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 such 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. However, 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- from whom it can receive gifts etc. without attracting the chargeability of the same? or vice versa i.e. whether HUF can give gifts etc. to an individual (who may or may not be its member) without attracting the chargeability of the same in the hands of such individual?
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:
(i) Individual being a natural person and thus can have relatives, while HUF is created by Karta and is not a natural person.
(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 section 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.
However as far as the question of receiving a gift by an individual from HUF, of which such individual is a member is concerned, the same is answered in a recent judgment given by the Rajkot Bench of ITAT in the case of Vineetkumar Raghavjibhai Bhalodia Vs. ITO, (2011) 11 taxmann.com 384 (Rajkot- ITAT)( IT APPEAL NOS. 583 (RJT.) OF 2007 AND 601 (RJT.) OF 2008) it was held that the gifts received by an individual from HUF are exempt in the hands of such individual. Brief facts of the said case are mentioned below:
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:
“From a plain reading of Sec. 56(2)(vi) along with the application 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 word/words could be read as plural also according to the circumstance/situation.
Therefore, the “relative” explained in Explanation to section 56(2)(vi) includes “relatives” and as the assessee received the 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).
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) (ii) of the Act.
Further in the near future we may come across a decision of the higher authority i.e. High Court, on the same matter which may overrule the above judgment. In this regard it is worth mentioning that in the case of Patil Vijaykumar v. Union of India [1985] 151 ITR 48/20 Taxman 363 the Karnataka High Court has held that the decision rendered by the High Court is binding on that High Court or the Tribunal's functioning in the territorial area over which it exercises jurisdiction and not on other High Courts or the other Tribunals.
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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