Tag: HUF

Tax Query: How to close HUF account with the I-T Department

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My friend is having an HUF account. Till 2016 he had business income in HUF. He has two sons and a spouse. Both sons are not interested in continuing the business, hence he wants to close his HUF account with the bank as well as the income tax department. Request your advice on how to close HUF account with the income tax department.

Pravin Shah

Hindu Undivided Family (‘HUF’) is dissolved only on the partition of property between the members. It is important to note that as per the provisions of section 171(9) of the Income-tax Act, 1961 (‘the Act’), partial partition of HUF is not recognised. Under the provisions of Act, partition means ‘full partition’.

For the purpose of dissolution of the HUF, your friend will need to draw up a deed of full partition and get the same registered. Once the partition of HUF is complete, it will cease to exist.

Till the date of such dissolution, the HUF shall be assessed in its capacity as a HUF and the return of income for such period should be filed by your friend. Also, your friend may make an application for surrender of PAN of HUF with the jurisdictional assessing officer by submitting a request in this regard after the partition of the HUF and related compliances (like filing of return) are complete.

In one of answers to a query earlier, you had stated that in view of the amendment to Sec. 55 of the Income tax Act, where the property is purchased before April 1, 2001, the fair market valuation as per the valuation by a registered valuer as at April 1, 2001 would be considered the cost of acquisition, which has been capped from April 1, 2021 at the stamp duty value, wherever available. A search on the site of the Inspector General of Valuation of Registration, Tamil Nadu reveals that fair valuation as revised from 9.6.2017 is available only from April 1, 2002. The site states that the information provided online is updated and no physical visit is required for services provided online. Do we then assume that since the stamp duty value is not available as on April 1, 2021, the fair market valuation by the valuer could be considered as the cost of acquisition for property sale in Chennai ?

Murli Krishnamurthy

As per the provisions of section 55(2)(b)(i) of the Income-tax Act, 1961 (‘the Act’), in case of a property purchased before April 1, 2001, the cost of acquisition shall be considered as any of the following at the option of the assessee:

– the fair market value (‘FMV’) of the property as on April 1, 2001; or

– the actual cost of acquisition of the property.

As per amendment made vide Finance Act, 2020, in case of a capital asset being land or building or both, the FMV of such asset (as on April 1, 2001) for the purpose of section 55, shall not exceed the stamp duty value (‘SDV’), wherever available, as on April 1, 2001.

In the instant case, I understand that SDV as on April 1, 2001 is not available for the subject property. In such scenario, you may consider FMV as on April 1, 2001 as the cost of acquisition of the property for the purpose of section 55 of the Act.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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Will home purchase by mother using NRI son’s money face tax?

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My son is an NRI and he wants to gift his earnings to his mother, who is a housewife and has no income. She wants to invest the amount in a residential site in her name. Please let me know tax implications on both the mother and son. Also, should she file I-T return on account of this?

LAKSHMISHA

Gifts will not attract income tax in the hands of the donor. Further, it will not attract taxation in the hands of the recipient if gifts are received from a relative as defined under the income tax act.

Parents are covered under the definition of relatives. As a result, any amount gifted by your son to your wife is not taxable in her hands.

However, any income that your spouse earns from the gift will be taxable in her hands. Further, under the provisions of the Income Tax Act, 1961 an individual is required to file a tax return where:

· the taxable income during the Financial Year (FY) exceeds the maximum amount not chargeable to tax, i.e., ₹2,50,000;

· has deposited an amount or aggregate of the amounts exceeding ₹ 1 crore in one or more current accounts maintained with a banking company or a co-operative bank; or

· has incurred expenditure of an amount or aggregate of the amounts exceeding ₹2 lakh for himself or any other person for travel to a foreign country; or

· has incurred expenditure of an amount or aggregate of the amounts exceeding ₹1 lakh towards consumption of electricity. or

· holds a foreign asset outside India either as a beneficial owner or otherwise

In case, the taxable income of your spouse from the said residential site during the relevant financial year exceeds ₹2,50,000 in any financial year or she fulfils any of the criteria mentioned above, she will be required to file a tax return.

I have an HUF, with demat account. I would like to transfer some shares of a listed entity from HUF to one of its members. This will be done via off-market transaction. The member (or the recipient) will pay fair and adequate consideration (say based on market price on the date of transaction) for this transaction. In such case, what will be the implications from income tax perspective, specifically: a) Will this be treated as sale of shares and HUF becomes eligible for payment of capital gains from this transaction? b) What will be the date of acquisition of these shares for the member (or the recipient)? c) Since these is adequate consideration, won’t this be treated as a gift? d) Also, will there be any difference in taxability, if the recipient is not a member of the HUF?

Ashish Ladha

The shares received by a member from the HUF shall be chargeable to tax in the hands of individual member as it neither is in the nature of gift nor is received from a relative defined under the Act.

a) As per Section 45 of the Act, any profits or gains arising from transfer of capital asset shall be chargeable to tax under the head Capital Gains in the year in which the transfer took place. Transfer of shares by the HUF to its member shall be treated as transfer and HUF shall be liable to pay tax on gains arising from such transfer.

As per Section 112 of the Act, long term capital gain arising from sale of listed securities shall be subject to tax at the rate of 20 per cent where cost has been indexed or at the rate of 10 per cent where the benefit of indexation of cost is not availed. Surcharge, if applicable and health & education cess at 4 per cent shall be payable in addition.

b) The date of acquisition of the shares for the member of the HUF shall be the date when the off-market transaction is initiated and shares are transferred to the member.

c) Given that the shares are transferred by HUF to its individual member for adequate consideration, i.e., at the fair market value of the shares as on the date of transfer, the said transfer cannot be treated as gift.

d) If the shares are transferred to any other person, who is not a member of HUF, there shall be no difference in the income tax treatment discussed above. All the points discussed above shall hold good.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

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Your Taxes – The Hindu BusinessLine

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It was mentioned in Business Line dated September 21, 2020 that if an individual transfers an amount (or gives interest- free loan) to his wife, the income earned on the same will be added to the income of the individual. What if a karta of an HUF transfers an amount (or gives interest-free loan) to his wife or parents? How is the income earned on that amount treated?

MG Suraj

As per Section 56(2)(x) of the Income Tax Act, any sum of money received in excess of ₹ 50,000 (without consideration/for inadequate consideration) is taxable, except where the donor is a relative or where the money is received in specified circumstances.

Under the I-T Act, as the term ‘relative’ does not include ‘HUF’ (Hindu Undivided Family), it appears that the gift received by individual HUF members (in excess of specified limits) from the HUF shall be chargeable to tax in the hands of individual members.

However, there are Tribunal rulings pronounced in the past, wherein such gifts have been treated as tax-free in the hands of the members on the premise that HUF is a group of relatives and, therefore, any amount received is a gift from the relative and is not taxable

There ought not be any tax implications on providing interest- free loan by karta (HUF) to his spouse, provided it can be established as a genuine transaction supported by adequate documentation.

The interest income earned on the money transferred to your wife’s account from the HUF shall be taxed in the hands of your wife only as the clubbing provisions are not applicable in case of HUF.

Further, if your parents are not members of your HUF, transfer of amount by way of gift from your HUF to your parents shall be covered under 56(2)(x) of the I-T Act and, accordingly, the whole aggregate sum of money received by your parents in a financial year (FY) shall be taxable in their hands as income from other sources, if the aggregate sum of money received exceeds ₹50,000 in a financial year. Further, the interest earned on such sum of money is taxable in their hands.

You may note that as per Section 10(2) of the I-T Act, any sum paid out from the income of the HUF to its members is exempt from tax. For the purpose of the above, we have assumed that payment is out of corpus of the HUF and not from its income.

I had invested in an FD in a Bengaluru-based cooperative bank and earned interest of ₹3.5 lakh in FY2019-20. Upon maturity of the FD, the interest and principal amount was credited to my savings bank a/c with the said bank. But unfortunately, the bank was sealed by the RBI due to some fraud committed there and huge NPA, and no business is being transacted by the bank. The RBI has also set a limit on withdrawals of not more than ₹1 lakh. Revival of bank is progressing. I want clarifications on a few points as I want to file ITR for FY2019-20 and pay tax. As my SB a/c is limited, is there any relief given to taxpayers, viz the above circumstances as I am unable to withdraw my money to pay tax. Can I file ITR without paying tax? Can I defer the tax payment?

HS Muralidhar

An individual can file tax return with tax liability and subsequently discharge the taxes.

Until FY2015-16, tax return filed with outstanding liability was regarded as defective return. With the amendment to tax laws, effective FY2016-17, filing tax return with tax payable is not regarded as defective return.

However, the taxpayer should be mindful that he would be regarded as assesse-in-default and thus may be subject to penal consequences besides interest implications.

Hence, it is recommended to discharge the taxes first before filing the tax return.

However, in case you choose to pay the taxes post filing of your tax return, such taxes, along with applicable interest, will have to be settled at a later date.

The due date of filing income tax return for FY2019-2020 is December 31, 2020. In the event the tax return is not filed within the said date, belated return can be filed on or before March, 2021, with additional interest and late payment fees.

Besides this, losses (except house property loss) cannot be carried forward if the return is not filed within the due date.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

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