This article is authored by CA Ritika Lath.

 

At the outset, it is imperative to note that the partition of any HUF is governed by Section 171 of the Income Tax Act, 1961 apart from other laws as applicable i.e. Hindu Succession Act, 1956 including the laws as applicable depending upon the facts of the case, i.e. Stamp Duty Act in respect of any registered deed or transfer of property act in respect of the transfer of property, if any, etc.

Income Tax Act, 1961

In regard to the taxability under the income Tax Act, 1961 it is imperative to take note of the relevant provision of the Income Tax Act, 1961 regarding the division of Hindu Undivided Family given under Section 171 of the Act which read as follows:

171. (1) A Hindu family hitherto assessed as undivided shall be deemed for the purposes of this Act to continue to be a Hindu undivided family, except where and in so far as a finding of partition has been given under this section in respect of the Hindu undivided family.

(2)  Where, at the time of making an assessment under section 143 or section 144, it is claimed by or on behalf of any member of a Hindu family assessed as undivided that a partition, whether total or partial, has taken place among the members of such family, the Assessing Officer shall make an inquiry thereinto after giving notice of the inquiry to all the members of the family.

(3)  On the completion of the inquiry, the Assessing Officer shall record a finding as to whether there has been a total or partial partition of the joint family property, and, if there has been such a partition, the date on which it has taken place.

(4)  Where a finding of total or partial partition has been recorded by the Assessing Officer under this section, and the partition took place during the previous year,—

(a) the total income of the joint family in respect of the period up to the date of partition shall be assessed as if no partition had taken place; and

(b) each member or group of members shall, in addition to any tax for which he or it may be separately liable and notwithstanding anything contained in clause (2) of section 10, be jointly and severally liable for the tax on the income so assessed.

(5)  Where a finding of total or partial partition has been recorded by the Assessing Officer under this section, and the partition took place after the expiry of the previous year, the total income of the previous year of the joint family shall be assessed as if no partition had taken place; and the provisions of clause (b) of sub-section (4) shall, so far as may be, apply to the case.

(6)  Notwithstanding anything contained in this section, if the Assessing Officer finds after completion of the assessment of a Hindu undivided family that the family has already effected a partition, whether total or partial, the Assessing Officer shall proceed to recover the tax from every person who was a member of the family before the partition, and every such person shall be jointly and severally liable for the tax on the income so assessed.

(7)  For the purposes of this section, the several liabilities of any member or group of members thereunder shall be computed according to the portion of the joint family property allotted to him or it at the partition, whether total or partial.

(8)  The provisions of this section shall, so far as may be, apply in relation to the levy and collection of any penalty, interest, fine or another sum in respect of any period up to date of the partition, whether total or partial, of a Hindu undivided family as they apply in relation to the levy and collection of tax in respect of any such period.

(9)  Notwithstanding anything contained in the foregoing provisions of this section, where a partial partition has taken place after the 31st day of December 1978, among the members of a Hindu undivided family hitherto assessed as undivided,—

(a) no claim that such partial partition has taken place shall be inquired into under sub-section (2) and no finding shall be recorded under sub-section (3) that such partial partition had taken place and any finding recorded under sub-section (3) to that effect whether before or after the 18th day of June 1980, being the date of introduction of the Finance (No. 2) Bill, 1980, shall be null and void;

(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place;

(c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine, or other sums payable under this Act by the family in respect of any period, whether before or after such partial partition;

(d) the several liabilities of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition,

and the provisions of this Act shall apply accordingly.

Explanation.—In this section,—

(a) “partition” means—

 (i) where the property admits of a physical division, a physical division of the property, but a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition; or

(ii) where the property does not admit of a physical division, then such division as the property admits of, but a mere severance of status shall not be deemed to be a partition;

(b) “partial partition” means a partition that is partial as regards the persons constituting the Hindu undivided family, or the properties belonging to the Hindu undivided family, or both.

 

On reading the above provision, A brief understanding of the provision stated above can be construed as follows including the process of partition of HUF:

1. Must have assessed as HUF once- For recognition of a HUF to be partitioned under Section 171 of the Income Tax Act, 1961 it is necessary that the HUF must have once assessed as a HUF. Otherwise, section 171 shall be inapplicable. 

2. The claim of partition by any coparcener– It is mandatory that any member of the HUF must make a claim of partition at the time of making assessment under section 143/144 of the Income Tax Act, 1961

3. Inquiry by the Assessing Officer regarding the partition of HUF –Upon making a claim regarding the partition of HUF as stated above, the Assessing Officer would issue a notice to all the members of the HUF making a detail enquiry regarding the said partition including the date of the said partition.

4. The manner of partition so that valid claim be held by the assessing office upon enquiry by him as stated above

 

• There should be actual partition and not fictional to avoid tax– Partition of a HUF has to be done in such a way that it gives a legal finding to the Assessing Officer that a complete partition has actually been taken place since then only he is authorized to compute the income of the HUF as if the partition has taken in the manner as described under section 171.

• Partial partition is not recognized under the Act– For instance, say one coparcener is getting certain property in the HUF via setting apart of that asset of HUF on the condition that no further claim in properties will be made by him, is nothing but a partial partition and not a family arrangement and this situation is not recognized in the Act.

• Physical division of property- In terms of clause (a) to Explanation to section 171 referred to herein above, in partition of a HUFs there should a physical division of property and not the division of income from the property otherwise the same shall not be treated as division of property. Therefore, in order to claim proper division of HUF, proper division of property is necessary to claim partition of HUF under Section 171 of the Act.

• Rights to be claimed by the coparceners

In this regard it is to be noted that under the Income Tax Act, 1961 there is no provision regarding the equal or unequal right in share during the partition of HUF.

The right of the coparceners in the share during division is governed by Section 6 of the Hindu Succession Act, 1956.

The Partition of HUF should be recognized as per the Income Tax Act and not as per the Hindu Law. Section 6 of the Hindu Succession Act would govern the rights of the parties but insofar as income-tax law is concerned, the matter has to be governed by section 171(1) of the Income Tax Act, 1961.

Therefore, in terms of Income Tax Act, 1961 an unequal partition can also be done via will of the co-parceners as to whether to allot on partition in accordance with the share specified under the Hindu Succession Act or to allot lower or more to anyone or more persons. The partition in the family could not be considered to be a disposition conveyance, assignment, settlement, delivery, payment or other alienation of property. A member of a Hindu undivided family has no definite share in the family property before division and he cannot be said to diminish directly or indirectly the value of his property or to increase the value of the property of any other coparcener by agreeing to take a share lesser than what he would have got if he would have gone to a court to enforce his claim.

• Requirement of registered partition

It is not necessary to effect partition by a written partition deed. It can be effected orally and be acted upon. Even a partition of an immovable property can be by an oral agreement. –Reference may be had to the case of Popatlal Devram v. CIT (1970) 77 ITR 1013 (Orissa) wherein it was held by the Hon’ble orrissa High Court that Law is well settled that a partition of the joint family properties can be effected by an oral agreement irrespective of the value of the property.

Section 17 of the Registration Act, 1908 talks only when immovable property is transferred. Therefore, family settlement without registration is okay if no immovable property is involved. However, in respect of transfer of immovable property separate registered documents only for immovable property can be made.

Therefore, in respect of transfer of properties of the HUF, the facts of each case have to be seen and analysis have to be done properly after referring to the various judicial pronouncements which are there in respect of different facts for each case.

5. Satisfaction of Assessing Officer that the total partition has taken place

Therefore, where the Assessing Officer is satisfied upon the findings that the total partition of HUF has taken place during the previous year then he shall proceed for the computation of income as briefed herein below in Point No. 6.

6. Calculation of Income Tax and liability- The income of the HUF Shall first be calculated up to the date of partition as if no such partition has occurred.

Again there are disputes also regarding eth joint and several liability of et members of HUF after such partition which also has to be analyzed in eth light of eth various judicial pronouncements in this regard.

7. Applicability of Capital gain taxation

There may be issue regarding eth taxation under the head ‘Capital Gain’ upon transfer of properties of the HUF. Fir instance, reference may be had to a judgement by Karnataka High Court in the case of CIT vs R. Nagaraja Rao, [2013] 352 ITR 565, wherein it was held that the word ‘transfer’ does not include partition or family settlement as defined under the Act. It is well-settled that a partition is not a transfer, What is recorded in a family settlement is nothing but a partition. Every member has an anterior title to the property which is the subject-matter of a transaction, that is, partition or a family arrangement. So there is a adjustment of shares, crystallization of the respective rights in the family properties and therefore it cannot be construed as a transfer in the eye of law. When there is no transfer there is no capital gain and consequently no tax on capital gain is liability to be paid.

However, it has also been held in many cases that to be very clear about documents to prove it a bona fide family settlement, Ramcharandas vs. Girjanandini Devi- 1966 AIR 323, CIT vs Sachin P. Ambulkar[2014]- Bombay High Court.

Therefore, proper document is of utmost importance for claiming exemption as stated above.

 

8. Deemed Income Under section 56(2)(x)

The deemed income provision under section 56(2)(x) in the Income Tax Act, 1961 is in the context of earlier gift tax only- in many decisions it has been held that that family settlement is not gift since it cannot be said that it is without consideration as gift is something without consideration. Giving up off right cannot be said as not a consideration- D Nagarathinam [2003]- Madras High Court, Santosh Singh [2002]- Delhi High Court, Ziauddin Ahmed [1976]- Guwahati High Court.

There is direct exemption under section 56 only for relatives and the definition of relative relevant for section 56 includes ‘in case of HUF, any members thereof’.

9. Applicability of Stamp Duty

There is no any specific exemption in the Stamp Duty Acts for levy or exemption upon family settlement. Stamp duty is levied on instrument. So, upon any agreement there may be levy of stamp duty and therefore amount involved in the agreement is very important. Therefore, the stamp duty of the agreement for transfer of immovable property shall be applicable as per law and to avoid any litigation in this respect.

Conclusion

Therefore, in view of the various litigations regarding the taxability under the Income Tax Act, 1961, applicability of stamp duty of transfer of properties and the amount involved in such transfer, etc. the partition has to be done after going through facts of case very properly. Also, the documentation things has to done very legitimately to prove the genuine partition and not just done for avoidance or reduction of tax liabilities.

 

 

Disclaimer: This is a general point of view and should be treated as such for reference purposes. This should not be construed as any legal opinion. For specific requirements, please get in touch with our experts.

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