By CA Ankit Gulgulia (Jain)
A Hindu Undivided Family can absolutely run a business, but the business must be built on HUF-owned capital and clean documentation, not on recycled personal funds masquerading as HUF money. When this one foundation is missed, Section 64(2) quietly kicks in and drags the income back into the individual’s tax net.
The Common Myth: “HUF Cannot Do Business”
Many taxpayers and even professionals casually assume that HUF is only for rental income or investments and cannot carry on business. In reality, a HUF is a separate taxable person that can own and run one or more proprietary businesses in its own right, with its own PAN and books. The confusion arises not from prohibition in law, but from misuse of capital and poor structuring, which then leads to clubbing of income and litigation.
The Core Rule: Capital Must Be HUF Property
Under the Income-tax Act, a HUF is a “person” [section 2(31)] and can hold property, enter into contracts, and run one or more proprietary concerns in its own name; the CBDT’s tutorial on HUF taxation and PAN guidelines also proceed on this premise.
For business income to be taxed in the hands of the HUF, the capital employed must originate from HUF assets. These can be ancestral properties, assets received on partition, gifts to the HUF, or income that has already accrued in the hands of the HUF and re-invested. If a member simply introduces his or her own self-earned money into the so‑called “HUF business”, the income attributable to that converted property is liable to be clubbed back in the member’s hands under Section 64(2).
Where people go wrong is treating HUF like a label instead of a real owner. The tax department looks at beneficial ownership of capital: if the real source is individual property transferred without adequate consideration, the statute deems the resulting income as that individual’s income, despite the books or letterheads saying “HUF”.
The corollary is that once a HUF is treated as a separate taxable unit, the key test for business income is not who signs the cheques but who owns the capital and bears the entrepreneurial risk. If capital belongs to the HUF and contracts are entered on its behalf, the resulting profits are prima facie HUF income, subject always to the clubbing rules where personal property has been converted
How Section 64(2) Actually Operates
Section 64(2) is very specific: when a member transfers personal property to the HUF for inadequate consideration, or converts it into HUF property, the income from such converted property (and any asset acquired out of it) is clubbed with that member’s total income. In a business context, this means profits traceable to such introduced capital, or assets purchased out of it, do not escape into the HUF slab merely by journal entries or capital account nomenclature.
Practically, once this clubbing applies, the tax officer may re‑allocate business profits to the individual, even if the return has been filed in the name of the HUF. This can disturb not only tax liability but also interest, penalty and even cash flow planning of the family.
Explanation 1 to section 64(2) expands “property” to include any interest in property, movable or immovable, its sale proceeds, and any asset into which those proceeds are subsequently converted. Courts have further confirmed that the section applies even where the individual is merely a coparcener and not the Karta, and that income continues to be clubbed, subject to specific rules, even after partition of the HUF in respect of the converted property.
Role of Karta: Manager, Not Owner
The Karta is the natural manager of the HUF and can sign all documents, run operations, and represent the HUF in business, including as a partner in firms on behalf of the HUF. However, managerial control does not convert beneficial ownership; the business and its capital still belong to the HUF, and the profits are assessable in the hands of the HUF as long as the capital is HUF-owned.
This distinction becomes crucial when the same individual also carries on business individually. A proprietorship run purely with personal capital will always be taxed in the individual’s hands, even if, in family conversation, it is loosely called the “family business”.
In landmark remuneration‑to‑Karta cases (such as V.D. Dhanwatey and related decisions examined in later commentary), courts have held that where the earning is linked to joint family investment or is made possible by sacrifice/detriment of joint family assets, the income can belong to the HUF; conversely, where it is attributable to personal qualification and exertion, it is taxable as individual income. The same principle applies in business: if capital and commercial risk are borne by the HUF, profits belong to the HUF; if an individual independently employs personal capital and skills, the income is his alone.
Remuneration to Karta: When Is It Allowed?
Remuneration can be paid by the HUF to the Karta for genuine services, provided it is backed by commercial expediency and proper authorisation. Courts have upheld that where a valid arrangement exists, and the payment is for real work, it can be deductible in computing HUF business income and taxable in the hands of the Karta as his individual income.
However, if so-called “salary” is merely a diversion of business profit or a disguised distribution of family income, it risks being disallowed or recharacterised. The amount must be reasonable, commensurate with responsibilities, and documented through resolutions or family arrangements that can stand scrutiny.
Documentation: The Backbone of HUF Business
Running a HUF business without paperwork is an invitation to future disputes. At a minimum, the following should be available and internally consistent:
- Evidence of HUF capital: partition deeds, family settlement documents, gift declarations to HUF, and records of ancestral property or inheritances forming the initial corpus.
- Bank trail: separate HUF bank account showing inflow of HUF capital and outflow into business, without unexplained credits from individual accounts.
- Proper books of account: distinct ledgers, capital accounts, and clear narration whenever funds are introduced or withdrawn.
- Statutory registrations: separate PAN for HUF, and where applicable, GST and other registrations in the name of the HUF business.
This evidence becomes critical during scrutiny or reassessment, where the officer may ask the simple question: “Show that this money belonged to the HUF and not to any member.”
The Silent Killer: Mixing Personal and HUF Funds
Co‑mingling personal and HUF money is the single biggest operational error. If the same bank account is used, or frequent unexplained transfers occur between the member and HUF accounts, tracing the capital source becomes difficult and clubbing risks increase. Even if the intention was bona fide, the lack of segregation can lead to adverse inferences, disallowances and prolonged assessments.
Good practice requires: separate bank accounts, clear loan vs capital classification, and written terms where a member gives a loan to the HUF or vice versa. When funds flow as a documented loan at arm’s length, interest can be structured appropriately without triggering Section 64(2), because ownership of capital does not change.
Why HUF Business Still Makes Sense
Despite these compliance demands, HUF remains a powerful vehicle for both succession and tax efficiency. A properly structured HUF business enjoys its own basic exemption limit and slab rates, may access presumptive schemes where eligible, and facilitates smooth inter-generational transfer of business without formal “sale”.
For families with ancestral assets or an existing HUF corpus, channeling capital into a well-documented HUF business can diversify ownership, reduce concentration of income in one individual, and align with long-term succession planning. The key is simple: let the law see what the family believes—that the business truly belongs to the HUF, not just on paper but at the level of capital, control and conduct
How Charteredonline Can Help You
Charteredonline helps you structure, implement and defend HUF business arrangements end‑to‑end – from deciding whether a transaction should sit in the HUF or in individual hands, to designing tax‑efficient capital structures that respect section 64(2), to drafting family arrangements, gift/partition documentation and bank/accounting trails that can withstand scrutiny, reassessment or litigation. Drawing on deep experience in income‑tax, GST and corporate law, the team can review your existing HUF and business setups, identify clubbing risks, clean up documentation, and then handhold you through return filing, assessments and long‑term succession planning so that what is intended as “HUF business” is also recognised as such in law.
Whatsapp us Now to Discuss More – Click Here
FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.