Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Amount received from an HUF by its member not taxable under
section 56(2)(vii)
August 6, 2019
In brief
Recently,1 the Chandigarh bench of the Income-tax Appellate Tribunal (Tribunal) held that the provision of section 56 (2)(vii) of the Income-tax Act, 1961 (the Act) does not apply to a gift given by a Hindu Undivided Family (HUF) to its members, on the premise that a member has pre-existing right in the family properties. Thus, when a member receives any sum from the HUF, during the subsistence of the HUF or on its partition, it cannot be treated as receipt without consideration. The Tribunal also held that even otherwise, the taxpayer was entitled to exemption under section 10(2) of the Act.
In detail
Facts
The taxpayer had received a gift from his HUF. The same was not offered to tax in the return of income.
The Tax Officer (TO) accepted the returned position. Subsequently, the TO reopened the
assessment to tax the gift which was in excess of the limit under section 56(2)(vii) of the Act. The TO agreed on the non- taxability of the gift, relying on the rulings of the Rajkot and Hyderabad bench of the Tribunal2 and completed the
reassessment proceeding.
Both the decision were on the premise that an HUF is nothing but a group of relatives and any gift
1 ITA No. 773/ CHD/ 2018
2 Vineetkumar Raghavjibhai Bhalodia v. ITO [2011] 12 ITR(T) 616 (Rajkot) and Mr. Biravelli Bhaskar Karimnagar v. ITO [ITA No. 398/HYD/ 2015]
received from a relative/
group of relatives is excluded from the purview of section 56(2)(vii) of the Act.
Subsequently, the
Principle Commissioner of Income-tax (PCIT)
considering that the HUF is not covered in the list of relative to an individual held that the gift from a HUF to its member is liable to tax and invoked section 263 of the Act setting aside the TO’s order and directing the TO to make fresh assessment.
Issue before the Tribunal Whether the provisions of section 56(2)(vii) of the Act are applicable to gift by HUF to its members?
Tribunal’s ruling
The TO’s order was passed after application of mind and was not erroneous and therefore the PCIT had wrongly exercised
jurisdiction under section 263 of the Act.
The interpretation of the PCIT that for claiming exemption under section 10(2) of the Act the
amount should be received for a consideration is misconceived.
To claim exemption under section 10(2) of the Act, two conditions must be fulfilled, i.e., (1) the individual is the member of an HUF and (2) the sum received is from the income of the HUF. The TO or PCIT had not rebutted/ denied the claim
Tax Insights
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or PCIT had not rebutted/
denied the claim of the taxpayer that amount is received from income of the HUF and hence, the taxpayer was eligible for exemption under section 10(2) of the Act.
HUF is a creation of law and cannot be created by the members. There is no presumption that a family is joint because it is comprises of joint property. If the persons in the family live together and are joint in food and worship, irrespective of the fact that there is joint property of the family, it constitutes a HUF.
A HUF is not an entity separate from its members.
All the members collectively own and enjoy property without determination of their shares until partition.
During the subsisting
coparcenary or to say broadly HUF, no member is entitled to receive any definite share out of the income of the HUF.
It is left to the prudence and wisdom of the manager (karta of HUF) who has to manage the affairs of the HUF and can even gift the HUF property.
On division, the share in the estate/ capital of the HUF cannot be treated as income of the recipient, rather, the same will be a capital receipt in his hands.
As the share of any member in the family property is not determined, the amount received from the HUF cannot be said to be more than his share in the HUF and be considered as the income of the member. Each member of the HUF has a
pre-existing right in the assets of the HUF, and therefore, receipt of any sum from the HUF cannot be said to be a gift without
consideration by the HUF or gift by other members of the HUF.
The provisions of section 56(2)(vii) are not attracted when a member receives any sum from its HUF, either during the subsistence of the HUF for his needs, or on partition of HUF.
The takeaways
This judgement reaffirms/
strengthens the argument of non- taxability of gifts received by an individual from an HUF.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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