Issue for
Consideration
Under the provisions of section 56(2)(x) of
the Income-tax Act, 1961, receipt of any sum of money or any property without consideration or for inadequate
consideration (in excess of the specified limit of Rs. 50,000) by the assessee
is chargeable to income-tax under the head “Income from other
sources”. The term ‘property’ is defined for this purpose as immovable
property, shares, securities, jewellery, bullion and artistic works like
drawings, paintings etc. The Finance Act, 2017 while inserting this new provision
has widened the scope of the old
provision by making the new
provision applicable to all types of assessees, as against the erstwhile
provision of section 56(2)(vii), which was applicable only to an individual or
an HUF.
The taxability as provided in section
56(2)(x) is subjected to several
exceptions. One of the important exceptions from taxability is when any such
sum of money or property is received by the assessee from his relative. The
Explanation to clause (x) of section 56(2) provides that the expression
‘relative’ shall have the same meaning as is assigned to it in the Explanation
to clause (vii). The said Explanation to clause (vii) defines ‘relative’
separately for individual and HUF in an exhaustive manner. In case of an
individual, ‘relative’ means –
(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 items (B)
to (F).
In case of an HUF, ‘relative’ means any
member of such HUF. Till 1st October 2009, there was no definition
of relative qua an HUF. The definition of “relative” qua an HUF
was inserted by the Finance Act 2012, with retrospective effect from 1.10.2009.
The definition of ‘relative’ for an individual does not include his HUF. In
other words, the definition of the term ‘relative’, qua an individual,
does not specifically exclude the receipt of a gift by an individual from an
HUF from the scope of taxation u/s. 56(2) (x). Therefore, the issue has arisen,
in the context of a receipt by an individual from his HUF, as to whether an HUF can be regarded as the
relative of the individual, if all the members of that HUF are otherwise his
relatives as per the above definition. While the Rajkot bench of the Tribunal
has taken the view that gift received from an HUF, whose members comprised of
the relatives of the recipient, is not
taxable, the Ahmedabad bench of the Tribunal has taken the view that HUF does
not fall in the definition of relative, so as to qualify for the exemption from
taxability. The view of the Rajkot bench has been confirmed by the decisions of
the Mumbai and Hyderabad benches.
Vineetkumar Raghavjibhai Bhalodia’s case:
The issue first came up before the Rajkot
bench of the Tribunal in the case of Vineetkumar Raghavjibhai Bhalodia vs.
ITO 46 SOT 97.
In this case, relating to assessment year
2005-06, the assessee i.e. Vineetkumar Raghavjibhai Bhalodia received a gift of
Rs. 60 lakh from Shri Raghavjibhai Bhanjibhai Patel (Bhalodia) HUF in which he
was a member. The assessing officer held that the HUF was not a ‘relative’ of the recipient and the gift of Rs. 60 lakh received from the HUF
was taxable.
The CIT(A) confirmed the view of the
assessing officer. He observed that if the legislature wanted that money received by a member of the HUF from the HUF
should also not be chargeable to tax, it would have specifically mentioned so
in the definition of ‘relative’. The CIT(A) also rejected the alternative
submissions of the assessee that the said gift was exempt u/s. 10(2), on the
ground that the sum was not received on total or partial partition of the HUF.
He held that the exemption u/s. 10(2) was available only in respect of that
amount which could be apportioned to the member’s share in the income of his
HUF. Since the assessee failed to establish whether the amount received was
equal to or less than the income which could be apportioned to his share, the
exemption was denied.
Before the Tribunal, on behalf of the
assessee, it was argued that HUF was a ‘relative’, in as much as the HUF was a
collective name given to a group consisting of individuals, all of whom were
relatives as per the definition. The HUF was a conglomeration of relatives as
defined under section 56(2)(v).
Section 56(2)(v) should be interpreted in such a way that avoided absurdity. Alternatively, it was also
contended that the receipt was exempt u/s. 10(2). Section 10(2) used the
language “paid out of the income of the family” and not “paid
out of the income of the previous year of the family” as was interpreted
by the assessing officer. Finally, it was submitted that if two views were
possible, the one beneficial to the assessee had to be adopted.
On behalf of the revenue, it was pointed out
that ‘person’ had been defined u/s. 2(31) of the Act and HUF was a separate
person thereunder. The revenue also relied upon the definition of ‘relative’
given in section 2(41), wherein also HUF was not included. Regarding
applicability of section 10(2), it was submitted that its object was to provide
exemption only in respect of partition, and not in case of gift.
The Tribunal held that the expression
“Hindu Undivided Family” must be construed in the sense in which it
was understood under Hindu Law. HUF constituted all persons lineally descended
from a common ancestor and included their mothers, wives or widows and
daughters. All those persons fell in the definition of “relative” as
provided in Explanation to clause (v) of section 56(2). The gift received from
“relative”, irrespective of whether it was from an individual
relative or from a group of relatives, was exempt from tax. Though it was not
expressly defined in the Explanation that the word “relative”
represented a single person. It was not always necessary that singular remained
a singular. Sometimes a singular could
mean more than one, as was in the present case of the gift from an HUF.
Regarding exemption u/s. 10(2), the Tribunal
disagreed with the view of the CIT (A) that only the amount received on partial
partition or on partition was exempt, as well as only up to the extent of share
of assessed income of HUF for the year. According to the Tribunal, for getting
exemption u/s. 10(2), two conditions were to be satisfied. Firstly, he must be
a member of the HUF, and secondly he received the sum out of the income of such
HUF, may be of an earlier year. Since there was no material on record to hold
that the gift amount was part of any assets of the HUF, it was out of the
income of the family to a member of the HUF. According to the Tribunal,
therefore, the same was exempt u/s. 10(2).
A similar view has
been taken by the Hyderabad and Mumbai benches of the Tribunal in the following
cases –
(i). Hemal D. Shah vs. DCIT [IT Appeal No.
2627 (Mum.) of 2015, dated 8-3-2017]
(ii). Dy. CIT vs. Ateev V. Gala [IT Appeal
No. 1906 (Mum.) of 2014, dated 19-4-2017]
(iii). ITO vs. Dr. M. Shobha Raghuveera [IT
Appeal No. 47 (Hyd.) of 2013, dated 3-3-2014]
(iv). Biravelli Bhaskar vs. ITO [IT Appeal No.
398 (Hyd.) of 2015, dated 17-6-2015]
Gyanchand M. Bardia’s case
The issue again came up before the Ahmedabad
bench of the Tribunal in the case of Gyanchand M. Bardia vs. ITO 93
taxmann.com 144.
In this case, relating to assessment year
2012-13, the assessee received a gift of Rs.1,02,00,000 from an HUF, which
consisted of the assessee, being Karta, his wife and son. This gift was claimed
to be exempt by the recipient. The assessing officer rejected the claim of the
assessee on the ground that the definition of ‘relative’ of an individual
recipient did not include HUF as a donor. He made the addition of the impugned
amount u/s. 68.
The CIT (A) confirmed the addition made by
the assessing officer. In doing so, he
observed that the relevant provision had been amended to exempt the gift
received by the HUF from its members. Though the Hon’ble Parliament brought
amendment to the statute declaring gift from member to HUF as tax free, it did
not consider it proper to make a gift from the HUF to a member as tax free. The
reason might be that if such provision
was made, the Karta of an HUF might
misuse the provisions and gift the corpus of the HUF to himself, as
other members of the HUF had no control over managing affairs of the HUF.
Further, the CIT (A) also noticed that the assessee could not produce the gift
deed in respect of the said gift received by him.
Before the Tribunal, on behalf of the
assessee, it was emphasised that besides him, the other two members of the HUF
i.e. assessee’s wife and son were also
covered in definition of “relative”. Accordingly, it was
claimed that the said gift received was not taxable, by placing reliance on the
decision in the case of Vineetkumar Raghavjibhai Bhalodia (supra). Apart
from this contention, the assessee also claimed exemption u/s. 10(2), which had
not been decided by the lower authorities, though it was claimed before them on
an alternative basis.
The Tribunal held that the ratio of the
decision in the case of Vineetkumar Raghavjibhai Bhalodia (supra) was no
more applicable in view of the subsequent legislative developments vide Finance
Act, 2012 w.r.e.f. 01.10.2009. The legislature substituted clause (e) to
Explanation in section 56(2)(vii) defining the term “relative” to be applicable in case
of an individual assessee as well as HUF; with retrospective effect from
01.10.2009. The legislature had incorporated clause (ii) therein to deal only
with an instance of an HUF donee receiving gifts from its members. Therefore,
by implication, the legislative intent was very clear that a receipt from an
HUF was not to be taken as one from a relative
in the hands of an individual
recipient. Accordingly, the assessee’s plea of receipt of valid gift from his
HUF being exempt, was declined.
Regarding the claim of exemption u/s. 10(2),
it was held that a sum which was not eligible for exemption under the relevant
specific clause could not be considered to be an exempt income u/s. 10(2).
Observations
An HUF is a separate assessable unit for the
purpose of the Income-tax Act. Under the general law, it is the members who constitute and represent it.
It being so, the gift received from the HUF may also be viewed as a gift
received from all the members of the said HUF and if that be so, such receipt
should be treated as the one from a relative of the donee and not liable
to tax.
The Ahmedabad bench of the Tribunal in the
case of Gyanchand M. Bardia (supra) did not follow the decision of the
Rajkot bench for the reason that the amendment made by the Finance Act, 2012 altered
the definition of the term ‘relative’
to specifically provide for relationship
vis-à-vis an HUF recipient and the amendment did not do so for an
individual in receipt of a gift from an HUF. The bench observed that a gift from an HUF, post amendment, will not be
exempt from tax for the reason that the
legislative intent was clear from the amendment that post amendment only a
receipt of gift by an HUF from its members is exempt from tax. Since this amendment is effective from
1-10-2009, receipts during the pre-amendment
period was not taxable as per the Rajkot bench. No other reason was
provided by the bench for upholding the taxability in the hands of the
individual. One fails to appreciate how
an amendment providing for an exemption for a particular situation changes the understanding derived for taxation or
otherwise in an altogether different and
converse situation. The kind of deductive interpretation applied by the bench
is not comprehensible. In our considered
view, the bench was bound to follow the
decision of the Rajkot bench and was required to refer the matter to a special
bench, if it disagreed with the said decision.
A useful reference may be made to the
memorandum explaining the insertion of the new definition of the term
‘relative’. A bare reading of the same
clarifies that there is nothing therein that conveys that the legislature
intended that it wanted to disturb the understanding supplied by the Rajkot
bench. The better way of appreciating the amendment is to accept that the
legislative intent was contrary to what was held by the Ahmedabad bench. The
legislature clearly intended not to provide that a gift from an HUF will not be
treated as from a
relative and will be taxable, in
view of its awareness of the
five decisions in favour of the interpretation exempting the gift
received by an individual from an
HUF. Not having so provided, the intention should be held to
be favouring the exemption, and not otherwise.
The issue can be looked at from another angle
also. A coparcener can make a gift of his undivided interest in the coparcenary
property to another coparcener
or to a stranger with the prior consent of all other coparceners. Such a gift
would be quite legal and valid. Therefore, when the karta of the HUF gifts
coparcenary property after obtaining the consent of all the coparceners, it may
be regarded as the gift of undivided interests in that property by all the
coparceners individually. Accordingly, the gift of property received from the
HUF may also be viewed as the gift of undivided interests in that property by
all the coparceners of that HUF. In such a case, if all the coparceners are
relatives of the recipient assessee, then the said gift cannot be taxed under
the provisions of section 56(2)(x). Alternatively, the receipt can be considered as the one for the body of
individuals where all the individuals are related to the recipient and the
receipt therefore is made eligible to exemption from tax.
Another important aspect is the intention behind
the provisions under consideration. In Circular No. 1/2011 dated 6-4-2011, it
has been mentioned that the provisions of section 56(2)(vii) were introduced as
a counter evasion mechanism to prevent laundering of unaccounted income. The
gifts received from relatives have been kept out of the purview of this
provision obviously because the possibility of such laundering of unaccounted
income does not exist or is very less. Therefore, taxing such gifts received
from the HUF, consisting of members who all are relatives, would not be in
consonance with the object of the provision.
Looking at the intention of the relevant
provision and the legal understanding of the concept of HUF, the view taken by
the Rajkot, Mumbai and Hyderabad benches
of the Tribunal seems to be the more appropriate view.
There is even otherwise a flaw in the view
that views the relationship in one direction only. This view holds that A is
the relative of B but B is not a relative of A. Such an absurdity in
interpreting the law should be avoided in preference to the harmonious reading
of the provisions under which the relationship is a two way affair whereby A is
a relative of B and B is therefore a relative of A and A and B are relative of
each other. Needless to say that the view beneficial to the tax payer should be
adopted in a case where two views are possible.
In the end, it may be useful to examine the
competence of the Karta or an HUF to deal with and dispose of the property of
the HUF by way of gifts. A gift may be rendered invalid where it is held to be
not permissible under the general law as
the one made beyond the competence of the person making it. One also needs to
examine whether such gifts when made, though not permissible in law, are void ab
initio or are voidable at the option of the parties to the gift. The issue
regarding validity of such gift given by the HUF needs to be examined. The
Supreme Court, in the case of R. Kuppayee & Anr. vs. Raja Gounder (2004)
265 ITR 551, has dealt with this issue and held as under:
“Combined reading of these paragraphs shows
that the position in Hindu law is that whereas the father has the power to gift
ancestral movables within reasonable limits, he has no such power with regard
to the ancestral immovable property or coparcenary property. He can, however,
make a gift within reasonable limits of ancestral immovable property for
“pious purposes”. However, the alienation must be by an act inter
vivos, and not by will. This Court has extended the rule in para. 226 and
held that the father was competent to make a gift of immovable property to a
daughter, if the gift is of reasonable extent having regard to the properties
held by the family.”
Thus, HUF’s property can be gifted by its
manager or karta only to a reasonable extent, and of immovable property only
for pious purposes. The Courts have given extended meaning to the ‘pious
purposes’ and validated the gift of ancestral property made by the father to
the daughter within reasonable limits. However, such extended meaning given to the
words ‘pious purposes’ enabling the father to make a gift of ancestral
immovable property within reasonable limits to a daughter has not been extended
to the gifts made in favour of other female members of the family. Rather it
has been held that husband could not make any such gift of ancestral property
to his wife out of affection on the principle of ‘pious purposes’.
However, gift of HUF’s property in excess of
reasonable limit or not for pious purposes is not void but voidable and that too at the instance of other members
of the family and not strangers. In Pollock on Contracts, page 6 (twelfth
edition), this distinction between the terms ‘void’ and ‘voidable’ has been
explained as follows:
“The distinction between void and
voidable transactions is a fundamental one, though it is often obscured by
carelessness of language. An agreement or other act which is void has from the
beginning no legal effect at all, save in so far as any party to it incurs
penal consequences, as may happen where a special prohibitive law both makes
the act void and imposes a penalty. Otherwise no person’s rights, whether he be
a party or a stranger, are affected. A voidable act, on the contrary, takes its
full and proper legal effect unless and until it is disputed and set aside by
some person entitled so to do.”
In the case of R.C. Malpani vs.
CIT 215 ITR 241, the Gauhati High
Court held that the income derived from the property which is alienated by the
Karta without any legal necessity is not assessable in the hands of the HUF, as
it is only voidable and not void. Similarly, any gift received from the HUF may
be required to be considered (whether income or not) under the provisions of
section 56(2)(x), even if it is impermissible and voidable, unless the Court
has declared it to be void.
