Whether a father can make a gift to his son's HUF.

Nilesh Shah writes:
Cell 92246-59941
E Mail: nilesh63@vsnl.com

The provisions of section 56(1)(v) were introduced for the first time
by the Finance No 2 Act,2004 with effect from 1-4-2005.

What has the Finance Bill No 2, 2004 has to say when the provision of
section 56(1)(v)- commonly referred to as the back door entry of Gift
Tax- was first introduced. I am sure none of you will believe 
yourself when you read it.

It reads:
Modification of the definition of income to include receipts in cash
or credit otherwise than for consideration

It is proposed to insert a new sub-clause in the definition of income
so as to provide that any sum received on or after the 1st day of
September, 2004, by an individual or a Hindu undivided family from
any person, in cash or by way of credit, otherwise than by way of
consideration of goods and services shall be included within the
definition of income under section 2(24) of the Income-tax Act. It is
also proposed to provide a general threshold limit of Rupees twenty
five thousand. In addition to this, in the case of an individual's
marriage, the gifts received will not be charged to tax.

However, in order to avoid hardships in genuine cases, it is also
proposed to exclude certain sums from the scope of the new definition
of income under section 2(24). The sums which shall not be included
in the income are : (a) the sum received by, or credited in the
account of (i) any individual from a relative out of natural love and
affection, or (ii) any individual or Hindu undivided family under a
will or by way of inheritance, or (iii) any employee or the dependant
of the deceased employee from an employer, by way of bonus, gratuity
or pension or insurance or any such other sum solely in recognition
of the services rendered by the employee, or (b) any sum received in
contemplation of death of an individual or karta or member of a Hindu
undivided family, or (c) any income referred to in section 10 of the
Income-tax Act or any other income which is exempt or not included in
the total income under the Act, or (d) any sum received on account of
transfers referred to in section 47 under this Act.

It is also proposed to define the expression "relative" for the
purposes of the new provision as (i) spouse of the individual, (ii)
brother or sister of the individual, (iii) brother or sister of the
spouse of the individual, (iv) brother or sister of either of the
parents of the individual, (v) any lineal ascendant or descendant of
the individual, (vi) any lineal ascendant or descendant of the spouse
of the individual, and (vii) spouse of a person referred to in items
(ii) to (vi) mentioned above.

It is also proposed to amend section 56 so as to provide that the
income referred to in the new sub-clause (xiii) of section 2(24) will
be chargeable as "income from other sources". This amendment will
take effect from 1st April, 2005, and will, accordingly, apply in
relation to the assessment year 2005-2006 and subsequent assessment
years. [Clauses 3, 5 and 12]

Thus the gift received from a father to his son's HUF is not
exempt.Only a gift received by an individual from his relative out
of natural love & affection is exempt. What is exempt in the hands of
an HUF is the sum received by an HUF under a will or inheritance.

Nilesh Shah writes from Mumbai:
Cell 92246-59941
E Mail: nilesh63@vsnl.com

The provisions of section 56(1)(v) were introduced for the first time
by the Finance No 2 Act,2004 with effect from 1-4-2005.

What has the Finance Bill No 2, 2004 has to say when the provision of
section 56(1)(v)- commonly referred to as the back door entry of Gift
Tax- was first introduced. I am sure Mr Parmar you will not believe
yourself when you read it.

It reads:
Modification of the definition of income to include receipts in cash
or credit otherwise than for consideration

It is proposed to insert a new sub-clause in the definition of income
so as to provide that any sum received on or after the 1st day of
September, 2004, by an individual or a Hindu undivided family from
any person, in cash or by way of credit, otherwise than by way of
consideration of goods and services shall be included within the
definition of income under section 2(24) of the Income-tax Act. It is
also proposed to provide a general threshold limit of Rupees twenty
five thousand. In addition to this, in the case of an individual's
marriage, the gifts received will not be charged to tax.

However, in order to avoid hardships in genuine cases, it is also
proposed to exclude certain sums from the scope of the new definition
of income under section 2(24). The sums which shall not be included
in the income are : (a) the sum received by, or credited in the
account of (i) any individual from a relative out of natural love and
affection, or (ii) any individual or Hindu undivided family under a
will or by way of inheritance, or (iii) any employee or the dependant
of the deceased employee from an employer, by way of bonus, gratuity
or pension or insurance or any such other sum solely in recognition
of the services rendered by the employee, or (b) any sum received in
contemplation of death of an individual or karta or member of a Hindu
undivided family, or (c) any income referred to in section 10 of the
Income-tax Act or any other income which is exempt or not included in
the total income under the Act, or (d) any sum received on account of
transfers referred to in section 47 under this Act.

It is also proposed to define the expression "relative" for the
purposes of the new provision as (i) spouse of the individual, (ii)
brother or sister of the individual, (iii) brother or sister of the
spouse of the individual, (iv) brother or sister of either of the
parents of the individual, (v) any lineal ascendant or descendant of
the individual, (vi) any lineal ascendant or descendant of the spouse
of the individual, and (vii) spouse of a person referred to in items
(ii) to (vi) mentioned above.

It is also proposed to amend section 56 so as to provide that the
income referred to in the new sub-clause (xiii) of section 2(24) will
be chargeable as "income from other sources". This amendment will
take effect from 1st April, 2005, and will, accordingly, apply in
relation to the assessment year 2005-2006 and subsequent assessment
years. [Clauses 3, 5 and 12]

Thus the gift received from a father to his son's HUF is not
exempt.Only a gift received by an individual from his relative out
of natural love & affection is exempt. What is exempt in the hands of
an HUF is the sum received by an HUF under a will or inheritance.

I am sorry for having disturbed the mental peace of many of our readers .But it is a reality.

Your's Sincerely,

Nilesh Shah