Monday, August 1, 2011

Chargeability of gifts made to HUF u/s 56 of I.T Act 1961

Chargeability of gifts made to HUF u/s 56 of I.T Act 1961


In this article the author has made an attempt to distinguish between the exemption benefits granted to Individual or HUF on gift received by them, although both of them are covered by the Act under the same section i.e. 56(2)(vii), leaving other categories of assessees e.g AOP and BOI which are not covered altogether under this section.

The present section 56(2) after insertion of clause (vii) by the Finance (No. 2) Act 2009, Which is effective from October 1, 2009 and provides for the taxability of a sum of money or Property either movable or immovable, received without consideration by an "Individual or HUF" under the said section, in case it exceeds the monetary limit of Rs.50,000 during the previous year.

Thus the provisions of existing section 56(2)(vii) are attracted once the following conditions are satisfied:

(i) Sum of money or property (movable or immovable) is received on or after 1.10.2009 by an Individual or HUF either without or insufficient consideration.

(ii) Such sum of money or property is not exempted under the said section.

Now from the above mentioned, it is understood that certain exemptions are provided by the section for providing the relief where the nature and intention of the gift given is such that it satisfies the exemption criteria laid down for this purpose. Amongst the various exemptions, the very first exemption is being given in case the sum of money or property is received from any relative.

This exemption criterion made it necessary to define the meaning of the term "Relative" expressly to avoid litigation and undesired exemptions. Further even under the new clause (vii), the meaning of the term "Relative" was kept unchanged as it was understood under the existing explanation to clause (vi) of sub-section (2) of section 56 which is reproduced below:

(a) Spouse of the individual

(b) Brother or sister of the individual

(c) Brother or sister of the spouse of the individual

(d) Brother or sister of either of the parents of the individual

(e) Any lineal ascendant or descendant of the individual

(f) Any lineal ascendant or descendant of the spouse of the individual

(g) Spouse of the person referred to in clauses (ii) to (vi).

Thus the above mentioned persons are deemed to be the relatives of an Individual and hence are allowed to give any sum of money or property without consideration to the individual who is considered to be his/her relative without attracting the taxability in the hands of the recipient. These provisions cover the relatives of an individual only and not that of HUF, which is self explanatory from the way the relation is established between persons (who are considered to be relative) and an Individual.

An individual, being a natural person can reasonably be assumed to have same relatives with whom his/ her relation is established merely by birth and blood relation. But the position is not made crystal clear in the case of HUF by section 56(2), which gives the rise to the below mentioned questions:

i. Whether HUF can have relatives?

ii. Whether the relatives of an Individual (who are defined in the explanation) can be assumed to be the relatives of HUF also which is formed by such Individual (in the capacity of Karta) or not? Or if we say in other way, can the relatives of Karta be assumed to be the relatives of HUF too for the purpose of claiming exemption?

As these questions challenge the benefit of exemption granted by section 56 with respect to gifts made to HUF in the absence of necessary explanation or coverage of HUF while defining relatives of an Individual but at the same time providing for the chargeability of both "Individual" as well as "HUF'' in the same section, it calls for the interpretation of the basic intention of the section.

No doubt, The basic intention of the clause (vii) of section 56(2) is to expressly cover the "Individual" and "HUF" (and covering companies and firms in other clauses) and brought them under tax net, however while granting exemptions on gifts received from the relatives, the benefit seems to be restricted to individuals only due to the following reasons:

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(ii) The relatives of Karta cannot be assumed to be the relatives of HUF, until and unless the HUF is assumed to be as Karta's Individual ignoring the separate capacity of HUF from the Karta but which cannot be done due to the independent recognition of HUF as a person under 2(31) (ii) and thus treating HUF as an independent assessee. And when an "Assessee" is recognized independently, its relatives should also have a relation with it directly and not through the Individual or person who formed it e.g. Karta of HUF. Another example in this regard is that where a company is formed by an Individual promoter, the relatives of such Individual cannot be said to be the relatives of the company after incorporation.

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The assessee received a gift of Rs.60 lakhs from HUF of which he was a member. The AO & CIT(A) held that as HUF was not covered by the definition of "relative", the gift was chargeable to tax u/s 56(2)(v). Further the alternate submission of the assessee that gift was exempt u/s 10(2) was rejected on the basis that sec. 10(2) could be applied only to amounts received "out of income of the estate" on partial or total partition of the HUF.

The conclusion of Hon'ble Rajkot bench of ITAT in the above said case is reproduced below:

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The above judgment seeks to provide the relief to the assessee from the tax liability that would have been imposed if the case was decided on the basis of the literal meaning of the section and its explanation being reasonably interpreted keeping in view the fact of HUF being an artificial person (which is managed and controlled by its karta & other coparceners) instead of a natural one and that it is considered as a separate and independent assessee under the Income Tax Act, 1961 by recognizing it as "Person " under section 2(31) of the Act.

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Keeping in view the above, the aforementioned judgment of ITAT cannot be given regarded as conclusive and the literal meaning of the section and other facts mentioned above cannot be ignored. Thus in order to avoid undesired litigations it shall be in the interests of the assessee if one can avoid taking the gifts directly in HUF and should prefer to route it through the account of individual donor into the account of another individual i.e. donee, who shall be the relative of the former and then transfer the amount to the account of HUF, if required from the account of such individual.

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