‡‡ I AM: HUF, by Income Tax Department, Government of India available at: https://www.incometaxindia.gov.in/Pages/i-am/huf.aspx §§§§§§§§§§ ITA No. 4886 (Mumbai) of 2011 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 income obtained will be assessed as a Hindu Undivided Family as if the partition did not take place.

Under the Income Tax Act, 1961 the income of different heads of income is ascertained after ignoring the incomes exempted under Sections 10 to 13A***********. If the Hindu undivided family earns any income due to the investment of funds, then such income is considered as the income of the Hindu Undivided Family and is assessed separately and taxed. The Hindu Undivided Family being a separate entity itself, income cannot be earned from salary. Income derived from profits from business or profession, income gained from house property, capital gains and income obtained from other sources will be regarded as the income of HUF only if the same has been classified under HUF. Transferring of income without transferring the asset will be taxable as part of the Hindu Undivided family†††††††††††. However, the income of the Hindu Undivided family is charged at the same rate as it is done to an individual. The difference in the rate of tax between an individual and Hindu Undivided Family has been removed with the intervention of the Wanchoo Committee‡‡‡‡‡‡‡‡‡‡‡ and the K.N. Raj Committee§§§§§§§§§§§. The higher exemption limit is no more enforced.

A member of HUF is not taxable at all in respect of any sum, which he receives as a member out of the income of the family, even though the family may not have paid the tax on its income.************ “A HUF cannot enter into a partnership with other persons, as it is not a legal person, but the Karta of HUF can. No member is allowed to make a profit out of oneself”††††††††††††. This is the principle of axiomatic in tax law. However, this principle is an exception to HUF.‡‡‡‡‡‡‡‡‡‡‡‡ A person can act as a Karta of HUF and also can make profits on behalf of his name.

Considering each HUF as a distinct taxable unit, the HUF is entitled to a separate exemption limit. This is greater than what is allowed to an individual under tax law.§§§§§§§§§§§§ The amount that

*********** supra note 32 ††††††††††† Section 60 of Income Tax Act, 1961 ‡‡‡‡‡‡‡‡‡‡‡ Wanchoo Committee Report, p. 7, para 3.23 §§§§§§§§§§§ Report, p. 97, para 6.1 ************ GUPTA, CHIRASHREE DAS. "The Tenacity of the Hindu Undivided Family: Gender, Religion, and Tax Concessions." Economic and Political Weekly, vol. 48, no. 40, 2013, pp. 73–75. JSTOR, www.jstor.org/stable/23528408. †††††††††††† Taxability of HUF, Income Tax Department ‡‡‡‡‡‡‡‡‡‡‡‡ Gupta, Chirashree Das. “Globalisation, Corporate Legal Liability, and Big Business Houses in India." Cambridge Journal of Economics, vol. 34, no. 5, 2010, pp. 895–913. JSTOR, www.jstor.org/stable/24231948. §§§§§§§§§§§§ Gulati and K.S. Gulati, “The Undivided Hindu Family: A Study of its Tax Privileges", Asia, 1962 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 is paid out of the funds of HUF to a member is considered to be a legitimate expenditure of HUF but under the condition that the member must render some kind of service*************.

As most of the taxpayers' lookout for minimizing their tax liability by various provisions under the Income Tax Act, 1961, the Hindu Undivided family is one such way. As seen above, it is treated as a separate entity and the tax is assessed for the entity but not for the individual income of the members. This helps in saving tax payments. The tax return filed by the Hindu Undivided Family is independent and separate from the members of the family. Only when the total income under different heads of income exceeds the exemption limit the Hindu Undivided Family is bound to file the returns for the income.

There are certain benefits available for the Hindu Undivided Family under the Income Tax Act, 1961 like the personal income of the members do not come under the purview of Hindu Undivided Family, such a family is also permitted to deduct from the gross total income eared as mentioned under Section 80 of Chapter VI – A of the Act while assessing the tax payable. There are a list of few payments and earnings that can be deducted from the gross total income†††††††††††††. The payments that can be deducted are – savings and investments as mentioned under Section 80 of the Income Tax Act, 1961; medical treatment, amount contributed to the political party, as the members contribute in the running of the Hindu undivided family business, a certain amount claimed to be a salary can be given to the members by further deducting that amount from the total income. The income received through the investments made by the HUF will be governed as the income of HUF but not an individual. The loopholes of will and gifts are used for forming several taxable units under the Income Tax Act, 1961.‡‡‡‡‡‡‡‡‡‡‡‡‡

There are certain incomes that will not be taken under the Hindu Undivided Family like the personal income of the members; the daughter’s individual property cannot be taxed under the Hindu Undivided Family even though she entrusts such property into Hindu Undivided Family.

Both a member or Karta has a right to make a separate acquisition of property for the purpose of his or her benefit and it shall remain free unless and until it is proved that such a property

************* Jugul Kishore Baldeo Sahai v. CIT (U.P) Supreme Court 1966 ††††††††††††† Taxman, Student’s guide to Income Tax including GST, Chapter 14 – Hindu undivided families – Computation of taxable income, p. 505 ‡‡‡‡‡‡‡‡‡‡‡‡‡ V.P. Gaur, D.B.Narang, Puja Gaur, Rajeev Puri, “Income Tax Law and Practice”, (45th ed) Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 grew out of the joint family property. §§§§§§§§§§§§§ Joint family property is synonymous with coparcenary property**************. In N. Venugopala Ravi Varma Rajah v. Union of India††††††††††††††, the Court held that the tax is imposed on both individuals and Hindu undivided families. An undivided family consisting of Hindus alone may be treated as a unit of assessment, whereas an undivided family not consisting of Hindus will be assessed to tax as an “individual”.

The terms ‘tax avoidance’ and ‘tax evasion’ has different meanings. Tax avoidance means reducing the liability of tax that is to be paid to the Government by making use of the loopholes in the law. Whereas, the term 'tax evasion' means illegally escaping from the taxation process and henceforth comes along with a lot of consequences. By the interpretation of these terms, it is understood that the HUF has been used as a tax avoidance technique but not as tax evasion‡‡‡‡‡‡‡‡‡‡‡‡‡‡.

CHAPTER IV – REFORMS

In the discussion on Super Tax Bill 1917, it was intended that the HUF would be accepted as a separate category for purpose of taxation. This is done to overcome the difficulty of dual characteristics of being a family and as well as a business entity. This interpretation has led to the acknowledgment of HUF as a separate tax entity that was subsequently incorporated into the Income Tax Act1922.

The Taxation Enquiry Commission observed certain drawbacks in the taxation mechanism of the Hindu undivided family. However, it came to a deduction that it shall be inappropriate to make any far-reaching variations for this, predominantly on the ground that the Hindu Code Bill was then pending before Parliament§§§§§§§§§§§§§§.

Ramanujam, a former Chief Commissioner of Income Tax, had averred “The government carries out any amount of amendment to the Hindu law without looking into the revenue loss caused by the recognition of the HUF as a separate taxable entity. HUF may be a boon to the taxpaying Hindu. But it is a bane to government

§§§§§§§§§§§§§ K.L.S.V.E. Annamalai Chetty v. K.L.S.V.E. Subramanian Chetty, AIR 1929 PC 1, Sir Padampat Singhania v. CIT, (1953) 24 ITR 184; DD. Kapoor v. CIT, (1955) 27 I.T.R. 184; Chandmal Rajgharhia v. CIT, (1967) 66 I.T.R 347 ************** V.N. Sarin v. Ajit Kumar Poplal and anr, AIR 1966 SC 432 †††††††††††††† (1969) 1 SCC 681 at p. 683 ‡‡‡‡‡‡‡‡‡‡‡‡‡‡ Jain, A. (1987). Tax Avoidance and Tax Evasion: The Indian Case. Modern Asian Studies, 21(2), 233-255. DOI:10.1017/S0026749X00013792..’ §§§§§§§§§§§§§§ Government of India, Report of the Taxation on Inquiry Commission 118 (Ministry of Finance Dept. of Economic Affairs, 1953-54 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 revenues***************” In 2002, The Law Commission of India in its 174th Report has “opined in the favour of the abolition of the coparcenary. Although, the report further explained that until the daughters are not made coparceners, the system of HUF cannot be abolished”†††††††††††††††.

As per the statistics of 2018 by the Income Tax Department, there are around two million HUFs that are registered. The main reason for the establishment of HUF is to ease the process of succession in joint families. The current tax-paying mechanism set up for HUF entitles them with a lot of benefits and decreases the tax burden as compared to an individual or a registered company. This is due to the consideration of the HUF as a person.

In 2018, the Law Commission of India has suggested complete abolition of the Hindu Undivided Family as a tax entity‡‡‡‡‡‡‡‡‡‡‡‡‡‡‡. This has been a controversial aspect as people had diverse opinions on the taxation mechanism of HUF. This suggestion has stirred a hornet's nest in the nation. It has also given rise to various natures of arguments. The Commission also proposed abolishing the deep-rooted custom of coparcenary of ancestral property enumerated under the Hindu Law and correspondingly the right of property by birth§§§§§§§§§§§§§§§ with respect to tenancy in common**************** rather than a joint tenancy. The abolishment of coparcenary in turn leads to the abolishment of the system of HUF as a whole. If this happens, the taxation mechanism for the existing HUF's shall become complex.

The reason behind the suggestion of the abolition of the HUF system by the Law Commission is because HUF is being used as a tool to avoid tax payment. This was mainly based on the advice of the Direct Taxes Enquiry Committee Report. It said that putting the country's revenue at stake cannot continue the HUF system despite being deep-rooted in the society and hence HUF should not be treated as a separate tax entity††††††††††††††††. The provisions are also inconsistent with the Hindu Succession Act, 1956. The taxation of HUF has many irregularities and voidness in the provisions.

If the entity of the joint family is abolished, the Income Tax Department has no obligation to look into the status of the 'non-existing' entity. Under such instances, the Tax Department shall cease to tax HUF income in a different manner. In order to avoid tax evasion by the HUF, anti-

*************** T.C.A Ramanujam, “HUF: Bane or Boon” available at; https://www.thehindubusinessline.com/todays- paper/tp-opinion/HUF-Bane-or- Boon/article20217532.ece ††††††††††††††† Law Commission of India in its 174th Report “Property Rights of Women: Proposed Reforms under the Hindu Law” (2000) ‡‡‡‡‡‡‡‡‡‡‡‡‡‡‡ Consultative paper “Reform of family law”, 31st August 2018 under the chapter on “Succession and Inheritance” by Law Commission of India. §§§§§§§§§§§§§§§ Also suggested by the Hindu Law Committee in its Report (1947) at 13 **************** Valiyeveettil Konnappan v. Mangot Velia Kunniyil Manikkam, AIR 1968 Ker †††††††††††††††† A Direct Taxes Enquiry Committee under the Chairmanship of K.N.Wanchoo in 1971 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020 avoidance rules to curb the same could be introduced by the Government for the taxation of Hindu undivided family business. Kerala is the only State that has abolished the Hindu Family System‡‡‡‡‡‡‡‡‡‡‡‡‡‡‡‡.

On the other hand, if we analyze the provisions under the Income Tax Law, there can be a division of income earned out of HUF among the members and the members shall be liable to pay tax on such an income after clubbing the income of HUF that has been divided. As there is already a provision for clubbing the income of minors and spouses, there can be provisions made for clubbing the income of Karta with the income of HUF under Section 64 of the Income Tax Act.

CONCLUSION

Hindu Undivided Family is known for its effective management. As it is a business run by family and Karta being the head for making decisions, there does not arise scope for conflicts. The liability of the coparceners being limited to the extent of his share, this ensures a balance between power and responsibility. Although Karta is enumerated with a lot of powers, he is also put at check for the prevention of misuse of power. This also makes sure that the Karta of HUF works for the benefit of all members. Being associated with the family, there is etiquette of loyalty and support among the members of HUF. Though it is an overall complex entity the management effective due to the centralization of power in HUF.

Giving the status of a separate entity to the Hindu Undivided Family in a way is discriminatory in nature. The minority groups such as Christians, Muslims are not granted any such benefits. It also threatens the basic essence of secularism, which is embodied in the Indian Constitution. Commonly, we find contradictory opinions about the ongoing topics like the Uniform Civil Code but not the privileges of the tax liability of the Hindu Undivided Family. However, the tax laws have developed overtime to keep up with human ingenuity.

Moreover, the recommendations made by the Law Commission of India §§§§§§§§§§§§§§§§ for the abolishment of HUF and coparcenary has not come into force. The applicability of such a recommendation requires a lot of planning, as it is a very complex procedure. As the application of such recommendations will create enormous glitches in assessing the tax of existing HUF and might as well create chaos among the Hindus.

‡‡‡‡‡‡‡‡‡‡‡‡‡‡‡‡ Section 3 of the Kerala Joint Hindu Family System (Abolition) Act, 1975 §§§§§§§§§§§§§§§§ supra note 54 Indian Journal of Legal Research & Advancements Volume 1 Issue 1 October, 2020