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Sunday, November 18, 2012

Tax planning for HUF

Tax planning for HUF
1- Claim reasonable salary etc. to Karta as expenses: - HUF should allow reasonable salary etc. to Karta in respect of his services in the conduct of business of the family.

However, such remuneration must be under a valid agreement which is bonafide in the interest of the business of the family. Such payment must be reasonable and genuine. In Jugal Kishore Baldeo Sahai vs. CIT (1967) 63 ITR 238(SC), the honorable Supreme court laid down the following conditions for allowability of remuneration to Karta.

(a) The payment of remuneration must be under a valid agreement.
(b) The agreement must be bonafide and by or on behalf of all the members of the family.
(c) The agreement must be in the interest of or expedient for the business of the family.
(d) The payment of remuneration must be genuine and not excessive.
(e) The payment must be on the grounds of commercial expedient, and it must be laid out wholly and exclusively for the purpose of the business of the family.

It is important to note that the agreement for payment of salary to the Karta should be between the Karta and other members of the family. Such an agreement not necessary required to be in writing and can be inferred from the conduct of the parties [CIT vs. P. Nirmal Rao (1991) 188 ITR 631 (Orissa), the Orissa High court held that in the absence of any prohibition in any law, if the member of HUF decide to pay more remuneration to Karta who may be managing its business, such remuneration is deductible while computing the income of such business.

However, unreasonable and excessive remuneration can be disallowed by the assessing officer under section 40A (2) of income tax act.

2- Employ family members in business: - the members of family can also be employed in the business because reasonable remuneration to members for taking part in the business of HUF is also allowed as deduction while calculating business income of the HUF.

It is important to note that the remuneration received by the Karta or any other members shall be taxable in the hands as their personal income.

3- Borrow money from Karta or members: - HUF can borrow money from Karta or other family members of HUF as reasonable rate of interest and can claim deduction of such interest against its business income.

4- Apply taxable income for the personal purposes to claim deduction: - HUF family can also reduce the tax liability by investing money in specified saving schemes mentioned under section 80C of income tax act.
HUF also can reduce its taxable income by spending money for certain personal purposes of Karta or members and claim deduction as provided under section 80 of income tax act.

5- Miscellaneous other tax planner for HUF
(a) In case any HUF holds shares in a company and any loan is advanced by the company to the member of HUF, it will not be deemed as dividend under section 2(22)(C) of income tax act because individual members are not shareholders of that company.[Rameshwar Lal Sanwarmal vs. CIT(Assam).

(b) A member can carry on any business in his own name and the income from such business shall be included in his individual total income. It is immaterial that the funds were provided by HUF.

(c) The income received by a member from an asset which was previously owned by him but has been put into common pool of HUF shall remain as his individual income.
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