Case-Law Backed Practical Note (Finin2min)
1️⃣ STATUTORY FRAMEWORK (FOUNDATION)
🔹 Section 64(2) — Core Provision
Where an individual transfers self-acquired property to an HUF otherwise than for adequate consideration,
➡️ Income from such property shall be clubbed in the hands of the individual.
📌 Trigger words:
- “individual being a member of an HUF”
- “separate property”
- “converted into HUF property”
- “otherwise than for adequate consideration”
2️⃣ WHAT IS “SEPARATE PROPERTY”?
| Nature of Property | Status |
|---|---|
| Self-acquired property of Karta/member | Separate property |
| Inherited ancestral property | HUF property |
| Property received by HUF under a will | HUF property |
| Property purchased from HUF funds | HUF property |
3️⃣ CORE PRINCIPLE FROM JUDICIARY
Tax law looks at the source of funds, not the label of ownership.
If the source traces back to individual funds, clubbing applies —
even if books, deeds, or resolutions say “HUF”.
4️⃣ LEADING CASE LAWS (CLUBBING UPHELD)
🔴 1. Surjit Lal Chhabda v. CIT (SC)
Facts:
Individual threw self-acquired property into HUF.
Held:
➡️ Property remains individual property for tax purposes
➡️ Income is clubbed
📌 Key Ratio:
Unilateral declaration does not change tax character.
🔴 2. CIT v. Keshavlal Lallubhai Patel (SC)
Facts:
Self-acquired assets converted into joint family property (partition treated as indirect transfer).
Held:
➡️ Clubbing applies under Section 64
➡️ Substance over form
🔴 3. CIT v Popatlal Mulji (Bom HC)
Facts:
Funds introduced by individual into HUF without consideration.
Held:
➡️ Income taxable in individual’s hands
➡️ Mere accounting entries insufficient
5️⃣ CASE LAWS WHERE CLUBBING DID NOT APPLY
🟢 4. CIT v. P. N. Krishna Iyer (SC)
Facts:
Property inherited as ancestral property.
Held:
➡️ Income belongs to HUF
➡️ No clubbing
📌 Key Distinction:
Source was inheritance, not individual transfer.
🟢 5. CIT v. Ashok Kumar (P&H HC)
Facts:
HUF received property under a will.
Held:
➡️ Valid HUF corpus
➡️ Income taxed in HUF hands
🟢 6. CIT v. Sitaldas Tirathdas (SC)
Principle laid down:
Real income theory — tax follows real ownership and obligation, not arrangements.
📌 Often cited in anti-clubbing defences.
6️⃣ GIFTS TO HUF — JUDICIAL POSITION
| Gift Source | Clubbing Risk |
|---|---|
| Parents / grandparents | ❌ No clubbing (with proof) |
| Relatives (others) | ⚠️ Scrutiny dependent |
| Member’s own funds | ❌ Clubbing applies |
📌 Documentation is decisive:
Gift deed + bank trail + donor capacity.
7️⃣ LOAN TO HUF — SAFEST STRUCTURE (JUDICIALLY ACCEPTED)
Courts have consistently distinguished loans from transfers.
✔ Conditions for Loan Defence:
- Written loan agreement
- Reasonable interest rate
- Repayment terms
- Actual repayment
- Proper accounting
📌 Result:
HUF income not clubbed, interest taxed in lender’s hands.
8️⃣ FREQUENT DEPARTMENTAL ARGUMENTS (AND COUNTERS)
| Department Argument | Judicial Counter |
|---|---|
| “HUF is colourable device” | Show independent corpus |
| “No real separation” | Produce bank & books |
| “Income diverted” | Prove loan / inheritance |
| “Only tax motive” | Motive irrelevant if lawful |
9️⃣ PRACTICAL CLUBBING RISK MATRIX
| Scenario | Clubbing Outcome |
|---|---|
| Self-acquired funds transferred | ❌ Clubbing |
| Ancestral property income | ✔ No clubbing |
| Gift from parents with deed | ✔ No clubbing |
| Loan with agreement | ✔ No clubbing |
| Informal cash funding | ❌ Clubbing |
| Mixed personal & HUF accounts | ❌ Adverse inference |
🔟 DRAFT DEFENCE PARAGRAPH
“The income earned by the HUF is derived from independently sourced corpus comprising ancestral assets / gifts / loans duly supported by documentation. No self-acquired property of the Karta or any member has been transferred to the HUF otherwise than for adequate consideration. Hence, provisions of Section 64 are not attracted, as consistently held by judicial precedents including Surjit Lal Chhabda (distinguished on facts) and P. N. Krishna Iyer.”
🧠 FININ2MIN FINAL TAKEAWAY
- Clubbing is source-driven, not structure-driven
- Self-acquired → HUF = high risk
- Loan ≠ transfer
- Ancestral & testamentary sources are safest
- Documentation is your primary defence, not explanations
⚠️ Disclaimer
This note is for general information and educational purposes only and does not constitute legal or tax advice. Judicial interpretations may vary based on facts. Professional advice should be obtained before acting.
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