(NB: This article was written long back. Since then the Estate Duty Act has been repealed. The article is being posted here, as it explains the concept of an HUF and a Company in detail)

H.U.F.
Morally, the H.U.F. is the most superior economic institution of the world.

The liabilities of the shareholders of a limited company are limited to the extent of their subscribed shares. The liability of an individual is limited to himself as distinct from those of his own family members. That is, on his passing away, his heirs and successors are responsible to his creditors only to the extent of assets left by him, and have a claim on the excess assets but no responsibility for excess liabilities. Since an H.U.F. is a continuing entity, which does not come to an end on passing away of any of the members of the family or of even the Karta himself in whose name the affairs of the family are managed, the question of termination of liabilities does not arise. They continue. In this age of transfer of assets to the names of other members of the family, just to evade such liabilities, this continuation of liabilities should be held as a very strong point for continuation of the institution of the H.U.F. through concessions in taxes in addition to recognition of their composite nature.

There is no comparison of an H.U.F. with a limited company because the shareholders of an H.U.F. have an unlimited liability. Financial liquidation of an H.U.F. affects at par both the H.U.F. and its members -share holders- except the properties held individually by the members. This business of having individual properties and incomes has come about only due to the abnormal treatment of the H.U.F.s by our tax laws. Otherwise, it is my contention that, barring a very few 'very wise' ones, citizens would have preferred to have the family as an economic unit rather than the present day individual brand of economy. In fact, I would like to give a booster to the H.U.F.s through the Estate Duty. Estate duty leviable on the demise of a member of an H.U.F. should be abolished or, at least, substantially reduced in comparison with that leviable on an individual. The basis for this is as follows-:

1. an H.U.F. is a continuing entity;
2. other members have contributed in the making of the share of the deceased;
3. the deceased is only a nominal owner;
4. the assets support those who are unable to support themselves in the family and the government does not take any responsibility to support them even after taxing the assets;
5. because of collective liability, an H.U.F. is most unlikely to resort to illegal means for amassing wealth or for saving on taxes;
6. it reflects social tendencies of the citizen as to how willing he is to work for others besides for himself.

Companies
Dual taxation exists on earnings by companies, firstly the companies themselves are charged income tax, and secondly dividends distributed by those companies are taxable in the hands of the shareholders also. Thus the same income becomes chargeable to tax twice. In addition, the companies are also subject to capital gains tax which may also form part of the dividend.

Losses, if any, are accumulated for a number of years for being set off against future gains. It is in this provision that the real anomaly lies because the real loss has been suffered by the shareholders through the depreciation in the value of their shareholdings. Further, a losing company is taken over by a profitting business by appropriate changes in the holdings, strictly confirming the letter of the law (but not the spirit, of course) and then the accumulated losses are misused to offset the gains of the transferee company's business, and thus deprive the Exchequer of its due share as revenue.

To remedy this situation, which in parts causes both undue advantages and undue disadvantages to the government, I propose the following:

1. For all taxation purposes, only the shareholders be recognised.
2. All profits during he year should be deemed to have acrued to the shareholders in proportion of their holdings. Profits should also be so distributed.
3. Any retention of the profits in the company should be deemed as capital formation and extra share certificates issued as such. This should be by consent of each shareholder. Those disagreeing must be paid their share of the profits in cash.
4. Likewise all losses should be distributed amongst shareholders as 'capital loss' to be set off against their other income. This will eliminate accumulation of losses by the companies for tax purposes and also give the 'advantage' of the loss where it is due. Naturally, the total amount of loss can never be more than the face value of the shareholding.
5. To compensaste the loss in revenue incurred by waiving the tax on companies, income from dividends may be charged special rates of tax which may be a flat rate. But then this income should be discounted for compilation of the total income for tax of an individual, though losses from the company may be adjusted after, say, five years against other income in the absence of income from dividend during this period.