In this blog post, Disha Mohanty,  a student pursuing her LL.B (5th year) from National Law University, Odisha and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyzes the corporate legal structuring of an e-commerce market, namely, Shopclues.

Introduction

Shopclues is one of the leading giants of the e-commerce market and occupies a substantial portion of the marketplace shares therein. Founded in 2011 by Sandeep Aggarwal and Sanjay Sethi, Shopclues, a horizontal marketplace[1] is headquartered in Gurgaon and is a subsidiary of Clues Network Private Limited, the parent company, Clues Inc having been established in USA[2].

Funding for Shopclues

Shopclues is currently one of the most successful models of the e-commerce marketplace notwithstanding its latest proposed series E funding which will provide for funding by institutional investors for the company to the tune of more than 100 million dollars with authorized capital worth 3500000 rupees and currently limited by shares[3], and following a zero inventory model serves to be an interesting study model which has essentially laid the ground rules for the e-commerce market. It’s unique in its kind as it is the first one to make a foray into the now lucrative field of online marketplace and hence can be said to have laid a precedent in the field. Therefore, the author seeks to analyze its structuring from the perspective of the requisite company laws applicable therein.

The current set of rules about Foreign Direct Investment do not permit FDI in e-commerce but do not extend the same restrictions to marketplaces,[4] a model which has been essentially used by Companies like Shopclues and Snapdeal to gain essentially entry into the market and secure foreign funding by the series of funding which takes place therein. While companies like Flipkart and Amazon etc. , primarily focus on their products being based on the structured retail product market, Shopclues differs on this account as it also targets the unstructured market, and out of the approximately 7,500 products the company has provided access to its site, close to 6,500 of these are regional brands [5]

While the primary marketplace model which Shopclues has followed is of business to consumer, it has also begun to consider venturing into the business to business marketplace model and has laid the groundwork for the same by tying up with Chinese major DHGate in addition to several other Korean players in order to stabilize its revenues. The latest funding though has taken place in 2016 which is Series E, with Shopclues eventually laying the path ahead to consider making an initial public offering on its cards.[6] aided by its funding procured from Tiger Global LP from the series of funding which took place in 2015 in its series D funding.

Structuring of Shopclues

Regarding the structuring of Shopclues, as a subsidiary of Clues Inc., as a private company, there are several points to be observed about the requisite compliances especially keeping in mind the impact structuring has, that can make or break a company’s funding process. While about India, there are four types of structures available as far as for-profits initiatives are concerned, the one relevant with Shopclues, i. e., its holding is that of a company, to enable and secure its investor’s faith.

Moreover taking into account its last series of funding which involves a considerable deal of FDI being brought in, a company will be the best initiative in this regard considering FDI permits the direct issuing of capital and is fraught with lesser number of restrictions when it pertains to a company even if the company does not happen to be under the Automatic route. As an e-commerce marketplace, there are several matters that have to be addressed such as the applicable tax regime (Service tax, VAT, etc.), fund structuring, compliance with the requisite labor laws, contract laws, in addition to ease which the subsidiary herein has in raising the term based debt.  As Shopclues has seen a monumental increase in its employee strength, licensing by the Shops and Establishments Act would be a must too. Considering that some regional brands are involved it is only imperative to ensure that the relevant Intellectual Property rights based policies are also accounted for. An important aspect of these marketplaces is to address their stand as an intermediary and the consequent liabilities which they must adhere to [7].Post registration, and especially after the controversy concerning fake products an iron clad buyer and seller agreement has become a must for Shopclues.

One may also take into account the recent issues press note by DIPP which states that a single vendor or a group company cannot be responsible for more than 25 percent of total sales of the online firm or platform. While B2B has acquired the approval for 100 % FDI, subject to no pricing interventions by the firms which are provided by means of the discounts provided on the website by indirectly funding the discounts for the sellers, the issue lies with B2C which hence addresses Shopclues’ need to ensure its foothold in the B2B market field.

While analyzing the structuring of Shopclues, it must be noted that the company was incorporated in the US following which the Indian Office was established and subsequently the Shopclues venture took off, a fact that would solicit compliance requirement, especially on an annual basis. A private limited company was a wise choice in this case as it will increase the confidence of the investors in the company. Moreover as the venture in question is a holdings company which eases the entry of FDI as a stable form of investment by means of upstream investment, wherein FDI will technically not be counted as FDI per se, by means of a layered structure, wherein investment in the Upstream company that is Clues Ltd will be counted as zero if it falls below 50% and will essentially have a  majority Indian shareholding and board.[8] This approach has helped Shopclues to procure investment despite the prominent FDI prohibitions.

A company provides more investors such as angel investors, venture capitalists and private equity. As stated previously with Shopclues planning to offer IPO, which it aims to do so by 2017, being a private unlisted company will help it substantially alter its ESOP value. By being a private company, it will also be enabled to issue preferential share allotments as per the wish of the board without losing control. As its turnover is over the stipulated limit, a secretarial audit is a must for Shopclues to file as a means of the compliance report. Shopclues even though it may be fourth in line when it comes to the garnering of investment walls considering it is one fifth of the total investment capital procured by Flipkart, it still continues to retain the faith of its investors having a stronger set of investor rights protection.

Most e-commerce companies, and not only Shopclues having incorporated the private limited company model are a safer bet for investors as there is a prominent distinction persisting between ownership and managerial and responsibility, which reduces the quotient of risk considerably. While there are particular restrictions on Shopclues making acquisitions being a layered down investment unlike some of the other e-commerce majors, the restriction only extends to companies adhering to a similar nature as itself.

Having been structured as a company, though, Shopclues will have to adhere to particular mandatory compliances which are a must for certain liabilities to be seen to if the benefits mentioned above are to be gained. This includes two levels of auditing, that is in addition to the standard statutory audit, the subsidiary will also have to ensure that the aforementioned secretarial audits will also take places. Additional annual compliance will be inclusive of Form 23 AC (Balance Sheet), Form 23 ACA(Profit and loss account statement), Form 20 B( Annual returns filing considering it has share capital and the compliance as mentioned above certificate under Form 66

Considering the IT platform architecture and construction which would require considerable capital financing to be raised, foreign loans can be easily procured with a stable credit rating due to its structuring as a company. With its recent debacle which led to several of market experts doubting its survival considerably notwithstanding the fact that it required a Series D funding which is primarily for companies which have a high probability of being a going concern. However it has bounced back and proceeded further to a Series E funding, which as aforementioned is intended to stabilize its revenue, notwithstanding the fact that proper structuring has helped the company to recover from impending loss and proceed further to be currently after the latest rounds of funding, valued at 1.1 billion dollars approximately, proving to be a unique case study for understanding the e-commerce marketplace.

References:

[1] Incorporated under Companies Act, 1956

[2] http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=144564048

[3] http://www.mca.gov.in/mcafoportal/companyLLPMasterData.do

[4] FDI Circular issues in March 2016

[5] http://dsim.in/blog/2015/06/23/how-shopclues-set-up-its-benchmark-in-indian-e-commerce-industry/

[6] http://articles.economictimes.indiatimes.com/2016-02-05/news/70373489_1_b2b-business-b2b-platform-carry-india

[7] Intermediaries Liabilities Act,2010.

[8] http://gradestack.com/Advanced-Certification-in/FDI-in-e-commerce/FDI-in-e-commerce/18712-3311-33256-study-wtw

In this blog post, Sunidhi, a student of the Rajiv Gandhi National University of Law, Patiala writes about the law that regulates the purchase of property by foreigners in India. The blog post explains the loophole in the law that defeats its purpose.

 Introduction

The law relating to purchase and sale of property by a person resident outside India is governed by the Foreign Exchange Management Act (FEMA), 1999.

“An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.[1]”

The FEMA act, unlike other acts, is more of a restrictive act, i.e., everything under it is prohibited unless otherwise specifically permitted. FEMA regulates the purchase of properties by Non-Resident Indians (NRI), Persons of Indian Origin (PIO), and foreign citizens.[2]  The agricultural or plantation land can strictly be purchased by an Indian citizen only. So, the buyer should ensure before purchase that the purchase property is not built on such land.

Who Is A Foreigner?

A foreigner under FEMA refers to a person resident outside India. Section 2(w) defines that a ‘person resident outside India’ includes person who stays outside India for:

• Employment outside India
• Carrying on businesses outside India
• Any other purpose, indicating the intention to remain outside India for an uncertain period.

Consideration of a Person as a Foreigner

According to Section 2(v) of FEMA, an individual who has come to stay in India is not considered a foreigner or is regarded as a person residing in India if:

• an individual who has lived in India for more than 182 days during the preceding financial year, and
• an individual who has come to stay in India for the purpose of employment, carrying on business in India or for a purpose that indicates his intention remain in India for an uncertain period.

If any of the above two conditions are met then he is considered as a person residing in India, i.e., he is not included in the category of a foreigner for the purpose of purchase of property in India.

What The Law States

According to the Foreign Exchange Management Act, 1999 a foreigner can buy property neither in Goa nor India. Only a person who is a  resident of India can buy property in Goa as well as the whole of India. But Indians are not restricted from purchasing property situated outside India.

Section 6(4) of the FEMA, 1999 states that Indians are not only allowed to purchase land situated outside India but also to invest in foreign currency, and security provided the foreign currency, security or property was acquired when he/she was resident outside India or inherited from a person who was a resident outside India.

The law prohibits foreigners from purchasing property in India, but there are two exceptions stated in Section 6(5) of FEMA, 1999 that allow them to purchase property in India. These are:

• A person residing outside India can purchase property in India if he/her owned such property when he/she was resident of India
• Or the property is inherited by the person residing outside of India from a person who was resident in India.

Section 6(5) also states that the person residing outside India can also own, invest or transfer Indian currency or security provided that it has been inherited from a resident in India or bought when he/she was himself/herself resident of India.

However, the citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, or Bhutan, who are residing in India can only purchase immovable property in India with the prior permission of the RBI, who will consider the request in consultation with the Government of India.[3]

Can They Buy Property Through A Company Incorporated In India?

It is illegal for a foreigner/person residing outside India to buy immovable property in India until he/she fulfills any of the above-stated conditions to become a person residing in India. It is illegal to buy property on a tourist visa in India because the tourist visa expires in 180 days.

Although it is illegal for a foreigner to buy property in India, they buy it under the garb of a company registered under Indian law in Goa. As Section 2 (v) (iii) of FEMA states that office, branch or agency in India owned or controlled by a person resident outside India is considered as a property belonging to a person residing in India. Therefore, a foreigner can purchase a non-agricultural property in India by forming a company and registering it under Indian Law.

The companies registered under Indian law by the foreigners with the prime motive of acquiring property in India can then legally hold property in Goa or India as they abide by the guidelines set by FEMA and RBI. Therefore, a loophole in FEMA has allowed foreigners to acquire property in India legally. This loophole prevents the Goa Government from preventing foreigners from buying property in India moreover Goa.

The figures provided by the Registrar of Companies (RoC) office at Goa substantiate the fact that companies incorporated under Indian law have been used to purchase property in Goa. The number of companies registered with the RoC has been increasing ever since the enactment of FEMA. The number has grown from 114 in 2002 to 189 in 2003. Then in 2004 the figures almost doubled and rose to 397. In 2005, it jumped to 655 and then it plateaued at 647 in 2006 and 565 in 2007. The ROC has also confirmed that compared to Indian Entrepreneurs, foreigners mainly register such firms in Goa. The major portion of it consists of companies in the tourism and travel sector where 100% FDI is allowed. 

All this has become possible for the foreigners with the support of Indian lawyers, Chartered Accountants (CAs) and Company Secretaries (CSs). They prepare the documents of the company that keeps the company on the safe side of the law by compiling with the requirements of the ROC. This includes issuance of shares, conducting board meetings, the general meeting of shareholders, etc.

Hence, foreigners have succeeded in piercing the wall of FEMA to acquire property in India by registering a company under Indian law.

References:

[1] Objective, Foreign Exchange Management Act, 1999.

[2] Available at http://www.saffronart.com/real-estate/Guidelines.aspx, last accessed on July 11, 2016, at 6:05 p.m.

[3] Ibid.

In this blog post, Arvind Radhakrishnan,  a partner at Synacrity Advisors LLP and a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the enforcement of the rights of beneficiaries in a public charitable trust. 

Introduction

Benign in concept and charitable in spirit, Trusts and Trust Law have all-the-same been wielded as instruments of non-compliance to promote ulterior motives since they came into existence. Indeed, the first Trust akin in nature and meaning of the modern term was formed in the 19^th century by John D. Rockefeller as a means of concentrating the power (read: shares) of the then largest global corporation – Standard Oil –  into the hands of a few, with himself owning approximately 41% of the entire entity.[i] Beginning with an overview of Trusts and Trust Law in India, as is governed by The Indian Trusts Act, 1882 (among others)this article aims to give the reader an overview of the specific roles played by the different parties involved in a Trust structure, with particular attention paid to how beneficiaries of a Public Charitable Trust can effectuate their rights under the law, should these rights be exploited or abused. – Source: IndiaFilings[ii]

In layperson terms, a Trust can be formed when the owner of some property, be it immovable or movable, transfers ownership of this property to a third party with the express intention of holding on to it for the benefit of others. In this definition, these entities are, in the order mentioned, the “author of the trust”, the “trust property”, the “Trustee” and the “beneficiaries” (Note that it is possible for the author and the trustee to be the same person, if allowed by the relevant courts).While this broad definition applies to all forms of Trusts; Private and Public Trusts can be differentiated by their chosen beneficiaries and the laws that govern each form. Simply put, if the beneficiaries of the Trust are a select group of individuals rather than the general public, the Trust will be deemed Private and will be governed largely by the Indian Trusts Act, 1882. If the greater public stands to gain, however and are therefore explicit or implicit beneficiaries of the Trust, a Public Charitable Trust can be formed, and this would be governed by the Public Trust Act applicable in the relevant State. In the absence of a Public Trust Act in that state, the applicable legislation will be the Indian Trusts Act 1882.[iii] 

Trust purposes that would allow for the creation of a Public Charitable trust, rather than a Private Trust, include “(i) Relief of Poverty or Distress, (ii) Education, (iii) Medical Relief, (iv) Provision of facilities for recreation or other leisure-time occupation and (v) The advancement of any other object of general public utility, excluding purposes which relate exclusively to religious teaching or worship” (ibid). Important to note here is that with a Public Charitable Trust, if a valid trust has been created and the property has been transferred to the trust, it cannot be revoked.

In illustrating the means by which a beneficiary’s rights can be enforced, it pays first to describe these rights, the duties of those who act in the beneficiaries’ interest (trustees) and the ways in which these rights can be exploited.

The Rights of Beneficiaries

The rights of the beneficiaries are largely subject to the provisions of the instrument of trust. In the absence of specific mention, however, certain key rights apply (The stated rights have been paraphrased from the official wording of the Act):

1. Rights to rents and profits
2. Right to specific execution of the intention of the author to the extent of the beneficiary’s interest, even if this includes transferring the trust property to the beneficiary (if he is competent).
3. Right to inspect and take copies of the instrument of trust, its accounts, related documents and cases or opinions taken by the trustee as and when required by him to execute his duties.
4. Right to transfer beneficial interest –If the beneficiary is competent to contract he or she may transfer his or her interest to another party, subject to any constraints indicated in the Trust Deed and under the guidance of the applicable laws currently in force.
5. Right to sue for execution of trust –If no trustee is available to execute the trust in the manner intended, the court may be allowed by the beneficiary to perform such services instead, at least until a suitable and competent trustee is appointed.
6. Right to proper trustees –The beneficiary has a right (subject to the provisions of the instrument of trust) that the trust property shall be properly protected and held and administered by proper persons and by a proper number of such persons. Note that as per the law, entities abroad, insolvent or with interests against the beneficiaries’ are not allowed to be made trustees.
7. Right to compel to any act of duty –The beneficiary has the right to expect that the trustee will perform all required duties as specified by the relevant laws and Trust Deed, and that said trustee would not commit anything amounting to a breach of trust.

The Duties of Trustees

As the executioners of a Trust Deed, Trustees hold a great deal of power over and responsibility towards both the author of the trust, to fulfill his intended purpose, and the beneficiaries, who are the Trust’s ultimate recipients. Whether intended or otherwise, failing to execute his or her duties effectively towards the fulfillment of a Trust’s purpose could constitute a breach of trust on the part of a Trustee, and is a ground for legal recourse. What follows is a curated list of rights that are most susceptible to cases where a breach of trust could occur:

1. Trustee to execute trust – Except for any and all impractical, illegal or otherwise immoral activities, the trustee is bound to act to fulfill the purpose of the trust in line with the instructions given by the author at the time of the Trust’s creation. 
2. Trustee to protect title to trust property – Subject to the provisions of the instrument of trust or Trust Deed, a trustee is required to take all reasonable steps and actions to maintain and defend all suits that may be relevant to preserve the trust property and its title.
3. Trustee not to set up title adverse to beneficiary –As always, the beneficiaries interests must be addressed and upheld and the trustee must not in any way threaten the title of the trust property in a way that negatively affects the beneficiary’s interests.
4. Care required from trustee–A trustee must treat the trust property as carefully as if that property were his own. Provided this has been done, and if there is no provision or contract that specifies otherwise, the trustee cannot be held responsible for any losses, destruction or deterioration of the trust property.
5. Trustee to prevent waste – Related to point 2 above, there are several beneficiaries in a Trust, but any single one has possession of the trust property, the trustee is required to take any reasonable measures to prevent actions that would be destructive, whether temporarily or permanent, to the trust property.
6. Accounts and information–A trustee is required (a) to keep clear and accurate accounts of the trust property especially relating to its amount and state, and (b) to provide these details in as accurate a form, as and when required by the beneficiary.
7. Investment of trust money – Where the trust property consists of money, the trustee is required, either by the applicable laws or the explicit instructions in the trust deed or instrument, the document to not invest trust money in any other securities.

Consequences of Breach

With the above sections giving an overview of the Public Charitable Trust structure, and the rights& duties of the two most important groups within that structure – the Beneficiaries and the Trustee – we now turn to the consequences of the breaches of trust, as well as the specific strategies beneficiaries can use to assert their rights.

As per the Indian Trusts Act, 1882, the beneficiary had the right to compel the trustee to perform any particular act of his duty and restrained from committing any contemplated or probable breach of trust[iv]. However, if it is found that a breach of trust has been committed, the Trustee is liable to “make good the loss which the trust-property or the beneficiary has thereby sustained, unless the beneficiary has by fraud induced the trustee to commit the breach, or the beneficiary, being competent to contract, has himself, without coercion or undue influence having been brought to bear on him, concurred in the breach, or subsequently acquiesced therein, with full knowledge of the facts of the case and of his rights as against the trustee.”[v]

Note that a trustee committing a breach of trust is not liable to pay interest except under certain provisions explicitly laid out in the Act. Further, some provisions exist in the Act to indemnify the Trustee to some extent if another person gained from a breach of Trust, if the liability arose from a predecessor’s or co-trustee’s actions, and a few other situations.

Enforcement of Rights

When a breach of trust is suspected, and a beneficiary’s rights violated, either (i) the Advocate General or (ii) two or more persons having an interest in the trust and having obtained the leave of the court, can institute a suit to seek 1 of 6 potential legal recourse actions[vi]:

1. removal of a trustee
2. appointment of a new trustee
3. for vesting any property in a trustee
4. for directing a trustee who has been removed or a person who has ceased to be a trustee to deliver possession of any trust property in his possession to the person entitled to the possession of such property
5. for directing accounts inquiries
6. for seeking of declaring what proportion of the trust property or the interest therein shall be allocated me any particular object of the trust.

In such a suit, the court may alter the original purpose of the trust if it deems necessary. This will occur if either the original purpose of the trust is fulfilled or cannot be carried out or where the original purpose of the trust provides a use for only part of the trust property or where the property of the trust can be used more effectively for another similar purpose.

The Court can also make an alternation of the original purpose if it deems that the nature or purpose or activities of the trust have changed such that it does not fulfill the definition of a public charitable trust anymore.

[divider]

References:

[i]Barak Orbach and Grace E. Campbell Rebling, 2012, “The Antitrust Curse of Bigness”, 85 S. Cal. L. Rev. 605

[ii]IndiaFilings, 2016, “How to Form a Charitable Trust”, Available at http://www.indiafilings.com/learn/how-to-form-a-charitable-trust/

[iii]CA Rajkumar S. Adukia, 2016,“Handbook on Laws Governing Formation and Administration of Charitable Organizations in India”, Available at http://www.caaa.in/image/hb-charitable_org.pdf

[iv] IndiaCorpLaw, 2014, “Rights of MBS Bondholders Against the Company: Part 2″, Available at http://indiacorplaw.blogspot.in/2014/01/guest-post-rights-of-mbs-bondholders_23.html

[v]Vakilno1, 2016, “The Indian Trusts Act, 1882”, Available at http://www.vakilno1.com/bareacts/indiantrustsact/indiantrustsact.html#Chapter_IV_8211_OF_THE_RIGHTS_AND_POWERS_OF_TRUSTEES

[vi]Advocate Khoj, 2016, “Law Library – Trust”, Available at: http://www.advocatekhoj.com/library/lawareas/trust/public.php?Title=Trust&STitle=Public,%20charitable%20and%20religious%20trusts

In this blog post, Darshika Tahlani,  a student pursuing her LL.B (4th year) from New Law College, Bharti Vidyapeeth University, Pune and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, explains how a family business can be partitioned. 

Introduction

A Family business is a commercial organization or economic system which is owned by several members lineally descended from a common ancestor. But in today’s era, the joint family business is degrading due to disputes among family members which lead to partition in business. Some reasons for a partition include mismatch of ideology, mismatch of the thought process, the death of a member, etc.

Karta is the head of the Family, and he is responsible for managing the business and day-to-day expenses of the Family.

In this article, we will talk about what is a partition, deed of partition, types of partition, who has the rights to claim a partition and the procedure for instituting partition.

What is a Partition?

Partition is the disjuncture of the status of Joint Hindu Family. The term is used in the law of real estate to describe an act by a court order for division of ancestral property into separate parts representing the proportionate interest of each of the members of the family.

Under Hindu Law, once the status is put to an end, there is a notional division of properties among the members and the joint ownership comes to an end. It is not necessary to divide the properties under METES AND BOUNDS. However under Tax Laws, the property should be divided physically to the extent possible. Determination of metes and bounds can be done through agreement or the Court will appoint a Commissioner to do the same.

A partition does not need to have a written partition deed. A partition deed can be done through an oral agreement.

What is a Deed of partition?

Deed of partition is a deed by which lands which are held in common, coparcenary, or joint tenancy are separated into different portions and distributed among several people who takes them in severalty. In the case where a deed of partition is executed, there can be no difficulty on the rights of the respective parties under the deed. Normally, the original of the deed of the partition will remain in the custody of the first party, and the duplicate copy hereof will remain in the custody of the other party.

Types of Partition

There are two kinds of Partition:

1. Total Partition: The property of the Hindu Undivided Family undergoes a total division of property and the same will be divided among the coparceners, and the family is dissolved.
2. Partial Partition: In Partial Partition, some of the members chose to exit the business, while other members continue to be a member of the family and in this case the remaining property will belong to the undivided family. However, Tax laws do not recognize partial partition after 31.12.1978 on insertion of Subsection(9) to Section 171 of the Income Tax Act, 1961.

Who has the Right to Claim Partition?

It is essential to know who has a right to claim partition in a family business. In any family where the dispute arises, any coparcener can claim partition. However, it is not necessary that other coparceners should agree to the partition sought by one of the coparceners.

The death of a partner cannot bring about an automatic partition and on such a death; the other surviving members continue to remain joint partners. However under the provisions of 56 of Hindu Succession Act, there is a deemed partition for a limited purpose of determining the share of the deceased coparcener for the purpose of succession under the Act. Even a minor has the right to claim for partition in the family business through his guardian. The validity of partition between the widowed mother and sole surviving coparcener son should also be kept in mind, the mother or a wife has no right to claim for a partition, but if the partition takes place, they get a share equal to that of the son. A Father also has the right to effect a partition of the joint family property between himself and his sons. However, he has to allot equal shares to his sons. The property which the male member receives on total partition will retain its character as a joint family property, but if he is single, it will be HUF property after his marriage. Any member can demand for the partition in the family business by entering into the DEED OF PARTITION, here parties are considered purely as contractual in nature, but the parties have to file a suit in a Civil Court for a decree of partition, the decree is registered with the Sub-Registrar of Assurance mentioned under the  INDIAN REGISTRATION ACT and after the successful registration it can also be used to obtain loans in future as financial institutions  would be more comfortable & accepting to the property as a security if there lies a court decree which is opposed to the mere contract in between the family.

Where a property is capable of physical division, the partition must be made by physical division only, but if the property does not admit physical division, the property must be so physically divided as permitted. There is a rule in section 179 to make a valid claim for recognizing the partition for Income-tax purposes.

It has been held that a business cannot be partitioned by metes and bounds if there has to be the conversion of Joint Hindu family property into partnership. A partition can also be made orally, and it is not essential in law that the partition must be evidenced by a written agreement. A partition of immovable property of HUF can also be done through an oral agreement. If the partition is effected orally, the claim will not be upheld, and the income generated from the business will be held assessable in the hands of a Joint family business. The validity of penalty on a Hindu undivided family after a total partition gives the decree to an assessing officer to impose the penalty on the Hindu undivided family provided under Section-171(8) of Income tax act.

Procedure for Partition:

1. The members of the Hindu undivided family must make a claim to the Assessing officer stating that their Hindu undivided family property is subjected to the total partition.
2. Then the Assessing Officer will enquire about the claim.
3. Then a notice will be issued by the Assessing Officer to all the members of Hindu Undivided Family.
4. If he is satisfied that the claim is correct, then he will record a finding that there was a Total Partition of the Hindu undivided family, and he will also mention the date when it took place.

Conclusion:

The contract does not govern the existence of a family business in India; it is governed by the principles of Hindu law. There is no written partnership agreement neither does it have any certificate of incorporation, though it also has a great impact on the global economy too. It is easy to carry out business in association with the family members but when a partition in the business happens, any coparcener can claim for a partition in the family business and the partition can be carried out by the Deed of partition. The assessing officer has a crucial role to play when the Hindu undivided family claims a total partition, he will make an inspection on the given claim and after issuing a notice to all the members of Hindu undivided family and after being content that the claim is correct, he will record the finding that there was a total partition claimed by the Hindu undivided family, and he will also record the date when it took place.

URL’s used for references:

• http://taxguru.in/income-tax/partial-and-full-partition-of-hindu-undivided-family-huf-and-income-tax-provisions.html
• http://www.itatonline.org/articles_new/the-entire-law-relating-to-hindu-undivided-family-huf-explained/
• http://definitions.uslegal.com/d/deed-of-partition/
• http://www.simpletaxindia.in/2015/09/partition-of-hindu-undivided-family-and.html

Books used for reference:

• Principles of Hindu Law, Universal Law Publishing Co. Pvt.ltd.

The Hindu Succession Acts 1956, Eastern Law House