Gift from HUF to a coparcener and the taxability of the same

Issue

Vijay received a cash gift of Rs.5 lakhs from his father Ramji, Karta of HUF. The amount received belongs to HUF consisting of Karta Ramji, Vijay and two more coparceners. Vijay claims that the amount received from HUF is as good as receipt of gift from ‘relatives’ hence not liable to tax. The Assessing Officer held that the term ‘relative’ as per Explanation to section 56(2)(vi) does not include HUF and therefore the amount received is chargeable to tax as income of Vijay. Decide.

Opinion

Section 56(2)(vi) says that any sum of money which exceeds Rs.50,000 received without consideration by an individual or HUF is chargeable to tax as income. However, such gift is not liable to tax in the following cases:

(a) from any relative; or
(b) on the occasion of marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the Explanation to section 10(20); or
(f) from any fund or foundation or university or educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C); or
(g) from any trust or institution registered under section 12AA.

The term ‘relative’ for this purpose would mean the following:

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;
(i.e. brothers-in-law and sisters in law)

(iv) brother or sister of either of the parents of the individual;
(i.e. maternal and paternal uncles and aunts of the individual)

(v) any lineal ascendant or descendant of the individual;
(i.e. parents and grandparents of the individual)

(vi) any lineal ascendant or descendant of the spouse of the individual;
(parents and grandparents of the spouse of the individual)

(vii) spouse of the person referred to in clauses (ii) to (vi) given above.


In Vineetkumar Raghavibhai Bhalodia v. ITO (ITA No.583 / Rajkot/2007 decided on 17.05.2011) the assessee (individual) received a gift of Rs.60 lakhs from Raghavjibhai Bhanjibhai Patel (HUF) in which he was a coparcener. The Assessing Officer held that the term ‘HUF’ is not covered in the definition of ‘relative’ and therefore taxed the entire amount of gift as income of the assessee. The Commissioner (Appeals) confirmed the view by observing that the definition of the term ‘relative’ does not cover any amounts received by a member from the HUF. The alternative plea that the amount received from HUF is exempt under section 10(2) was also negatived in appeal.

The tribunal held that it is true that the term ‘HUF’ is not included in the definition of ‘relative’. However, the expression ‘HUF’ must be construed in the sense in which it is understood under the Hindu law as was the case in Surjit Lal Chhabra v. CIT (1975 ) 101 ITR 776 (SC). The term ‘HUF’ denotes 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 the Explanation to section 56(2)(vi) of the Act. The tribunal rejected the observation of the CIT (Appeals) who held that HUF is as good as ‘a body of individuals’ and cannot be termed as ‘relative’.

It held that HUF is a group of relatives and a gift from group of relatives of the HUF could not be excluded from the tax exemption. It gave an example to drive home the point that a gift given by a secretary of the club represents the gift given by him on behalf of the members of the club and it is the collective gift from all the members of the club and not of the secretary in his individual capacity. It held that the term ‘relative’ whether individual or from a group of relatives such as ‘HUF’ fall within the Explanation to section 56(2)(vi) of the Act. Accordingly, it held that the amount received by a member of the HUF could not be subjected to tax.

It also upheld the alternative plea of the assessee that an amount received by a member from HUF could fall under section 10(2) of the Act. It held that receiving anything in consideration of his pre-existing right in a property or income is also covered by section 10(2) of the Act.

Position under DTC: The term ‘relative’ in DTC is defined in section 314(214) which is a total reproduction of what is contained in the Explanation to section 56(2)(vi) of the present law. Such gift from non-relative is chargeable to tax under the head ‘income from residuary sources’ as per section 58 of the DTC. Thus gift received from relatives would continue to remain tax-free under the DTC regime also.

Source: The Tax Referencer Volume 120 dt.25.07.2011
www.tpcc.in