Assessment of HUF – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Assessment of HUF – CA Final DT Question Bank
X (HUF) was the owner of a house property which was being used for the purposes of a business carried on by a partnership firm XY and Co., in which the Karta and other members of the HUF were partners in their individual capacity. The Assessing Officer proposes to assess the annual letting value of the said property as the HUF’s income from house property. The HUF contends that the building was used for business purposes and, therefore, the annual letting value thereof was not taxable in ) its hands as income from house property under section 22. Examine the rival contentions. [CA Final May 1997] [4 Marks]
As per section 22, the annual value of house property is not taxable if the house property is used by the assessee for the purposes of his business or profession. It has been held by Courts that if the house property of a person is used for business purposes by the partnership.firm in which such person f is a partner, then it shall be deemed that the house property is used by the partner for his business purposes. Consequently, the income from house I property shall not be assessable in the hands of partner as per section 22.
Where the Karta of a HUF is a partner in a firm in a representative capacity and the property belonging to the HUF is occupied by the firm for carrying on business, exemption under section 22 will be available to HUF [CIT v. Shri Champalal Jeevraj (1995) (Mad.)].
In the present problem, the karta and other members of X (HUF) are partners in the partnership firm XY & Co., in their individual capacity and not in their representative capacity. The business carried on by XY & Co., cannot be treated as business carried on by X (HUF) merely because the partners in XY & Co. were also the members of X (HUF). Hence, the proposal of the Assessing Officer to assess the annual letting value of the said property as the HUF’s income from house property is correct.
Krishna Kanhaiya HUF, running Kanha Departmental Stores consists of Karta, his wife, two sons and daughter. Both the sons who are having professional/technical qualifications as a Chartered Accountant and as an Automobile Engineer started in partnership a garage for the repairing of motor cars with a clear understanding that the technical side of the business be looked after by the Engineer while the general administration and finance part be taken care of by the Chartered Accountant. They had taken an Interest Free Loan of ₹ 5,00,000 from the HUF for starting the venture. The business of garage resulted into Net Profit of ₹ 15,00,000 for the year ended 31.03.2021. The A.O. proposes to assess the income from the business of motor garage in the hands of HUF What do you say about the validity of the proposition of the A.O.? [CA Final Nov. 2010] [4 Marks]
The facts of the case are similar to the facts in CIT v. Charan Dass Khanna & Sons (1980) where the Delhi High Court held that where primarily I the personal efforts and skills of the individual coparceners resulted in setting up of a new business, and the investment from the HUF in the business played only a minor role, then the profits from such business shall not belong to the HUF.
In this case, two sons who are having professional and technical qualifications have started a partnership of garage for repairing of motor cars. They had taken an interest free loan of ₹ 5,00,000 from the HUF for starting the f venture. The business of garage resulted into Net Profit of ₹ 15,00,000 and the A.O. wants to treat the income from the business of motor garage in the hands of HUF.
By applying the above rationale, the action of the A.O. to assess the income from the business of motor garage in the hands of HUF is riot correct.
Mr. Ram (age 56) is Karta of his HUF. The HUF consists of himself, his wife and two sons viz. Mr. C (age 28) and Minor D (age 16). The HUF is assessed to income tax and has business income from the year 2003-04 onwards. The business income of HUF for the year ended 31.3.2021 is ₹ 5,00,000 (computed). Mr. Ram is employed in a private company and his salary income for the same period is ₹ 6,10,000 (computed).
You are requested to answer the following treating each of them as independent situations:
(i) Mr. C gave cash gift of ₹ 1,00,000 to the HUF of Mr. Ram. What would be the total income of HUF?
(ii) The HUF has one house property fetching rent of ₹ 10,000 per month and some movable assets. There is a proposal to make a partial partition of HUF by allotting the house property to Mr. C. Is it advisable to do a partial partition?
(iii) Minor D earned ₹ 70,000 by use of his special skill and talent. How would his income be taxed?
(iv) A Car owned personally by Mr. Ram was blended with HUF during the year. It was leased out for a monthly rent of ₹ 10,000 from 1.10.2020. How would this income be taxed? [CA Final Nov. 2015] [6 Marks]
|Total income of HUF||₹|
Income from other sources [Note]
As per sec. 56(2)(x), where an assessee receives any sum of money without consideration, the aggregate value of which exceeds ₹ 50,000 in any previous year, the whole of the aggregate value of such sum, from any person or persons, shall be taxable under the head “Income from Other Sources”. But, if such sum is received by any assessee, being an individual or HUF, from their relatives, it shall not be taxable. A relative for HUF means its members. Therefore, the cash gift received by HUF from Mr. C (being member of HUF) will not be taxable u/s 56(2)(x) in the hands of HUF.
(ii) The Income-tax Act does not recognise any partial partition of HUF vide section 171. Section 171 provides that where a partial partition has taken place among the members of a Hindu family hitherto assessed as undivided,—
(a) no claim that such partial partition has taken place shall be inquired into by the Assessing Officer and no finding shall be recorded that such partial partition had taken place;
(b) such family shall continue to be liable to be assessed under this Act as if no such partial partition had taken place;
(c) each member or group of members of such family immediately before such partial partition and the family shall be jointly and severally liable for any tax, penalty, interest, fine or other sum payable under this Act by the family in respect of any period, whether before or after such partial partition;
(d) the several liability of any member or group of members aforesaid shall be computed according to the portion of the joint family property allotted to him or it at such partial partition, and the provisions of this Act shall apply accordingly.
Therefore, partial partition is not advisable.
(iii) As per sec. 64(1 A), all income which accrues or arises to a minor shall be clubbed in the income of that of his parent whose total income (excluding the income clubbed under this sub-section) is greater. But the income earned by the minor child by way of manual work done by him or by way of activity involving application of his skill, talent or specialized knowledge and experience shall not to be clubbed. In this case, Minor child D has earned ₹ 70,000 by use of his special skill and talent and therefore, it shall not be clubbed in the hands of either of the parent and shall be taxable in his hands.
(iv) As per sec. 64(2), where an individual, who is a member of an HUF, converts his personal property as the property of the HUF, or throws his property into the common stock.of the family, without adequate consideration, then the income derived from such property by the HUF shall be included in the total income of such individual. Therefore, the monthly rent earned by leasing out of car by HUF shall be taxable in the hands of Mr. Ram.