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