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.

----------------------------------------------------------------------------

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.

Warren Buffett: Why Stocks Beat Gold & Bonds

By Warren Buffett

In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives over time.


FORTUNE -- Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Warren Buffett: Your pick for Businessperson of the Year

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain -- either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've exploited both opportunities in the past -- and may do so again -- we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof " delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO),  IBM , and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by farthe safest.

This article is from the February 27, 2012 issue of Fortune.

Source: http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/

--------------------------------------------------------------------------------------------

EXPECTATIONS FROM FINANCE BUDGET, 2012

The Finance Minister may consider following amendments to be incorporated in his budget presentations on 16th March, 2012.

Direct Taxes -

1) Threshold limit should be raised from Rs. 180,000/- to Rs. 3,00,000/- for all assesses.

2) Agricultural income over Rs. 5,00,000/- should be taxed at flat rate of 15%.

3) Bank, Post Office interest should be exempted upto Rs. 50,000/-.

4) Saving limit should be raised from Rs. 1,00,000/- to Rs. 2,00,000/-.

5) All short term capital gains to be taxed at 15%. All long term capital gains to be taxed at 10%.

6) All interest and rental income of charitable and religious trusts to be taxed. Trust should not be allowed to do business.

7) Exempted income should not have application of rule - 8D u/s 14A.

8) Standard deduction of 30% of salary should be allowed.

9) MAT should be reduced to 12% and income exempt u/s 10(38) should not be considered for MAT calculation.

10) Surcharge and education cess may be abolished.

11) Maximum rate of tax on companies and firms may be reduced to 27%.

12) Foreign companies should be taxed at least 35%.

13) All Foreign remittances and deposits in bank accounts from unknown sources should be taxed at 35%.

14) Audit requirements should be applicable only when turnover exceeds 1 crore or value of services rendered exceeds 50 lakhs.

15) Books of accounts should be required only if the turnover exceeds Rs. 25 lakhs.

16) Wealth tax limit should be raised to 2 crores.

Indirect Taxes - Service Tax

1) Basic limit should be raised to Rs. 25 lakhs.

2) All services to be covered, no exemption.

3) Service tax to be charged at 10% flat with MODVAT facility.

4) No classification of different type of services.

Indirect Taxes – Excise Duty

1) Hundreds of classifications should be reduced to following 3 categories:

a. Essentials of life - to be exempted from Excise duty

b. General Items - to be taxed at 10%

c. Items of Luxuries - to be taxed at 30%

2) Excise Duty limit for Small scale industries should be increased to Rs. 3 crores.

Indirect Taxes - Customs Duty

1) Hundreds of classification should be reduced to following 5 classes:

a. Basic Food / Medicine etc. items - NIL duty

b. Other food items - 40%

c. Industrial items - 15%

d. Other items of common use - 20%

e. Luxury items – 35%

2) Baggage allowance should be increased to Rs. 1,00,000/-.

These simple amendments will make the life of a common person happy and comfortable and provide protection to home industry. Tax burden will be shifted on richer class.

----------------------------------------------------------------------------