As individuals or other assessees who enjoy the infrastructure and other facilities for conducting business or generating income, we are also liable to pay taxes to the government so that ample development is achieved concerning the country and society. The Income Tax Act provides a proper threshold limit for each assessee, crossing which they will have to pay tax to the government for any benefits enjoyed by them.
However, it is often seen that the assessee uses various methods for evading tax or reducing the tax burden. This includes the concealment of income, excess claiming of deductions, sources of income to other persons while the assets stay with the assessee, transferring income to the name of relatives, minors, and such other forms. Among these, one of the major ways the assessee chooses to evade tax is the conversion of self-occupied house property into joint family stock. And this is the topic of major discussion. The provisions of Income Tax pertaining to this and the tax treatment of such conversion are looked into in detail here.
Provisions of the Income Tax Act relating to the Conversion of a Self-Occupied House Property into Joint Family Stock of the HUF
Referring to provisions of section 64(2) of the Income Tax Act, we can understand that;
An individual who has become a member of the Hindu Undivided Family (HUF) after the date of 31.12.1969;
i) Is converting a property which he held separately to be the property of HUF or
ii) Throws the property into the Common Stock of the family or
iii) Otherwise, he transfers his individual property to the family, which is done for inadequate or a consideration which is not adequate.
Then, it should be noted that the income from such property shall still be included in the total income of the individual.
In simple words, we can say that if a self-occupied property of an individual is converted or treated as a joint family stock without the payment of adequate consideration for the same, the income which has been derived from such property by the joint family shall be included in the total income of the individual who was the previous owned of such self-occupied property.
Doctrine of Blending
The rule of doctrine of the blending suggests that a coparcener deliberately and intentionally throws his independently occupied or acquired property into the group or the joint family stock such that it becomes a part of the same. If a member of a joint family converts his self-acquired or occupied property into the common stock of the joint family with an intention of evading tax and not declaring the income earned through such property but to establish such abandonment a clear intention to waive separate rights must be established.
Here, to blend is to share with others and not to surrender one’s own interest in favour of others to the exclusion of oneself. For applying the doctrine of blending, the following pre-conditions should be fulfilled:
- Existence of coparcenary,
- The existence of coparcenary property and
- Existence of separate property of a coparcener.
Tax Treatment of Converted Property in the Hands of Transferor
Following are the tax treatment which should be followed by the assessee:
i) Referring to the provision of Section 64(2), the property includes any interest in the property, movable or immovable, and the proceeds of sale thereof and also any money or investment for the time being which is actually constituting of the proceeds of sale thereof and where the property is converted into any other property by any method, then such other property.
ii) Income earned from converted property for inadequate consideration is chargeable to tax in the hands of the transferor.
iii) When an income arises from a property that was self-occupied but converted into joint family stock, then such income shall be taxed in the hands of the transferor and not the transferee, which here is the HUF or Hindu Undivided Family. It should also be noted that the accumulated income of such property shall not be taxed in the hands of the transferor.
iv) The loss which is arising with respect to the converted property shall also be allowed to the transferor while computing income and this shall not be applicable to the income earned alone.
Tax Treatment of Converted Property at the time of Partition of HUF
In the case where the converted property becomes the subject matter of partition between the members of the family or the HUF, the income derived from such property as received by a spouse on a partition shall be deemed to arise to the spouse from such assets which the assessee transfers to the spouse, and such income arising from the portion transferred shall be clubbed with the income earned by the assessee and taxed in his own hands i.e., the transferor instead of being taxed in the hands of the spouse as per the provisions of the Income Tax Act.
Say Mr A is part of a HUF consisting of his wife, Mrs X, and a major son, Mr Y. He transferred a property that holds an income of INR 4,50,000 per annum to the common stock of HUF. Such a transfer would give the members of HUF the title to the income in the ratio of 1/3 as there are 3 members. This means Mr X shall be entitled to INR 1,50,000, Mrs X to INR 1,50,000, and Mr Y to INR 1,50,000.
Here it is to be noted that the amount of INR 1,50,000 earned by Mr. X and Mrs. X shall be taxed in the hands of Mr. X. Meanwhile, the other amount earned by Mr. Y shall be taxed in his own hands.
Section 56(2)(vii) of the Income Tax Act
As per section 56(2)(vii), certain gifts are not chargeable to tax when the sum of money/property is received by Individuals/HUF on or after October 1, 2009.
The term ‘Movable property’ would beincludingthe following elements like the shares, securities, jewellery, archaeological collection, drawings, paintings, sculptures, any work of art or bullion, and such other properties.
The sum of money or property, as the case may be received by any person (on or after 01-04-2017) in the following circumstances shall not be chargeable to tax:
i) Gifts received from relatives;
ii) Gifts received by an individual on the occasion of his/her marriage;
iii) Gifts received by way of Inheritance/will;
iv) Gifts received in connection with the death of the payer;
v) Gifts received from any local authority;
vi) Gifts that have been received from the following like funds, foundations, universities, educational institutions, hospitals, medical institutions, any trust or institution referred to in Section 10(23C);
vii) Gifts were received from the following trusts or institutions registered under section 12A/12AA.
viii) Share which was received as a consequence of demerger or amalgamation of a company pertaining to the provisions of section 47 and its clauses, namely, clause (vid) or clause (vii), respectively.
ix) Share received as a consequence of business reorganization of a co-operative bank under section 47(vi)(cb)
x) from such class of persons and subject to such conditions which would be as specified.
Relatives here shall include the following:
– Spouse of the individual
– Brother or sister or the siblings of such individual
– Â Brother or sister or siblings of the spouse of the individual
– Brother or sister of parents of the individual, say, father or mother
– The individual ascendant or descendant
– the individual’s lineal ascendant or descendant’s spouse
– Spouse of any of the above-referred persons.
Hence, we can conclude that when the self-occupied or acquired property is converted by an assessee to the joint family stock, and the same has been done with no or inadequate consideration then the same shall be taxed in the hands of the transferor or assessee rather than the joint family which would be a HUF.
