HOW ONE CAN CREATE HUF(HINDU UNDIVIDED FAMILY)

Though every body is interested in this question and this question has been asked by many and generally not have any answer in text book also ,why it so ?

The answer is very Interesting that the above question is wrong the correct question is

"how we can create capital for Huf '

we can not create Huf but can arrange capital for it

"Till the time the HUF has an empty kitty,it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a "ball"oon only when it swells up with air inside it. Without the air the balloon is inert,dormant. An HUF too is inert and dormant without funds."....................CA Sanjeev Bedi(ludhiana)

"The million-dollar question indeed is: How to blow funds into the HUF and turn it into a balloon that floats?

• A member of the HUF throwing his money into the common pool, or to use that overused cliché' the family hotchpot, is out of the question, thanks to Section 64(2) which would tax the income earned by the HUF on that money in the individual member's hands only.
• But the clubbing provisions can be bypassed if the HUF invests the money in instruments yielding tax-free income. The tax-free income can then be reinvested to earn even taxable income--income on income is out of the clubbing provisions.
• Strangers can make gifts but only up to Rs 50000 (Section 56).
  
• A way-out is to receive gifts from members of bigger HUFs, who though your relatives, aren't members of your smaller HUF.
  
• A father may make a gift of money to his son's newly-created HUF, clearly specifying in the Gift Deed that the gift is to his son's smaller HUF and not to the son himself. This will keep both Section 64(2)and Section 56(2) at bay.
  
• After the HUF has a nucleus of its own and gets going, care has to be taken to keep the HUF's affairs completely distinct from the individual members' affairs. Where the members of the HUF carry on their individual businesses, as they normally do, the distinction between what constitutes the individual's income and what is HUF's income may get blurred.
• Some other people, who aren't members of the HUF but are relatives in terms of Section 56(2) can also be found out.
  

Now every body comfortable with the question because creating a capital by transfer ,gift and all like stuff as hinted by Sanjeev we all know to some extent .

so to have capital in huf account we should take following steps

1. we should have opened a bank account first (not must) but it is advisable so that we can have transaction by cheques .
2. Apply for permanent account number (pan)
3. Formation of capital of huf,Transfer money by gifts etc to HUF capital keeping in view the clubbing provisions and tax on gifts under Income tax act,Remember there is no Tax on gifts in kind though they may attract clubbing provisions in some cases.

Regarding Huf an Interesting and detailed reply has been given by our group star contributor CA Sanjeev Bedi we are giving abstract of the answer.

• The Hindu Undivided Family has its roots in the ancient Hindu law like the Manu Smriti, compiled by a male chauvinist Hindu "Scholar"called Manu, who lived around 200 BC; the Yajnavalikya Smriti compiled by Yajnavalikya and Narada in 100 and 200AD (it merely embellished what had already been laid down by Manu); and Mitakshara codified by a guy called Vijneshwara somewhere around the year 1100AD. Mulla, the foremost authority on Hindu law, has described the Mitakshara as "the quintessence of the Smriti law,its precepts and injunctions".
  

• Later in the 12th century, there came along another variation of the Hindu law called the Dayabhaga written by one Jimutavahana.
  
• The Dayabhaga challenged and deviated from the Mitakshara law in some ways, particularly in relation to succession and inheritance.
• Under the Dayabhaga system,the father is the sole owner and the exclusive possessor of the joint family property. No member can enforce the partition of the HUF so long as the father lives.
  
• But the Mitakshara law stipulates that the property vests in the HUF itself and not in any individual member of the family and therefore can be partitioned within the lifetime of the father.
• The Dayabhaga law is prevalent in West Bengal and Assam.
  
• Hindus in the rest of the country are governed by the Mitakshara law.

• Manusmriti completely forbade women to have a share in the family property.
  
• The modern Indian government embarrassed by these antediluvian,anachronistic laws has sought to bring them inline from time to time with the egalitarian values of 21st century.On 9th September 2005, the Hindu Succession Act, 1956 was amended to provide that
  
• a daughter too could be a coparcener i.e. joint heir,like her brother to the joint family's assets and
  
• she too could enforce the partition of the family property to claim her individual share.
  
• She continues to be the coparcener in her father's HUF even after she gets married and forms another HUF with her husband.So gender bias has largely been taken out of the HUF laws.
  

• A coparcener is one who has a right to demand that the family property be divided and they be handed over their share in the property (or whatever assets the HUF has) in case he or she decides to part ways with the HUF.
  
• Not all members of the HUF are its coparceners. The coparcenery extends to four degrees down the family hierarchy in the following manner:
• 1st degree :Holder of ancestral property for the first time.
• 2nd degree : Sons and daughters(09.09.2005).
• 3rd degree: Grandsons.
• 4th degree : Great grandsons.

• The most frequently asked question about HUF is: How does it come into being? To form an HUF, all you have to do is Get Married. The HUF gets created as soon as you complete the seven (or four,whatever) circles round the holy fire and become Man and Wife.
  
• There have to be a minimum of two people to constitute a family. The husband and wife together make up a family. They don't have to wait till they have a baby to constitute their HUF.
• Someone asked "Can an unmarried man create an HUF?" No, he cannot,if you mean an HUF of which he seeks to be the Karta himself. He can very well be the member of the HUF of his father or grandfather, but to create his own HUF he has to wait till he ties the nuptials.Come to think of it, "Creation of an HUF" is an oxymoron—-a contradiction in terms. Only orphan-and-unmarried Hindus don't belong to an HUF. Every Hindu becomes a member of an HUF the moment she ejects out of her mother's womb, mode of delivery--C-section or Normal--notwithstanding.
  
• Till the time the HUF has an empty kitty,it is like a balloon that no one has yet blown air into. A balloon can rightfully be called a "ball"oon only when it swells up with air inside it. Without the air the balloon is inert,dormant. An HUF too is inert and dormant without funds.
• The Karta, which in Hindi means the Doer, is usually the Father, the pater families of the family. He has immense powers over the affairs of the family, more than any other coparcener can wield.
  
• Can a female be the Karta? The answer can't be No in the light of the amendment in the HS Act in 2005.An unmarried daughter, in the unfortunate event of her father passing away, will become the Karta of the HUF if she has no brother.
  
• Can there be an all-female HUF? Yes, there can be. Where a couple has only one issue—-a daughter—-and the husband passes away,the mother-daughter duo can continue the HUF (although a problem may arise after she gets married and becomes a member of her husband's HUF). It has been held by the Allahabad High Court in CIT v. Sarwan Kumar 13 ITR 361 (All) that there can be an HUF consisting of female members only
• The Karta can enter into partnership with a firm on behalf of the HUF. But the HUF itself, being not a legal person, can never be a partner in a firm. The fact that Income Tax law grants a PAN to itand treats it as an assessable entity does not bestow upon it the status of a person under the general laws. This has been held to be so in numerous cases. In Ram Laxman Sugar Mills v. CIT 66 ITR 613(SC), the Supreme Court said that "an HUF is undoubtedly a person within the meaning of the Indian Income Tax Act, It is however,not a juristic person for all purposes and cannot enter into an agreement of partnership either with another undivided family or individual".
• So while conducting bank audit, in case you come across a loan file where the HUF is shown to be the partner, raise an objection.
• There have been cases where the courts have held that businesses started by individual members after borrowing funds from the HUF were assessable in the HUF's hands, especially where the HUF is already engaged in the same business. So think twice before letting the HUF lend any money to its members and viceversa.
  
• In CIT v. Gopal Bansilal Inani (2000) 245 ITR 2 (SC),the Supreme Court disallowed the interest paid to coparceners on the loan the HUF had taken from them as a business expenditure u/s 37(1).

• Can an HUF pay remuneration to its Karta? Yes, in Jugal KishoreBaldev Sahai v. CIT 63 ITR 238 (SC), the Supreme Court held that "ifa remuneration is paid to a Karta of the family under a valid agreement which is bona fide in the interest of and expedient forthe business of the family and the payment is genuine and not excessive, such a remuneration must be held to be an expenditure laid out wholly and exclusively, for the purpose of the business and must be allowed as an expenditure under section 10(2)(xv)[corresponding to the present-day Section 37(1)] of theAct".
• There is also the issue of Partition of the HUF. Al though the Mitakshara and other Hindu laws do not forbid partial partition ofthe HUF, the Income Tax law frowns upon it. Under the Hindu law,you may have eliminated the HUF by partioning the property (or what ever assets) of the HUF, but the taxation authorities have invested themselves with powers u/s 171 of the I T Act to continue to treat the defunct HUF as an assessee liable to pay tax unless the partition is effected in strict keeping with the manner laid down in that section. The law wants to dissuade assessees to smash up their bigger HUFs into smaller ones just to create more files to bring down their tax liabilities.Total partition in the context of the I T Act means partition by metes and bounds. "Metes and Bounds", anAnglo-French term, means the boundaries or limits of a tract of land.If the HUF property is physical, it isn't difficult to divide it up,delineating the share of each member. But a non-physical property will have to be divvied up amongst the members in such a manner as to comply with Explanation (b) below Section 171(9). Care must be taken that erst while coparceners don't simply end up becoming co-owners in the property. For example an FD held by the HUF being partitioned can't be converted into a joint FD of members after partition; if itis,interest on it will continue to be assessed in the HUF's hands.The FD can continue only in one member's name; he can cough up some cash to the other members to compensate them for loss of FD.What ametes and bounds partition does is deflate the balloon of the HUF. The Income Tax law will recognize its demise (for want of a better word,since a divided Hindu family can be reunited again),only when the HUF is stripped naked of each and every layer of the clothing of property—-tangible or intangible, movable or immovable--it had. It has to get back into its birthday suit again to be truly partitioned.
• There is a book titled "Formation & Management of HUF along with Tax Planning" by authors S R Kharbanda and Prem Nath published by Commercial Law publishers.
  

CA Sanjeev Bedi................

if you have different opinion or any question left please comment.............