HUF -  Deduction from HUF Business Income

HUF being a separate assessable entity as per the provisions of Section 2(31) of the Income-tax Act,1961 and a separate legal entity as well is very well capable of doing business in its own name. There is no bar on HUF doing business. The business in such a case can be either carried on in the name of the HUF or if it is required to give a separate name to the business, then in such cases, the HUF can become proprietor of such a business and business name can be distinctive and different from the name of the HUF. Whenever HUF does any business, it would have to obtain Trade Licence, Profession Tax Registration etc which are generally required to be obtained as per the Rules and Regulations prevailing in the State in which the business is being carried on.

The HUF while doing business can claim all the deductions which are available for being claimed under the heading Income from business and profession under Chapter IV-D of the Income-tax Act, 1961 which contains Sections 28 to Section 44DB of the Act except the Sections as follows:

1. Deduction u/s 33AC relating to Reserves for shipping business is available only to a company.

2. Deduction u/s 34A relating to uñabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies.

3. Deduction u/s 35DD relating to Amortization of expenditure in case of amalgamation or demerger.

There are some other provisions also contained in Chapter IV-D of the Income-tax Act, 1961, deductions in respect of which is not available to a HUF mainly because of the nature of expenses which can only arise in case of assessees other than HUFs. For further details, it is better to refer to Chapter IV-D of the Income-tax Act, 1961 as above. Normally all expenses which are incurred for purposes of business can be claimed. Tax is on net income and on real income. Section 37 is residuary section to take care of all unspecified expenses. Deduction for depreciation, rent, interest, salary etc. are admissible.

Some of the issues arising out of the Computation of Income under the head Profits/gains of Business/Profession are dealt with herein below:

1. Whether Remuneration/Salary paid to Karta/other members of the HUF is Deductible from the Business income of HUF?

The Karta of the family generally manages the affairs of the family including the business run by the family. The other family members may also be engaged in assisting the Karta or may be independently/actively engaged in the running of the family business. A question arises whether during the course of their engagement, can Karta and/or other members of the family draw remuneration/salary from the business and if so whether the same would be deductible from the business income. The aforesaid issue was subject matter of appeal before the Apex Court in the case of Jugal Kishore Baldeo Sahai vs CIT. (1967) EL SCR 4161= (1967) 63 ITR 2381 and the Apex COurt after detailed reasoning allowed the appeal by holding the remuneration paid to Karta to be deductible u/s 10(2) (xv) of the 1922 Act by holding as follows in Para-8

8. In our view, if a remuneration is paid to the karta of the family under a valid agreement which is bonafide and in the interest of, and expedient for, the business of the family and the payment is genuine and not excessive, such remuneration must be held to be an expenditure laid out wholly at exclusively for the purpose of the business of the family and must be aif owed as an expenditure under Section 10(2) (xv) of the.Act.

The Apex Court relied on its earlier case of Jitmal Bhuraa1 vs CIT reported in (1962) 44 ITR 887 wherein it was held that a Hindu Undivided family can be allowed to deduct salary paid to a member of the family, if the payment is made as a matter of commercial or business expediency and the services are rendered to the fanfily. In the case of Jitmal Bhuramal though the Hon’ble Court held that the deduction on account of salary could only be made while computing the profits of the partnership to which the junior members of HUF were rendering the service and not in the assessment of the HUF.

Thus, it can be concluded that the salary/remuneration drawn by the Karta/members of HUF are deductible as a business expenditure provided the payment is genuine and reasonable.

2. Whether Interest on Loan taken from Coparcener is Deductible out of income of HUF

The Apex Court in the ese of CIT vs Gopal Bansilal Inani (2000) 245 ITR 2 in a very short judgement held that such interest is not deductible. However, it must be noted that this decision has to be understood in the facts of the case, which are available in CIT vs Venugopal Inani [19991 239 ITR 514 (SC), which was followed in this case. It was not a case of complete partition by metes and bounds recognised under section 171, so that separate accounts as between the HUF and coparceners though acceptable in general law could not be accepted, because of the deeming provision under section 171 requiring the assessment to be continued to be made in the hands of the HUF in the absence of an order recognising the partition under section 171. The decision as such has to be read in a limited context and cannot be applied in general.

3. Withdrawal of Development rebate in case of partial partition of HUF.

An interesting question arose in the case of CIT vs S.Balasubramnian (1998) 3 SCC 596 [= (1998) 230 fiR 934] where the Assessee was a HUF and had claimed certain development rebate on new plant and machinery installed for the purposes of business of the Joint family. Thereafter the said plant and machinery was allotted on partial partition to the coparceners and the coparceners sold the said plant and machinery within a period of 8 years and the question arose whether in such cases there was a transfer of plant and machinery, so as to warrant withdrawal of the development rebate allowed to the HUF asséssee. The Hon’ble Apex Court held as follows:

1. In so far as the transfer of assets on partial partition is concerned, the same cannot be said to be a transfer within the meaning of Section 2(47) of Income-tax Act,1961 on account of the fact that the essence of joint Hindu family property is unity of ownership and community of interest. Shares df members are not defined. However, in view of the unity of ownership and community of. interest of all coparceners in the joint Hindu family business, the position on partition of joint Hindu family business, whether it ‘be partial or complete is very similar in law to the position on dissolution of partnership firm. On partition the shares of thecoparceners in the joint family business become defined and their community of interest is separated. Division of assets is a matter of mutual adjustment of accounts as in the case of a dissolved partnership firm. The property which so comes to the share of the coparceners, therefore, cannot be considered as transfer by the joint family to a coparcener or the extinguishment of the right of the joint family in that property, the joint family not having its own separate interest in that property which can be transferred.

2. Thereafter, the Hon’ble Apex Court held that though in the present case, it cannot be said that the HUf had transferred the assets within a period of eight years, however in the present case, the coparceners had sold the assets to third party within the period of 8 years and therefore this wa a case where the assessee had not used the machinery for his business for a period of eight years even if the assessee is taken as a compendium. of joint hindu family-cum-coparceners and thereafter it held that the development rebate was rightly withdrawn.