How to Constitute a Hindu Undivided Family (HUF)

Ordinarily, HUF is constituted on marriage when a person is bestowed by the God almighty with a Child and only family property/asset is created by act of a man. Though it has been held in several court cases, that a Joint Hindu family is a creation of law, but for the purposes of Income-tax Act, 1961, the Act recognizes HUFs property constituted in several ways and they are discussed as below:

1.  Constitution Of HUF Property By Own Will Or Choice Of A Person

HUF property can be constituted by a Hindu Father when he decides to unite for the purpose of constituting the Hindu Undivided family and for the purpose of a creating a joint and common pooi of assets to be used for the purpose of the benefit of the whole family. The essence for constitution of HUF by own will/choice of a Person is this common cause.

Once a Hindu father decides to constitute a HUF, it is advisable to request a close relative or friend to gift of a sum of money or gift in kind who essentially settles this sum for the purpose to the HUF and to be kept as corpus of the HUF for use absolutely by the family. This sum of money or gift in kind acts as a corpus of HUF in such cases. It is important to note here that according to Section 56(2) (vii) of the Income-tax Act, 1961, gifts received in aggregate from any person of any immovable property or specified property or money in excess of Rs. 50000/- in any previous year is taxable as Income of the donee and theifore, it is better to keep the amount/value of gift to a sum less than Rs. 50000/- so as not to attract the provisions of Section 56(2) (vii) as above. It may be noted that in respect of gifts above Rs. 50000/- in so far as the basis of valuation is concerned the stamp duty value is applicable in case of immovable property and the fair market value is applicable in case of any property other than immovable property. With retrospective effect from 1st Octoher,2009 new rules 1W and 11UA have also been inserted in the Income tax Rules, 1962 prescribing the method of determination of fair market value of property other than immovable property for the purpose of Section 56 vide Income-tax (Second Amendment) Rules,2010. reported at (2010) 322 ITR (St.) 25.

Once this Gift is received, the amount can be deposited in a Bank account to be opened in the name of HUF. Once the gift is received and deposited in the Bank account, the HUF property comes into being and the accumulations/accretions in the corpus fund are treated as either capital or revenue receipt depending upon the nature of the receipt. Generally it is better to get the gift from one’s father or mother so that concept of ancestral funds of Family is continued in the Corpus of the HUF which is created on receipt of the Funds.

However in all cases, the gift should be genuine. Burden to prove the identity, capacity and genuineness of the donor is on the donee else, the value of the gift as arrived at herein at would be assessable as Donee’s Income from undisclosed sources. Declaration of gift should be well worded, duly signed by the Donor and accepted by the Donee. Reliance can be placed on the decision of the Apex Court in the case of Pushpa Devi vs CIT (1977) 109 ITR 730(SC).

2. Whether ancestral property is necessary for nucleus of HUF

The Hon’ble Supreme Court in the case of Commissioner of Income-tax vs K. Satyendra Kumar reported at (1998)232 ITR 360(SC) had held that in respect of gifts received by a person from her mother with an intention that the property should be held for the benefit of the entire family can be treated as HUF property. This is an important decision, which has been rendered on the concept of the Hindu Joint family in respect of assets acquired by gift from a female member of the family. The Apex Court in this case was deliberating upon the judgement of the Madras High Court in the case of Satyendra Kumar vs CIT reported at (1963) 14QITR 840(Mad). This decision was affirmed by the Apex Court. The Apex Court approved the following views of the High Court:

“Property may be joint property without having been ancestral. Where the members of a joint family acquire property by or with the assistance of joint funds or by their joint labour or in their joint business or by a gift or a grant made to them as a joint family, such property is coparcenary property of the persons who have acquired it, whether it is an increment to ancestral property, or whether it Jias arisen without any nucleus of ancestral property.

3. Ancestral Property vis-à-vis effect of Section 8 of Hindu Succession Act, 1956

Again it may be noted that in the case of Yudhister vs Ashok Kumar (1987) 1 SCC 204 (SC) the Apex Court held that where a house was built by a Hindu governed by Mitakshara law,after his death the same would devolve on his s2n not as Karta of HUF but in his individual capacity. The Apex Court considered the decision of CWT vs Chander Sen(1986) 161 ITR 370 wherein it was held that under the Hindu law, the moment a son is born, he gets a share in fathers property and becomes part of the coparcenary. His right accrues to him not on the death of the father or inheritance from the father but with the very fact of his birth. Normally, therefore whenever the father gets a property from whatever source, from the grandfather or from any other source, be it separated property or not, his son should have a share in that and it will become part of the joint Hindu family of his son and grandson and other members who form joint Hindu family with him. This Court observed that this position has been affected by Section 8 of the Hindu Succession Act, 1956 and, therefore, after the Act, when the son inherited the property in the situation contemplated by Section 8, he does not take it as karta of his own undivided family but takes it in his individual capacity. This Court dealt with the effect of Section 6 of the Hindu Succession Act, 1956 .Shri Banerji relied on the said observations of Mayne on Hindu Law, This Court observed in the aforesaid decision that the views expressed by the Allahabad High Court, the Madras High Court, the Madhya Pradesh High Court and the Andhra Pradesh High Court appeared to be correct and unable to accept the views of the Gujarat High Court. In that view of the matter, it would be difficult to hold that property which devcilved on a Hindu under Section 8 of the Hindu Succession Act, 1956 would be HUF in his hand vis-à-vis his own sons. If that be the position then the property which devolved upon the father of the respondent in the instant case on the demise of his grandfather could not be said to be HUF property. If that is so, then the appellate authority was right in holding that the respondent was a licensee of his father in respect of the ancestral house.

A Sample of the gift deed in such cases in given herein below:

The following precautions should be taken in preparation of a gift deed:

1. The Stamp paper should be of a requisite value, which is required for an affidavit based on the Stamp Act of the State in which the declaration is being made.

2. The date of the stamp should not be stale, i.e., it must be usable.

3. The stamp paper must be in the name of the bonor or the Donee or if it is in the name of an Advocate, that Advocate must be a witness to the Gift deed.

4. The deed of gift should clearly state that the gift is being given to the HUF consisting of the members of the HUF and not to the Karta in his individual capacity.