Understanding how HUF works/How to benefit under HUF

T. Banusekar

This week, `Tax Talk' answers queries primarily based on the HUF -- Hindu Undivided Family -- concept.

The tax benefits, exemptions and basic slab rates pertaining to the HUF are analysed. Issues of capital gains tax liability and leave travel concession are also briefly discussed.

Query

I would like to know the following:

* The concept of smaller HUF for tax planning. * A company's shares are purchased for Rs 20 in the market. These are subsequently transferred at the same price of Rs 20 after five years (off-market deal) to another person. The market value is Rs 100 on the date of transfer. What would be the tax implication to the buyer and the seller?

Manjunath, Mangalore

Reply

Like every other person, a HUF is given a name for identification. It is normally referred to as ``Name of the Karta (HUF)''. There might be situations when a person might be a karta in more than one HUF. For example, `X' might constitute a HUF along with his two younger brothers, his spouse, the spouses of his brothers and the children of all the brothers. In this HUF, since he is the oldest surviving male member, he will be the karta. This HUF will be `X' (HUF). `X' may also be the karta of the HUF consisting of himself, his wife and children.

To avoid any difficulty in identification, the first HUF is identified as `X' (BHUF) and the second as `X' (SHUF) where BHUF and SHUF stand for bigger HUF and smaller HUF respectively.

A smaller HUF may also be created by partial partition of a HUF which is now derecognised, due to the operation of Section 171(9) of the Income-Tax Act though recognised under the Hindu Law.

Where a smaller HUF is created as a taxable entity, one would appreciate that the basic exemption, the lower slab rates of tax and other deductions will be available thereby helping in planning to reduce the tax liability.

***

Where a share purchased for Rs 20 is sold after five years for the same price when the market value of the share on that date is Rs 100, it is possible that the transaction may be viewed as a sham. It will be for the seller to prove that the price that has actually been transacted is only Rs 20 and that no other consideration has been received. If this were not proved to the satisfaction of the assessing officer, it would result in the balance of Rs 80 also being treated as consideration in the hands of the seller. In the hands of the buyer, if the value recorded in such circumstances is only Rs 20, the balance of Rs 80 would be treated as unexplained investments and deemed as income under Section 69B.

However, if it can be proved to the satisfaction of the assessing officer that the price transacted is only Rs 20, there would be no consequence either in the hands of the buyer or the seller. Showing that the balance of Rs 80 was intended to be a gift or other circumstances that may exist on the facts of the case such as a distress sale, can prove this.

Query

I would like to know the tax benefits for a HUF. My husband and I are salaried employees in government jobs. My mother-in-law (62 years, a housewife) wants to gift money to my nine-year-old daughter as a security for her future. I would like to know if any tax benefit can be claimed by either by me or by my husband under Hindu Undivided Family Act.

M. Surekha, Chandigarh

Reply

In the instant case, if the gift is taken for the benefit of the family, which will include your daughter, the income arising from the money invested would be treated as belonging to the HUF which will be a separate taxable entity. Therefore, the basic exemption, the lower slab rates and deductions would be available to the HUF. The reader may also consider the possibility of creating a private trust for the benefit of the minor daughter. You may refer to the articles published in this column on July 16 and August 19. There is no law known as the Hindu Undivided Family Act. The Hindu Law governs HUFs.

Query

How should I invest the sale proceeds of a flat to avoid capital gains tax liability?

T. R. R. Pillai

Reply

On the sale of a flat, the exemption may be availed either under Section 54, by reinvesting in another residential house, or under Section 54EC, by investing in bonds redeemable after three years issued on or after April 1, 2000, by Nabard or the National Highway Authority of India (NHAI). If the amount invested is more than or equal to the capital gain, the entire capital gain would be exempt. If the amount invested is less, the exemption would be available to the extent of such investment.

The investment in another residential house for exemption under Section 54 should be in case of purchase one year before or two years after the transfer and in case of construction within three years from the date of transfer. For exemption under Section 54EC, the investment should be within six months from the date of transfer.

Query

Please clarify whether leave travel concession received for a visit to Nepal by bus is exempt from income-tax. If so, please quote the relevant Income-Tax Rule number.

P. U. M. Rao

Reply

Under Section 10(5), an individual is entitled to an exemption in respect of leave travel concession only if he travels to any place in India. Therefore, if a visit is made to Nepal the exemption under Section 10(5) will not be available.

Query

As per AS-2, excise duty should be removed from the cost of purchase and inventory should be valued net of excise duty. Coming to income-tax, Section 145A states that the inventory should be valued at gross value, including excise duty. In this context, what adjustments need to be done in the computation of income? Should these adjustments be done every year or only in the transition year that is, assessment year 1999-2000?

Sanjeev Kumar, Hyderabad

Reply

It is true that under Section 145A, purchases, sales and inventory should be valued inclusive of excise duty, while in accordance with the guidelines of Institute of Chartered Accountants of India (ICAI) they need to be valued net of the excise duty. The adjustments that have to be made in the statement of computation of income to comply with Section 145A have been clearly highlighted by way of an illustration in paragraph 23.15, page 71 of the Guidance note issued by the ICAI. Reference my also be made to paragraph 73 for an illustration of the method of working out the valuation in accordance with Section 145A.

These adjustments have to be done every year and not merely in the transitional year.

(The author is a Chennai-based practising chartered accountant. This column which normally appears on the first and third Sundays of every month, will appear more frequently due to the large number of queries received.)

Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600 002, or by e-mail to vaidy@thehindu.co.in