GIFT RECEIVED FROM HUF IS NOT TAXABLE

BY : CA A. K. JAIN

Rajkot Bench of ITAT in the case of Vineetkumar Raghavjibhai Bhalodia v. Income tax Officer, Rajkot has discussed the controversial issue of taxability of gifts from HUF to its members. The issues taken up were 

1. Whether a gift received from 'relative', irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax under provisions of section 56(2)(vi)?

Answer: Held, yes.

2. Whether HUF is a group of relatives and therefore, gift received from HUF would be exempt from tax under section 56(2)(vi)?

Answer: Held, yes

3. Whether for getting exemption under section 10(2) two conditions are to be satisfied, firstly, a person must be a member of HUF and secondly he should receive sum out of income of such HUF, may it be income of earlier year?

Answer: Held, yes

4. Whether where assessee was a member of HUF and received gift from HUF which was out of income of family and there was no material on record to show that gift amount was part of any assets of HUF, same would be exempt under section 10(2)?

Answer : Held, yes

Fact of the case: During the course of assessment proceedings the Assessing Officer noticed that the assessee had accepted gift of Rs. 60 lakhs from HUF and the Assessing Officer was of the view that HUF is not covered in the definition of 'relative'. Therefore, the gift received from the HUF was held to be taxable. The Commissioner (Appeals) confirmed the view of the Assessing Officer that the sum 'relative' is defined in Explanation to proviso to clause (v) of sub-section (2) of section 56. He further observed that if the legislature wanted that money exceeding Rs. 25,000 is received by the member of the HUF from the HUF is also not chargeable to tax, it would have specifically mentioned so in the definition in 'relatives'. He also considered the alternative submissions of the assessee that the said gift was exempt under section 10(2). He observed that under section 10(2) if the sum is received by any coparcener of HUF on partial or total division is exempt. The case under consideration was not a case that the said amount of Rs. 60 lakhs received by way of total or partial partition of the HUF. The Commissioner (Appeals) further observed that the above section speaks about sum received by a member of HUF if the same is out of income of the estate belonging to the family. If section 10(2) is read with section 64(2) what is to be seen is that sum received by a member of the HUF from the income of the HUF cannot exceed the amount which can be apportioned to his share in the estate or property or asset of the HUF. The Commissioner (Appeals) held that the assessee had failed to make out a case either before the Assessing Officer or before him to prove and to establish that Rs. 60 lakhs received from HUF was equal to or less than the income, which could be apportioned to his share of income in the HUF.

On second appeal :

HELD

Gift received from HUF is a gift receive from relative

A Hindu Undivided Family is a person within the meaning of section 2(31) and is a distinctively assessable unit under the Act. The Income-tax Act does not define expression 'Hindu Undivided Family'. It is well defined area under the Hindu Law which has received recognition throughout. Therefore, the expression 'Hindu Undivided Family' must be construed in the sense in which it is understood under the Hindu Law as has been in the case of Surjit Lal Chhabda v. CIT [1975] 101 ITR 776 (SC). Actually a 'Hindu Undivided Family' constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall in the definition of 'relative' as provided in Explanation to clause (vi) of section 56(2). The observation of the Commissioner (Appeals) that HUF was as good as 'a body of individuals' and could not be termed as 'relative' was not acceptable. Rather, an HUF is 'a group of relatives'. Now having found that an HUF is 'a group of relatives', the question now arises as to whether would only the gift given by the individual relative from the HUF be exempt from taxation and would, if a gift collectively given by the 'group of relatives' from the HUF not exempt from taxation. To better appreciate and understand the situation, it would be appropriate to illustrate an example, thus - an employee amongst the staff members of an office retires and in token of their affection and affinity towards him, the secretary of the staff club on behalf of the members of the club presents the retiring employee with a gift could that gift presented by the secretary of the staff club on behalf of the staff club be termed as a gift from the secretary of the staff club alone and not from all the members of the club, as such? Answer to this quoted example would be that the gift presented by the secretary of the club represents the gift given by him on behalf of the members of the staff club and it is the collective gift from all the members of the club and not the secretary in his individual capacity. And if it is held otherwise, it will lead to an absurdity of interpretation which is not acceptable in interpretation of statutes.

Further, from a plain reading of section 56(2)(vi ) along with the Explanation to that section and on understanding the intention of the legislature from the section, it could be seen that a gift received from 'relative', irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax under the provisions of section 56(2)(vi) as a group of relatives also falls within the Explanation to section 56(2)(vi). It is not expressly defined in the Explanation that the word 'relative' represents a single person. And it is not always necessary that singular remains singular. Sometimes a singular can mean more than one, as in the case on hand. In the instant case the assessee received gift from his HUF. The word 'Hindu Undivided Family', though sounds singular unit in its form and assessed as such for income-tax purposes, finally at the end a 'Hindu Undivided Family' is made up of 'a group of relatives'. Thus, a singular words/words could be read as plural also, according to the circumstance/situation. To quote an example, the phrase 'a lot'. Here, the phrase 'a lot' remains as such, i.e., plural, in all circumstances and situations, where in the case of 'one of the friends' or 'one of the relatives', the phrase remains singular only as the phrase states so that one amongst the relatives and at no stretch of imagination it could mean as plural whereas in the phrase 'a lot' the words 'a' and 'lot' are inseparable and if split apart both give distinctive numbers, i.e. 'a' singular and 'lot' plural and whereas when read together, it can only read as plural in number unlike in the case of 'one of the relatives' where 'one' is always singular in number whereas 'relatives' is always plural in number, but when read together it could read as singular in number. Applying this description with the case on hand, it could be said that though for taxation purpose, an HUF is considered as a single unit, rather, an HUF is 'a group of relatives' as it is formed by the relatives. Therefore, the 'relative' explained in Explanation to section 56(2)(vi) includes 'relatives' and as the assessee received gift from his 'HUF', which is 'a group of relatives', the gift received by the assessee from the HUF should be interpreted to mean that the gift was received from the 'relatives' therefore the same was not taxable under section 56(2)(vi ).

Section 10(2) exemption in case of gift from HUF

Section 10(2) provides that tax shall not be payable by an assessee in respect of any sum which he receives from a member of Hindu Undivided Family and as the sum has been paid out of the family income, or in the case of an impartible estate, whose such sum has been paid out of the income of the estate belonging to the family, subject however, to the provisions of section 64(2). The object of the provision is that a Hindu Undivided Family, according to section 2(31) is a 'person' and a unit of assessment. Income earned by a HUF is assessable in its own hands, so as to avoid double taxation of one and same income once in the hands of the HUF which earns it, and again in the hands of the member whom, it is paid. In respect of the family property qua its members it has been held by various authorities and courts that there is an antecedent title of some kind of a Member in the properties of HUF and a family arrangement which merely acknowledges and defines how that title is looked at and it is not an alienation of property at all. But even if it should be regarded as a transfer, the object of avoiding family litigation is consideration in money's worth. The real consideration in a family arrangement is based upon a recognition of a pre-existing right hence, there is no transfer of property at all. The Apex Court in CGT v. N.S. Getti Chettiar [1971] 82 ITR 599based its observation on that ground in a case of unequal family partition and held that it is not transfer, hence no gift tax liability is attracted. Every member of the HUF has a claim as to his maintenance. Receiving anything in consideration of his pre-existing right in a property or income covers by section 10(2).

There are two ways involved in a transaction, i.e., (i) amount given and (ii) the amount received. If one relate the provisions of Income-tax Act to these ways of 'given' and 'received' in case of an HUF it could be said that the case of amount received by an HUF from its member is provided in section 64(2). Section 64(2) was inserted by the Taxation Laws (Amendment) Act, 1970 with effect from 1-4-1971. This section was inserted to avoid creation of multiple HUFs and others. Similar provisions was also inserted in the Gift-tax Act, 1958 and accordingly transfer of assets in such case was termed as deemed gift. The provisions of section 64(2) provides that - where in the case of an individual being a member of a Hindu Undivided Family, any property having been the separate property of the individual has been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration then, notwithstanding anything contained in any other provisions of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act. The individual shall be deemed to have transferred the converted property, though the family, to the members of the family for being held by them jointly. The income derived from the concerted property or any part thereof shall be deemed to arise to the individual and not to the family. Where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly. To cover the transaction between a member of HUF and the HUF the Income-tax Act provides section 10(2) and section 64(2). Section 10(2) is not similar to section 64(2). It deals with the transaction differently which would mean that the legislature in their own wisdom was aware about the circumstances and accordingly provisions are enacted in the Act. Therefore, in our opinion, both the situation of amount received and amount given to HUF by a member is to be dealt with accordingly. 

Firstly, there is no provision in the Act to contend that it is applicable only to the extend of income of the year. Secondly, the property or the income of HUF belongs to the members thereof who are either entitled to share in the property on partition or have a right to be maintained. For getting exemption under section 10(2) two conditions are to be satisfied, firstly, a person must be a member of HUF and secondly he should receive the sum out of the income of such HUF may be of earlier year.      
 

The assessee received gift from HUF and had satisfied both the conditions of section 10(2) that the assessee was a member of HUF and received amount out of the income of family. There was no material on record to hold that the gift amount was part of any assets of HUF. It was out of income of family to a member of HUF, therefore, the same was exempt under section 10(2). 

: Case Reference :

A. L. GEHLOT, ACCOUNTANT MEMBER AND N. R. S. GANESAN, JUDICIAL MEMBER, IT APPEAL NOS. 583 (RJT.) OF 2007 AND 601 (RJT.) OF 2008, [ASSESSMENT YEARS 2005-06, MAY 17, 2011]

Now it is also clarified through Budget 2012-13 that

Exemption of any sum or property received by a HUF from its members [ Section 56(2)(vii)] [W.e.f. 1.10.2009]

The definition of relative as given in section 56(2)(vii) is only in relation to an individual and not in relation to a HUF. It is therefore proposed to amend the provisions of section 56 so as to provide that any sum or property received without consideration or inadequate consideration by a HUF from its members would also be excluded from taxation.

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Note : Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.