QUESTION: Please refer to your answer in The Hindu dated October 3, 2011, regarding treatment of a Hindu Undivided Family (HUF) under the U.S. law. I am herewith enclosing an article in a U.S. law journal on the subject, suggesting that the karta of a HUF may be treated as a trustee of the Hindu Undivided Family with possible tax implications in the U.S. What is the correct position in law?
ANSWER: The article in the U.S. law journal “Legal Era”, Volume 1, Issue 8 under the title “United States — Tax Effects of Hindu Undivided Families” by Michael Galligan and Laura Schiller, Philips Nizer, LLP dated October 2010, enclosed with the query fairly represents the Hindu law on the subject, pointing out that the income may require to be treated as belonging to a different taxable entity. The clubbing of income of the beneficiary from a trust in the hands of the grantor under Sec. 678 of the U.S. Code cannot possibly be invoked, because karta is not a grantor of the property. If there had been contribution out of the U.S. income by a U.S. resident to form part of HUF property in India, the U.S. resident may well be taxable on the unrealised appreciation of the property under Sec. 679 of the U.S. Code and not otherwise. The income of a joint family in India cannot also be taxable under Sec. 2041 of the U.S. Code, which provides for income over which the resident has power of appointment. None of the contingencies would be applicable in respect of income from joint family property in India held by a resident in U.S.
Even if the untenable inference that the karta is a trustee of the HUF property is stretched, the location of trustee in the U.S. should not attract liability when the property is in India. In fact, the karta or any other member cannot be treated as a trustee, merely because of a possible fiduciary angle to his role, because for the same reason, a director of a company, who holds a fiduciary position, can not be understood as having personal right over the property of the company. No assessment can be made on him as regards the income of the company. Such an inference of likely liability by inference of the karta as a trustee, though expressed in the article merely as a doubt, overlooks the character of the joint family discussed in the extract published in The Hindu dated October 3, 2011.
The income of the HUF has to be treated as that of the Hindu joint family irrespective of death of karta or any other coparcener as long as there is no partition to enable separate right of inheritance of the deceased's share as was pointed out in State of Maharashtra v Narayan Rao Sham Rao Deshmukh (1987) 163 ITR 31 (SC).
Any inference of liability of Indian income in the U.S. is subject to Double Tax Avoidance Agreement, which should also spare liability on the passive income from investment of the HUF in India.