HINDU UNDIVIDED

FAMILY An insight into the concept and tax status

The document endeavors to shed light on the concept of a HUF and the various tax positions on the same through the life of a HUF from formation to cessation

2011

Santhosh Srinivasan Divakar Vijayasarathy and Associates

5/6/2011

TABLE OF CONTENTS

Introduction ....................................................................................................................................................................3

Meaning of a HUF ..........................................................................................................................................................5

Schools of HUFs .............................................................................................................................................................5

Hindu Law and its Applicability .............................................................................................................................7

Business and HUF .........................................................................................................................................................8

Formation of a HUF ......................................................................................................................................................9

HUF and Income Tax ................................................................................................................................................ 10

HUF and Wealth Tax ................................................................................................................................................. 12

Partition of HUF .......................................................................................................................................................... 14

Partition and Income Tax Act .............................................................................................................................. 16

Landmark Decisions on the principle of HUF .............................................................................................. 17

Tax Planning Prospects through HUF .............................................................................................................. 19

Introduction

The system of Joint Hindu Families also known as Hindu Undivided Families, besides being

the backbone of the Indian Social System had been playing a significant role in the

development of business in India. The concept of ownership of property by the family as a

distinct and separate unit when carrying on a family business is the distinguishing factor of

a Hindu family, from a family as is otherwise normally understood

The recognition of a HUF as a separate entity had its genesis when taxation on income was

introduced by the British in the late 19th century. At those times, an undivided family was

an active, social entity, engaged in commerce and industry not only among Hindus all over

the country but also among Sikhs, Jains and Buddhists. The British considered it prudent to

tax such units as a separate entity and the principle has stuck ever since, expanding into

areas of wealth, gift and estate taxation.

HUFs are legally governed by the Hindu Succession Act, 1956 which recognizes the

formation and partition of a HUF. An interesting point of note is that a HUF is not created

by an act of parties like in the case of a firm or company, but is rather a creation of law.

Meaning of a HUF

A Hindu Undivided Family is defined as consisting of a common ancestor and all his lineal

male descendants together with their wives and unmarried daughters. A female once

married becomes a member of the HUF of her spouse and ceases to be a member of the

HUF of her father.

A Hindu refers to any person who is a Hindu by religion. The Hindu Succession Act, 1956

states that it applies to any person, who is a Hindu by religion in any of its forms or

developments, including a Virashaiva, a Lingayat, or a follower of Brahmo, Prathna or Arya

Samaj, a Buddhist, Jain or Sikh

A HUF, as such, can consist of a very large number of members including female members

as well as distant blood relatives in the male line. However, out of this, coparceners are

only those males who are within 4 degrees in lineal descendent from the common male

ancestor. The relevance of concept of coparcenary is that only coparceners can ask for

partition. The other male family members; i.e, other than coparceners in a HUF, have no

direct claim over HUF property, but can claim only through the coparceners.

Schools of HUFs

As said earlier a HUF is governed by Hindu Law, and this law although uniform in

fundamentals, varies in some details from one place to another. Thus although the same

law is applicable to all taxpayers vis-à-vis chargeability, incentives and assessment, there

are few issues arising out of the fact that different HUFs are governed by different schools

of Law

There are two major schools of Hindu Law namely Mitakshara and Dayabhaga. During the

eleventh century, Vijneshwara compiled a compendium of law as it then existed and named

it Mitakshara. Mitakshara has been commented upon, explained, interpreted and

elaborated resulting in the emergence of Dayabagha School of thought. Dayabhaga is a

treatise written by Jimutavahana in the twelfth century. It is critical of the Mitakshara in

many ways, but more particularly in respect of the law of inheritance and succession. It

however does not reject Mitakshara in totality. Where Dayabagha is silent Mitakshara

automatically prevails.

The Dayabagha School of thought is prevalent only in the state of Bengal and not in any

other part of India. In this school of thought, the father is the absolute owner and in

exclusive possession of the joint family property which devolves on his death to his sons

and widow as company-heirs by succession and not by survivorship

The Mitakshara school, including its sub schools are the most prevalent. According to the

Mitakshara school of thought, ownership of property vests in the family as such and not in

any member of the family. It recognizes two modes of devolution of property, one for the

joint family and other for the individual.

On death of an individual his undivided coparcenary interest devolves on the other

coparceners by survivorship. If however he is the only male coparcener at the time of his

death, his entire interest will pass to his heirs by succession. There is no restriction on the

individual members of the HUF owning properties in their own individual names and such

property devolves to his heirs by succession on his death.

In a Mitakshara family every member born into the family acquires an interest in the family

property by birth and the interest of every member in the family fluctuates by birth and

death in the family. The HUF continues its existence on the death of any member including

that of the common ancestor or the Karta, who is replaced by the next senior most member

as the Karta.

The Joint property of a Mitakshara HUF includes the following

- Property, which in the hands of the firs holder is ancestral i.e. the property inherited

by him in the male line

- Property acquired by him or the members of the family with the help of the

inherited property as distinct from the property acquired by him or the other

members by their individual effort.

- Separate property acquired by coparceners of the family but thrown into the

common pool of the family property.

- Property acquired on partition of an HUF

Hindu Law and its Applicability

Before the codification of the Hindu Law in 1956, the application of the law was governed

by custom, tradition and usage, which was often sanctified by judicial decisions. Hindu Law

applied to the following

- Hindus not only by Birth but also by conversion

- Illegitimate Children where both parents are Hindus

- Illegitimate children where father is Christian and mother a Hindu and if children

are brought up as Hindus

- Jains, Buddhists in India, Sikhs, Nambudri Brahmins except so far as such law is

varied by custom and to Lingayats

- A Hindu by birth having renounced Hinduism has reverted to it

- Sons of Hindu dancing girls

- Brahmos, Arya Samajists, and Santhals of Chota Nagpur

- Hindus who make a declaration that they are Hindus for the purpose of Special

Marriage Act

- Cutchi Menons who had settled in Madras and Travancore etc and regulated their

affairs according to Hindu law in matters of succession, inheritance and property

including the concept of coparcenary and survivorship

The following laws were however enacted which codified the Hindu Law and expressly

stated to whom the statutes apply.

(i) Hindu Marriage Act, 1955

(ii) Hindu Succession Act, 1956

(iii) Hindu Minority and Guardianship Act, 1956

(iv) Hindu Adoption and Maintenance Act, 1956

As regards children of mixed marriages, the Supreme Court in CWT v. Late R Sridharan 104

ITR 436 (SC) held that a son born to a Hindu father and Christian mother who has been

brought up as a Hindu formed a HUF and would be governed by Hindu Law

Business and HUF

An HUF is liable to Income tax on its income and the most common source of income for an

HUF is from business. A HUF is liable to income tax, capital gains tax, gift tax and wealth tax.

The business of an HUF is different from a proprietary business of an individual in the

sense that at no time is the individual proprietor accountable to anyone else while the

Karta of the HUF is bound by the obligations imposed upon him by the Hindu Law.

A Karta / manager of the HUF can incur debts on behalf o the family and pledge the credit

and asses of the family to raise funds for the business of the family. He can utilize the

profits of the business in the best interest of the family according to his discretion.

As regards limitation of liability, if there are any unsettled debts at the time of partition,

such debts are considered to be the liabilities of the coparceners and limited only to such

extent of their interest in the HUF. However the Karta has unlimited liability with respect to

such debts and his personal assets can be attached to the debts.

While a HUF can carry on business as such, the Karta and other coparceners can carry on a

business in their individual capacity as well. The Supreme Court has laid down certain

criteria for determining whether a particular income belongs to the individual or the HUF

Whether the income received by the coparcener had any real connection with the

investment of joint family funds.

Whether the income was directly related to any utilization of family funds or assets

Whether the family had suffered any detriment in the process of realization of

income from the business

Whether the income was earned with the aid and assistance of family funds.

Formation of a HUF

A HUF springs from a common male ancestor and consists of descendants of such common

male ancestor in the male line, their spouses and unmarried daughters. Every male Hindu,

while he is also a member of a HUF, can create a HUF with his own descendants, which are

a part of the bigger family and constitutes a branch of the main family. This can further

extend to sub-branches. The branches are not recognized as a separate entity for income

tax purposes unless there is a partition of the main HUF and assets devolve upon the

branches.

Partitions have been used for creating a large number of taxable units enabling the Karta to

arrange the affairs of the family in such a manner that the income of the family is divided

among various branches and consequently reduce the incidence of taxation.

A Hindu male with his sons and grandsons constitute a HUF but it may not own any

property where there is no inheritance.

Members of a joint family may by their joint labour, earn income and acquire property.

HUF assets can also be created by individual members contributing their personal assets

into the common pool of the HUF. However implications of the provisions of the Income

Tax Act have to be considered in such a situation where there are no existing HUF assets.

As per deeming provisions where an individual contributes his personal asset to the HUF,

income from such asset will be taxed in his personal capacity only. However income from

such income is the asset of the HUF. For instance suppose a member contributes a

commercial property to the HUF which lets it out on rent for Rs 1 lakh, the income is taxed

in the hands of the individual. However if the HUF earns an interest of Rs 10000 by

investing the 1 lakh, it is considered the asset of the HUF and Rs 10000 is taxed in the

hands of the HUF

A new HUF may receive gifts from outsiders or from father or brothers of the Karta who are

not members of the donee HUF. All such receipts will be added to the family fund without

attracting the deeming provisions as mentioned above.

Another mode of creation of an HUF is through a Will, but the intention of the bequest

being for the family has to be made absolutely clear in the Will.

Partial or Total Partition of an Existing HUF results in the creation of a number of smaller

HUFs because on partition the coparceners are allotted family assets as heads of their

respective family branches,

HUF and Income Tax

Under section 2(31) of the Income Tax Act , 1961 a HUF is a ‘person’ and consequently an

assessee under section 2(7) subject to taxation as a separate legal entity. Slabs of taxation

as are applicable to a resident male shall be applicable to a HUF. Section 10(2) further

specifies that no liability to income tax shall be attracted or imposed on any member of a

HUF in respect of any sum received by him/her as a member of the family whenever such

sum has been paid out of income of the family. This however is subject to the applicability

of the deeming provisions.

Under section 18 of the Hindu Adoption and Maintenance Act, 1956, a Hindu wife, shall be

entitled to be maintained by the husband, and be entitled to live separately without

forfeiting the right of maintenance under certain circumstances. Section 19 provides for the

entitlement of maintenance by her father-in-law after the death of her husband while

Section 20 speaks about maintenance of children and aged parents. Any payments made by

a HUF out of its income to a Hindu married woman, widow, children and aged parents

under the provision of these sections are exempt from tax in the hands of the recipient.

As regards return of income, it shall be submitted in the paper or electronic form in Form

ITR 2 if it does not have income from business. Where the HUF has income from business it

shall be submitted in Form ITR 4. If the provisions of Tax Audit apply, then the returns are

to be mandatorily filed in the electronic form. The returns have to be signed and verified

by the Karta, and where the Karta is absent from India or is mentally incapacitated from

attending to his affairs, by any other adult member of the family.

Determination of Residential Status for the purpose of taxation is provided under section

6(2). Accordingly a HUF is considered a resident in India where during the year the control

and management of its affairs is situated wholly or partly in India. Where the control and

management of its affairs is situated wholly outside India it is considered a non-resident.

Where a HUF is considered a resident by virtue of the above provisions, it is considered to

be a resident and ordinarily resident if the Karta is a resident for two out ten years

immediately preceding the Previous Year or has been in India for more than seven hundred

and twenty days in the seven years immediately preceding the Previous Year. Otherwise it

is considered a resident but not ordinarily resident.

Normal provisions relating to Capital Gains tax as are applicable to individuals shall apply

to HUFs as well. Exemption under section 54, 54D, 54EC, 54ED, 54F, 54G, and 54H has been

extended to HUFs as well. However determining the cost of acquisition of assets under

some circumstances poses some problems. The cost to the previous owner shall be

considered as the cost of acquisition in the following circumstances where the capital asset

became the property of HUF

- on any distribution of assets on a total or partial partition of a HUF

- under a gift or Will

- by succession, inheritance or devolution

- by modes referred to under section 64(2) of the Income Tax Act – deeming

provisions

Under section 64(2), which provides for clubbing of income in respect of self-acquired

property thrown into the common pool of the HUF, the income from such property will be

clubbed in the hands of the individual though he has divested himself of his separate

interest in the property and retains only the coparcenary interest therein. If the blended

property is later on subjected to a total or partial partition amongst the family members,

then the income derived from such property “as is received by the spouse or minor child on

partition shall be deemed to arise to the spouse or minor child from assets transferred

indirectly by the individual to the spouse or minor child” and accordingly the income will

be clubbed in the hands of the individual. However where funds are advanced as returnable

loans the above provisions does not apply.

According to the Income Tax Act, 1961, in a case where there is an impartible estate, the

holder of the impartible estate shall be deemed to be the individual owner of all the

properties comprised in the estate.

HUF and Wealth Tax

According to section 3 of the Wealth Tax Act. 1957,wealth tax is charged on the net wealth

of a HUF as on the corresponding valuation date at the rate of one percent of the amount of

net wealth in excess of Rs Thirty Lakhs.

It is to be noted that the net wealth will be taxable in the hands of the HUF only if it is the

real owner of the property or wealth concerned and its members do not have definite or

ascertained share in the HUF property. HUF can be assessed to wealth if there is unity of

ownership and unity of possession in respect of the HUF.

To constitute a HUF there must be more than one member and one member cannot by

himself constitute a HUF. Though a coparcener receiving a share on partition of HUF can

form a HUF when he marries, yet until his marriage, he cannot be assessed as a HUF.

Where a member throws his private property into the pool of HUF property, such assets

will be considered as assets in the hands of the individual and not the HUF. Where the said

property is the subject property of a partition, the converted property or any part thereof

which is received by the spouse of the individual shall be deemed to have been transferred

to the spouse indirectly by the individual and clubbed in the hands of the individual.

A Karta of a HUF may on certain occasions, make gifts to his spouse, to his unmarried and

married daughters and other relatives. The courts have held that, though the validity of the

gifts can be questioned, however for the purposes of Wealth Tax, a gift made ceases to be

an asset of the HUF and though voidable the transfer is not revocable and thus the assets

are not subject to Wealth tax in the hands of the HUF.

It is to be noted that the Wealth Tax is charged on the wealth as on the last moment of the

valuation date. Thus if there is any partial or total partition of the HUF before the valuation

date, such partitioned assets cannot be taxed in the hands of the HUF. In case there is a

partial partition, where on the valuation date, property was partly distributed to the

members without disrupting the HUF, the distributed wealth does not belong to the HUF

and cannot be included in its wealth.

However, the situation is different where a total partition is recognized on the valuation

date under section20 where it is provided that if partition had taken place on the last day of

the previous year, and the Wealth Tax Officer has recognized the partition, then each

member or group of members shall be jointly and severally liable for the tax assessed on

the net wealth of the HUF. Thus the assessment has to be made on the HUF as it existed

before the partition and not on the smaller HUFs formed as a result of total partition.

Partial partition is not covered by this section.

As regards exemptions provided under the Act, the interest of the assessee in the

coparcenary property of the HUF of which he is a member is exempt from taxation in his

individual hands. Further One house or part of a house belonging to a HUF is exempted

from taxation.

Where the ownership of assets is in dispute, the asset may be in possession and enjoyment

of one but the ownership may be claimed by another. Under such circumstances, it is open

to the assessing officer to include the asset in the net wealth of both the taxpayers

simultaneously and ultimately retain the finally upheld in appeal, cancelling the other. Such

assessments are called protective assessments

Partition of HUF

A partition in a HUF can happen in two modes – a complete partition or a partial partition.

In a complete partition all constituents of the family and all properties of the family are

distributed resulting in the creation of new smaller HUFs and the cessation of the existing

HUF. In a partial partition, only some of the constituents or some of the properties go out

resulting in new smaller HUFs while the existing HUF continues to remain and function

without the branches.

Since the interest of a coparcener fluctuates on birth and death in the family, unless and

until there is a partition in the family, a member’s share cannot be determined in definite

terms. A Partition may be effected by volition of parties or by arbitration or a deemed

partition based on the operation of law. A partition is said to be complete when by

agreement or otherwise the share of coparceners in the family are defined, and properties

distributed. Until the partition has led to the physical division of the properties, the

incomes derived from such properties will continue to be assessed in the hands of the HUF.

There is a change in ownership of property as a result of partition but it does not involve

transfer of property.

Under Hindu Law it is not necessary that the partition should be effected by a registered

partition deed. Even a family arrangement is enough to effectuate the partition between

coparceners and to confer right to a separate share and enjoyment thereof. Every

coparcener has got a right to become divided at his own will and option whether the other

coparceners agree and consent to it or not. A division in status takes place when he

expresses his intention to become separate unequivocally and unambiguously and the

filing of a suit for partition is considered a clear expression of such an intention and that in

consequence there is a severance in status when the action for partition is filed.

It should be noted that conversion of a member to Islam or Christianity operates as a

severance of the joint status as between him and other members of the family and

extinguishes the right of survivorship as between the convert and other coparceners and

he ceases to be a coparcener from the moment of his conversion

On a partition the shares are allotted as under

- In case of a HUF which includes father, mother and sons, mother has no right to

claim partition but when a partition is actually effected she takes a share equal to

the sons

- In case of a HUF which includes father and sons and where the mother is not living,

each son takes a share equal to that of the father i.e. all have an equal share

- If joint family consists of brothers, they take equal shares on partition

- Each branch of a HUF takes an equal share as regards other branches, and members

of each branch take equal share as regards other members within the branch.

- Unmarried daughters have the same share on partition as their brothers.

The issue whether a partition can be construed as a transfer under the Income Tax Act or

the Gift Tax Act has been brought up many times. The Madras High Court had held that

partition is really a process in and by which a joint enjoyment is transformed into an

enjoyment in severality. Each one of the shares had an antecedent title and therefore no

conveyance is involved in the process, as a conferment of new title is not necessary. The

Supreme Court has held that the word ‘transfer’ used in the Acts was used in the strict

sense and not in the sense of including every means by which property may be passed from

one to another. The Court further held that a partition could not be considered as cross gift

or indirect transfer.

Where a HUF has only an undivided interest in a property, the only division that is possible

is by specifying and separating the shares of the members and the division of income. Such

a partition is valid and upheld by courts. Further a family business cannot be divided into

parts in the same manner as a piece of land. Division is possible only by making entries in

books of accounts and such division is quite legal and acceptable.

A partition once made is final in Hindu Law and cannot be reopened. However there are a

few exceptions to this.

In case of fraud by one coparcener which gives him an undue advantage in the

partition

In case a creditor has obtained decree of a court against a coparcener before the

partition

In case by mistake an allotment made to a coparcener is a property under unsettled

mortgage or a property belonging to an outsider, a readjustment may be called for

In case any property of the HUF has been missed to be partitioned

It is to be noted that even after a total partition there may arise circumstances where some

or all of the coparceners wish to reunite, undoing the earlier separation. The effect of such

an action is to remit the reunited members to their former status as members of a HUF. Just

as a HUF can be partitioned based on an oral arrangement, the members can reunite based

on an oral arrangement. However, where the earlier partition was viz a registered deed,

then reunion must mandatorily be viz a registered deed.

Partition and Income Tax Act

Section 171 of the Income Tax Act, 1961 provides for an assessment of HUF after partition.

The Income Tax Act recognizes only total partition of the HUF.

Where there has been a total partition during the year

- The total income of the HUF in respect of the period up to the date of partition shall

be assessed as if no partition had taken place

- Each member or group of members shall, in addition to any tax or which he or it

may be separately liable, be jointly and severally liable for the tax on income so

assessed

Where there is a partial partition

- It shall not be recognized under law.

- The HUF shall continue to be assessed as if no such partition had taken place

- Each member or group of members of such HUF immediately before the partial

partition and the HUF shall be jointly and severally liable for any tax, penalty,

interest, fine or any other sum payable under the Income Tax Act.

For the purpose of determining the several liability of any member or group of

members there under, it shall be computed according to the proportion of the property

allotted to him or it at the partition

A petition challenging the validity of the above provision, invoking Article 14 of the

Constitution, was dismissed by courts and it was held that the provisions are in conformity

with Constitutional Provisions

Landmark Decisions on the principle of HUF

Krishna Prasad v. CIT – 97 ITR 493 (SC)

On partition between father and sons, the shares which sons obtained on partition

of the HUF with their father, is considered to be the ancestral property of the son’s

HUF, as regards the grandsons of the father. Therefore one of the sons who was not

married at the time of the partition will receive HUF property, however income

therefrom will be taxed as HUF Income from the date of his marriage.

A.G v. A.R. Arunachalam Chettiar – 34 ITR 421 (PC)

A Mitakshara HUF consisted of father and son. On death of a son, the father and the

widow of the son constitute the HUF.

Gowli Buddanna v. CIT – 60 ITR 293 (SC)

A joint family may consist of a single male member with his wife and daughter and it

is not necessary that there should be two male members to constitute a joint family

N V Narendranath v. CWT 74 ITR 190 (SC)

The property received by a coparcener on partition of the HUF is the HUF property

in his hands vis-a-vis the members of his branch i.e. with his wife and daughter

L Hirday Narain v. ITO 78 ITR 26 (SC)

After the partition between the father and his sons, the father and his wife

constitute a HUF which gets enlarged on the birth of a son.

CIT v. Veerappa Chettiar 76 ITR 467 (SC)

Even when a HUF is reduced to female members only it continues to be a HUF

CIT v. Sandhya Rani Dutta 248 ITR 201 (SC)

Female members cannot create or form a HUF by their acts even under the

Dayabagha School of Hindu Law

Pushpa Devi v. CIT 109 ITR 730 (SC)

The right to blend the self acquired property with HUF property is restricted to a

coparcener (male member of HUF) and not available to a female member. However,

there is no restriction on a female member gifting her property to the HUF of her

son.

Surjit Lal Chaabda v. CIT 101 ITR 776 (SC)

The property which was thrown into the common pool was not an asset of a pre-

existing HUF of which the assessee was a member. It became an item of HUF

property for the first time when the assessee threw what was his individual

property into the common pool. Therefore the property may change its legal

incidence on the birth of the son, but until that event happens, the property, in the

eye of the Hindu Law, is really the property of the assessee.

Tax Planning Prospects through HUF

Tax Planning

Evading payment of tax is quite different from tax planning. A person may plan his finances

in such a manner, strictly within the four corners of the taxing statute that his tax liability is

minimized or made nil. If this is done and is observed strictly in accordance with and taking

advantage of the provisions in the Act, by no stretch of imagination can it be said that

payment of tax has been evaded.

Certain areas of taxation laws provide incentives with a view to either encourage savings or

investments in areas which are considered desirable in the interest of the economy as a

whole. Tax planning is as much concerned with the fuller utilization of the provisions of

incentives in the tax laws as with the avoidance of tax by so arranging one’s affairs within

the ambit of law, so as to attract the least amount of tax.

For considering tax planning through a HUF the first and foremost emphasis is to be given

to creation of a family nucleus or creation of a smaller HUF while the bigger HUF is living

and active.

Partition

Partial partition of HUF had been one of the important devices for reducing liability to

direct taxes by creating new taxable entities, being smaller HUFs or individuals which

enabled spreading the wealth. However the concept of partial partition had been

derecognized under law since 1978. The Assessing Officer does not recognize any partial

partition that may have occurred during the year at the time of assessment and completes

his assessment as if no such activity had taken place. However there arises a peculiar

situation whereby, according to law this derecognition can be accorded by the Assessing

Officer only if the HUF had been assessed as such prior to the partition. In case of a HUF

where no assessment has been completed hitherto, the above regulations do not apply.

Thus, if a HUF has been earning income which was not liable to be assessed or which is

below taxable minimum, it is not covered under section 171 of the Income Tax Act and can

therefore go in for partial partition of its assets.

Reunion after Partition

Where there is an ambiguity of whether a partial partition would be acceptable to the

authorities, one option available is to go in for total partition of the HUF assets and

subsequently those smaller HUFs who wish to be together can go in for a reunion with their

partitioned assets. Effectively this would replicate the objectives of a partial partition but

however the same would be within the ambit of law.

Vesting of Individual Property in the HUF

Every coparcener is entitled to throw his self acquired property into the common asset

pool of the HUF being either a bigger HUF of which he is a coparcener along with his

brothers or a smaller HUF with his wife or sons – of which he is also the Karta. By doing so,

the income of the individual is split into two parts – one taxable in his own hands and one

taxable in the hands of the HUF of which he is a Karta.

However the deeming provisions of Income Tax Act have to be considered for this aspect.

Accordingly, any income from assets so vested will be taxed in the hands of the individual

only and not the HUF, thereby overriding the above mentioned benefits. However it has to

be noted that the income is still the asset of the HUF and any further accretions of income

on such deemed income will not be clubbed and will be taxed in the hands of the HUF only.

Further it is also possible for the individual to relinquish his interest in the HUF after

vesting his property. By this he is no longer a coparcener of the HUF when the income

accrues and therefore the deeming provisions are avoided. The income will be taxed in the

hands of HUF only.

Comparison of HUF with Partnership, LLP and Company

Basis HUF Partnership LLP Company

Legislature Codified Hindu Law viz.

Hindu Marriage Act, 1955

Hindu Succession Act, 1956

Hindu Minority and Guardianship Act, 1956

Hindu Adoption and Maintenance Act, 1956

The Partnership Act,

1932

Limited

Liability

Partnership

Act, 2008

Companies Act,

1956

Dividend

Distribution

Tax

Not Applicable Not Applicable Not Applicable Applicable

Separate

Legal Entity

Yes Yes Yes Yes

Ratio of Profit

Sharing

Profits part of HUF and members are not

entitled to any share as such. However

sharing is done in equally amongst on all

members.

As per agreement/deed As per

agreement /

deed

As per share

holding ratio

Wealth Tax Applicable Not applicable directly

however indirectly liable

in the hands of partners.

Not applicable

directly

however

Applicable

indirectly liable

in the hands of

partners.

Ease of

Formation /

Entry

Created By law and not by act of parties Oral or Written Deed –

May or may not be

registered

To be

Registered

with MCA –

Cumbersome

process

To be Registered

with MCA –

Cumbersome

process

Compliance

Requirements

No regular compliance requirements as per

law.

No regular compliance

requirements as per law.

Cumbersome

Compliance

Requirements

Cumbersome

Compliance

Requirements

Winding up /

Exit

Can be Closed by Partition Can be closed by

dissolution of

partnership

Cumbersome

Approval

Process

Cumbersome

Approval Process