UCC impact on HUF

 The existence of HUF as a legal entity is based on an acknowledgment of customs by the Raj in India. It was seen as an institution that operated on a strong sense of blood ties and kinship to jointly exercise control over property in Hindu families, and led to business arrangements based on Hindu personal laws rather than contractual arrangements.

As a legal entity, HUF always portrayed a dual identity of a family-backed institution and an income-generating entity solely for the maintenance of the family. Such an arrangement probably played a part in the tax treatment that came to be incorporated in Indian law.

For income tax purposes, an HUF consists of all persons lineally descended from a common ancestor, and includes their wives and unmarried daughters. An HUF has its own Permanent Account Number (PAN) and files tax returns independent of its members. An HUF has a karta who is typically the eldest male person in the family, and manages its day-to-day affairs. Other members are coparceners; children are coparceners of their father’s HUF.

The historical view

The Indian Income Tax Act of 1886 recognised HUF under the term “person”. In an effort to shore up finances for World War I, the British introduced the Super Tax Act, 1917, which recognized HUF as a separate entity for tax purposes for the first time. Super tax was levied in addition to income tax.

The idea of HUF as a distinct category of taxpayer was incorporated in the Income Tax Act, 1922, which formed the basis of the post-independence Income Tax Act, 1961. The law currently in force recognizes HUF as a person under Section 2(31)(ii).

The Justice Wanchoo Committee Report of 1971 explicitly stated that the institution of HUF was being used to avoid tax. In 2018, a Law Commission consultation paper declared that “it is high time that it is understood that justifying this institution on the ground of deep-rooted sentiments at the cost of the country’s revenues may not be judicious”.

The tax treatment

From 1922 onward, additional exemption limit was allowed to HUFs compared to other taxpayers, including individuals, which allowed HUFs to pay lesser tax than other similarly placed taxpayers, despite earning the income in the same manner. This preferential exemption regime was done away with under the Income Tax Act, 1961.

However, HUF as a separate tax entity provides another avenue for Hindu families to reduce their tax burden.

The creation of the HUF thus results in a legitimately tax-free income of Rs 2,50,000, and a lower effective tax rate for Ram Kumar owing to his net taxable income now being in a lower tax bracket.

Finally, Section 10(2) of the Income Tax Act, 1961 provides that any sum received by an individual as a member of HUF out of the HUF income is not to be included in her total income. This effectively means that Ram Kumar can receive a share of the rental income earned by his HUF but not pay tax on it. This is in contrast to the first option in which Ram Kumar ended up bearing the tax burden of receiving rental income in his own name. Hence, the benefit is not only at the HUF level but also at an individual member level.

Additionally, the HUF is entitled to claim expenses, exemptions, and several deductions from its taxable income, which further reduces the tax burden of a Hindu family.

Not available to all

The concept of HUF is closely tied to the concepts of joint family & coparcenary. This is unique to Hindu personal law (deemed to include Jains, Buddhists & Sikhs).

Interestingly, Kerala abolished the joint family system in 1975 by enacting the Kerala Hindu Joint Family (Abolition) Act, 1975. The Supreme Court adjudicated on the interplay of this abolition with the Income Tax Act, 1961 in CIT vs. N. Ramanatha Reddiar (HUF) (1996) by holding that once the entity of joint family and HUF has been abolished by a competent legislature, the Tax Department can no longer make an assessment on an HUF assessee. As a corollary, the individual taxpayer also can’t avail of tax benefits by creation of an HUF.

However, this benefit of statutory tax planning is not available to a taxpayer for other religions, such as Muslims, Christians, Parsis, etc., which raises concerns over the lack of uniform application of tax laws. De hors the issue of UCC, it can be argued that granting an additional treatment that lowers the tax burden only on the basis of religion is arbitrary, and may fall foul of Article 14 of the Constitution.

Given the above discussion, if and when the issue of UCC is taken up for deliberation, the beneficial tax treatment of HUF will occupy considerable space under the lens of equality before and of tax law, as well as uniformity in application of the tax laws across religions.

WHAT IS UCC

article - 44

The State shall endeavour to secure for the citizens a uniform civil code throughout the territory of India.

While there is no draft or model document yet for the UCC, the framers of the Constitution envisioned that it would be a uniform set of laws that would replace the distinct personal laws of each religion with regard to matters like marriage, divorce, adoption, and inheritance

Dr. B.R. Ambedkar had more of an ambivalent stance toward the UCC. He felt that while desirable, the UCC should remain “purely voluntary” in the initial stages. He stated that the Article “merely” proposed that the state shall endeavour to secure a UCC, which means it would not impose it on all citizens. The amendments to protect personal laws from the UCC were eventually rejected.

• Experts argue that if there is plurality in already codified civil and criminal laws, how can the concept of ‘one nation, one law’ be applied to diverse personal laws of various communities.

• The Supreme Court in various judgements has called for the implementation of the Uniform Civil Code

The Law Commission suggested certain measures in marriage and divorce that should be uniformly accepted in the personal laws of all religions.

SOME ARGUMENTS

India is a country of multi-religions and multi languages. Number of people is governed by their personal laws. It leads to different treatment meted out to different classes of people in their personal laws.

There are different codes for different communities like Hindu Marriage Act, Hindu Succession Act, Hindu Adoption and Maintenance Act, Hindu Guardianship Act. Muslims and Christians are governed by their personal laws.

There is difficulty in distribution of justice; hence decisive steps were taken towards national consolidation in form of idea of uniform civil code which was for the first time mooted seriously in the Constituent Assembly in 1947.

through Article 44, the modern State is called upon to perform its onerous responsibility of giving uniform civil code on the above subject, applicable to all the citizens of India

SECULARISM VS UCC

. A secular State shall not discriminate against anyone on the ground of religion.

In S.R. Bommai v. Union of India , as per Justice Jeevan Reddy, it was held that religion is the matter of individual faith and cannot be mixed with secular activities can be regulated by the State by enacting a law.

In India, there exist a concept of positive secularism as distinguished from doctrine of secularism accepted by America and some European States i.e., there is a wall of separation between religion and State.

The State, which has no religion of its own, does not necessarily mean an anti-religious State. It may be a State respecting all religions. 

Uniform Civil Code is not opposed to secularism and will not violate Article 25 and 26. Article 44 is based on the concept that there is no necessary connection between religion and personal law in a civilized society

Marriage, succession and like matters are of secular nature and, therefore, law can regulate them. No religion permits deliberate distortion. The UCC will interfere only in matters of inheritance, right to property, maintenance and succession, there will be a common law