HINDU UNDIVIDED FAMILY

2. Genesis and Structure of HUF

• HUF as a legal entity originated from customs acknowledged during the Raj in India.
• It operates as a family-backed institution for jointly controlling property in Hindu families.
• HUF has a dual identity as a family institution and an income-generating entity for family maintenance.
• Members of HUF include all persons lineally descended from a common ancestor, along with their wives and unmarried daughters.
• A HUF has its own Permanent Account Number (PAN) and files tax returns independently, with a karta managing day-to-day affairs.

3.  Historical View

• HUF was recognized as a separate taxpayer category in the Indian Income Tax Act of 1886.
• The Super Tax Act of 1917, introduced to support finances during World War I, officially acknowledged HUF as a separate tax entity.
• The Income Tax Act of 1922, which served as the basis for the post-independence Income Tax Act of 1961, incorporated the idea of HUF as a distinct taxpayer category.
• Government committees examined the preferential tax treatment for HUFs, citing revenue loss and anomalies, but changes were not made due to the link between HUF's tax treatment and its legal status under Hindu personal law.
• The Justice Wanchoo Committee Report of 1971 highlighted the use of HUF for tax avoidance purposes, while a 2018 Law Commission consultation paper questioned the justification of HUF based on deep-rooted sentiments at the expense of the country's revenues.

4. Tax Treatment of HUF

• The preferential exemption regime for HUFs was abolished in the Income Tax Act of 1961.
• HUF as a separate tax entity still provides opportunities for Hindu families to reduce their tax burden.
• Creating an HUF allows income from the ancestral property to be taxed separately, potentially resulting in lower net taxable income and a reduced effective tax rate for individual members.
• Section 10(2) of the Income Tax Act, 1961 allows individuals to receive a share of HUF income without including it in their total income, providing additional tax benefits.
• The HUF can claim expenses, exemptions, and deductions, further reducing the tax burden for Hindu families.

5. Exclusivity of HUF Treatment

• The concept of HUF is unique to Hindu personal law, including Jains, Buddhists, and Sikhs.
• Kerala abolished the joint family system in 1975, rendering HUF assessments invalid.
• Tax benefits associated with creating an HUF are not available to taxpayers from other religions, raising concerns about the lack of uniform application of tax laws and potential violation of Article 14 of the Constitution.

6. The WayForward

• As the Law Commission deliberates on the Uniform Civil Code, the tax treatment of HUF will be a significant consideration.
• It raises questions of equality and uniformity in tax laws across religions, as well as the potential arbitrariness of granting additional tax benefits based on religion.
• Achieving a more equitable and uniform tax system may necessitate a reevaluation of the preferential tax treatment for HUFs to promote fairness and avoid any constitutional concerns.