Whether a private company can accept deposits from HUF?

Vinita Nair | corplaw@vinodkothari.com

Provisions of Law

According to Section 2(31)  of the Companies Act, 2013 ‘Deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. The exclusions are cited in Rule 2 (1) (c) of Companies (Acceptance of Deposits) Rules, 2014 which are applicable to public and private companies.

Rule 2 (1) (c) (viii) of Deposit rules excludes amounts received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company, provided that the person declares that the amount is his own fund and not borrowed. The private company is required to disclose the details of money so accepted in the Board’s report.

‘Relative’ as defined under Section 2 (77) of Act, 2013 with reference to any person, includes anyone who is related to another, if they are members of a Hindu Undivided Family (HUF).

Further, Section 73 (2) permits acceptance of deposits from members subject to fulfillment of conditions specified under (a) to (e).  MCA vide exemption notification dated 5^th June, 2015 granted exemption to private companies that accepted monies from members not exceeding 100% of aggregate of paid-up share capital and free reserves, from complying with the requirements specified under (a) to (e) provided such company shall file the details of monies so accepted to the Registrar.

Concept of HUF

As explained on income tax website[1], an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family. HUF is treated as a ‘person’ under Section 2 (31) of the Income Tax Act, 1961 (IT Act). HUF is a separate entity for the purpose of assessment under IT Act.

In Dasharatharao v. Ramchandrarao[2], the meaning to be given to the expression ‘Hindu Joint family’ was explained as follows:

“A joint family consists of persons who are lineally descended from a common ancestor. Such family includes the wives of male members as well as unmarried daughters. As soon as the daughter marries she leaves the family of her father and becomes a member of the husband’s family. It is quite true that every member of a Hindu Joint family is not a coparcener. Where a member of an undivided family is a coparcener or not would depend on whether he is entitled to demand partition and that would in its turn, depend on the question whether he has a right in the property of the coparcenery by his birth.”

Is the HUF different from its members?

It is important to understand meaning of the term ‘members of HUF’. The obvious intent of treating members of an HUF as relatives is that they have common economic interest, such that the HUF forms a single economic unit, the same way as a husband-wife couple does. If a family is living together and has jointly-owned properties and resources, the family must be regarded as a single economic unit.

The essence of existence of a Hindu Undivided Family is the presence of a sufficiently strong nucleus which is shared by all the members of the family. Normally, an HUF is also characterized by common food and worship. Where two members are residing in different residential units, each of them enjoy their own privacy and have their own separate economic interests much larger in dimension than the inherited property

There is an elaborate discussion on the features of an HUF in V Srisailam vs. Krishna Murty and others[3], which has reviewed several rulings of the Supreme Court and Privy Council. Joint food, worship and property are the common characteristics of existence of an HUF – Kamalakant Gopalji vs Madhavji Vaghji, AIR 1935 Bom 343.

In case of Vickers Systems International Limited v. Mahesh P. Keshwani[4], Company Law Board explained as under:

“19. In some of the decisions in the context of the Income-tax Act, it has been held that the Hindu undivided family is not a juristic person for all purposes although it is a person for the purposes of the provisions of the Income-tax Act or that for certain purposes it is a legal entity although acting through the karta. In the case of transfer of shares by a shareholder to another, the only question to be examined is whether the transfer deed has been validly executed in accordance with the provisions of Section 108 of the Companies Act and submitted to the company for registration of transfer as provided in Section 110 of the said Act. Section 108 enables execution of a transfer deed by or on behalf of the transferor or the transferee. In the case of a Hindu undivided family, it is represented by its karta and in the present case, the transfer deed has been signed by the respondent as karta of Mahesh P. Keswani, Hindu undivided family. Under Section 153 of the Act, a company cannot take notice of any trust on its register of members. In the case of a Hindu undivided family, if the shares are held in the name of the karta of the Hindu undivided family it cannot be equated with trust property held by a trustee. A Hindu undivided family means persons constituting the family and all such persons are owners of Hindu undivided family property. The karta is one of the coparceners. There is no legal bar on a Hindu undivided family investing its monies in shares and securities and the Companies Act does not prohibit membership of Hindu undivided family. We have also noted that in respect of shares held by a minor, it has been held in a number of cases that there is nothing objectionable if the shares are registered in the name of the minor represented by his guardian. Similar is the position in the case of a Hindu undivided family and the shares can be registered in the name of “A” as karta of the Hindu undivided family.”

In case of Chhotey Lal And Ors. vs Jhandey Lal And Anr[5], Allahabad High Court discussed following:

“11. It is thus clear that the members of the joint family collectively own the coparcenary property. Each member has an interest in such property, though his interest becomes definite on partition. Till then, it is an undivided interest. The view expressed in Mahabir Singh’s case, 14 AH LJ 278 = (AIR 1916 All 111) and the other cases mentioned above, that the members were not the tenants of the holding because they had no interest in it, is, with respect, falfacious. In law, the members of the joint Hindu family together become the tenant of the holding. The coparcenary body as such, and as an entity apart from its members, does not own property. The property does not vest in the coparcenary but in its members, though collectively. This view finds support in Maha-virprasad Badridas v. M. S. Yagnik, AIR 1960 Bom 191. Shah, J. (as he then was) held that “the property belonging to a Hindu undivided family is the ownership of the coparceners in that family and that such a family is not a corporation. It is not a judicial entity distinct from the members who constitute it. It cannot sue or be sued in the joint family name and cannot convey the property held by it in its joint character. The coparceners who are members of the Hindu undivided family are undoubtedly owners of the property; but a Hindu undivided family has up independent existence apart from the individuals who constitute the same. Statements sometimes made in decided cases and text books that a Hindu joint family is a “sort of corporation” in dealing with questions relating to enjoyment of the property of the family (see for instance Apaji Narhar Kulkarni v. Ramchandra Ravji Kulkarni, ((1892) ILR 16 Bom 29 at pp. 39 and 78) and Mayne’s Hindu Law 11th Edition, Article 243, at page 305) do not justify the view that a Hindu undivided family is a corporation”. His Lordship emphasised that the property is the property of the coparceners who for the time being constitute the Hindu undivided family.

12. Hindu Law does not recognise a joint Hindu family or coparcenary as a juristic personality capable of holding property, as an entity separate from the members of the family. When it is popularly said that a property is joint family or coparcenary property, the true position in law is that the members collectively own it, each having an interest. One of the distinctive features of such “coparcenary property” is in its passing on death of a member. According to Hindu Law, the interest of a dead member passes by survivorship to other existing members of the family. It does not devolve on his personal heirs.”

Hon’ble Supreme Court in case of Gopal and Sons (HUF) v/s CIT Kolkata-XI ^[6] while answering the contention “Whether in view of the settled principle that HUF cannot be a registered shareholder in a company and hence could not have been both registered and beneficial shareholder, loan/advances received by HUF could be deemed as dividend within the meaning of Section 2(22)(e) of the Income Tax Act, 1961 especially in view of the term “concern” as defined in the Section itself?” explained following:

“17) It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards share holding in the Company was given by the assessee/HUF. Though, the share certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder. In any case, it cannot be doubted that it is the beneficial shareholder. Even if we presume that it is not a registered shareholder, as per the provisions of Section 2(22)(e) of the Act, once the payment is received by the HUF and shareholder (Mr. Sanei, karta, in this case) is a member of the said HUF and he has substantial interest in the HUF, the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act. This is the effect of Explanation 3 to the said Section, as noticed above. Therefore, it is no gainsaying that since HUF itself is not the registered shareholder, the provisions of deemed dividend are not attracted. “

Hon’ble Supreme Court in P. N. Krishna Iyer v. CIT [1969] 73 ITR 539[7], held as under:

“16. Income received by a member of a Hindu undivided family from a firm or company in which the funds of the Hindu undivided family are invested, even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family if it is earned by determined to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member’s separate income”.

Hon’ble Gujarat High Court while deciding the matter in case of Shah Rajendrabhai Jayantilal  v.  D. Pranjivandas & Sons[8] referred to Hon’ble Supreme Court’s discussion in the matter of Ramanlal Bhailal Patel and concluded following:

“44. Thus, I have reached to the conclusion that although the H.U.F. in the case at hand may be engaged in a business and is running a firm in the name of M.S. Traders and may be having a common purpose, yet what   is   missing   is   the   element   of   free   will   and   volition.   A   mere combination   of   individuals   will   not   constitute   an   “association   of individuals”. To make it as an “association of individuals”, in terms of Section   141   of   the   N.I.   Act,   it   is   absolutely   necessary   that   the combination of individuals must be on their own free will and volition. Secondly, it is also necessary that such combination of individuals must be with a common purpose. There may be a common purpose to be carried forward by an H.U.F., but an individual becomes a member of the H.U.F., not on his own free will and volition, but by status and birth.”

In a nutshell, identity of HUF has been interpreted differently by different legislations. It depends on the objective of the legislation and definition of ‘person’ under the said legislation. The purpose of taxation laws is to tax the HUF on its income; the purpose of Hindu law is to define and delineate the property and income of the family as opposed to separate property and incomes.

For the purpose of prosecution, it has been held that A H.U.F. is not a legal entity distinct and separate from that of the members who constitute it. However,for the purpose of IT Act, HUF is regarded as a separate juristic entity and the income of HUF is assessed separately. For the purpose of Companies Act as well, it would be fair to assume that HUF is no different from its constituents and that the money that flows from any coparcener is money given by HUF.

Acceptance of deposits from HUF/ members of HUF

With the aforesaid assumption, we list down the requirements with respect to acceptance of deposits by a private company.

Case 1: 1 coparcener of the HUF is director of the private company.

Position: In that case, all other members of HUF will be regarded as director’s relatives and therefore, any amount received from them will be equivalent to amount received from the HUF. The Company shall disclose the details of money so accepted in the Board’s report.

Case 2: 1 coparcener is the shareholder of the private company but does not hold directorship.

Position: In that case, amounts accepted from the coparcener will be assumed to be amount contributed by HUF and requirements of Section 73 (2) (a) to (e) shall not apply to private companies accepting monies from members not exceeding 100% of aggregate of paid-up share capital and free reserves, provided the companies file the details with the Registrar in form DPT-3. In case the same exceeds the limit, compliance of Section 73 (2) (a) to (e) shall be ensured and the amounts of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits shall not exceed 35% of the aggregate paid-up share capital, free reserves and securities premium account of the Company.

Case 3: HUF is the shareholder of the private company through the Karta and no coparcener holds directorship.

Position: In that case, requirements of Section 73 (2) (a) to (e) shall not apply to private companies accepting monies from the HUF if the amounts raised from members do not exceed 100% of aggregate of paid-up share capital and free reserves. The company shall file the details with the Registrar in form DPT-3. In case the same exceeds the limit, compliance of Section 73 (2) (a) to (e) shall be ensured and the amounts of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits shall not exceed 35% of the aggregate paid-up share capital, free reserves and securities premium account of the Company.

Case 4: Neither the HUF or the coparcener holds shares of the company nor any of the coparceners hold directorship in the company

Position: Amounts cannot be accepted from the HUF/ coparcener unless the same specifically falls under any of the exemptions specified under Rule 2 (1) (c) of Deposit Rules.

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[1] http://www.incometaxindia.gov.in/Pages/i-am/huf.aspx

[2] AIR 1951 Bom 141 at p. 142

[3] http://indiankanoon.org/doc/469010/

[4] (1992) 73 Com Cases 317 (CLB)

[5] AIR 1972 All 424

[6] http://judis.nic.in/supremecourt/imgs1.aspx?filename=44459

[7] https://indiankanoon.org/doc/1601247/

[8] http://barandbench.com/wp-content/uploads/2017/02/R_SCR.A_1970_2015_j_4.pdf