GIFT RECEIVED FROM HUF IS NOT TAXABLE
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).
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.
