RELATIVE IS RELATIVE TO THE ACT IN QUESTION

Introduction

Who is a relative? This question
may appear very mundane at first blush, but when viewed in the legal context it
becomes very significant. India is a land of laws and each one of them is an
island in itself. Many of the Acts have defined the term ‘relative’ and each
has done so in its own independent manner, thereby creating multiple
definitions. Hence, the term ‘relative’ is relative to the Act in question,
i.e., it depends on the Act which is being examined.

The generic definition of the term
‘relative’ as contained in the Concise Oxford English Dictionary is a person
connected by blood or marriage. In State of Punjab vs. Gurmit Singh, 2014
(9) SCC 632, the Supreme Court held that in Ramanatha Aiyar’s, Advance
Law Lexicon (Vol. 4, 3rd Ed.), the word ‘relative’ means any person related by
blood, marriage or adoption. Again, in the case of U. Suvetha vs. State
by Inspector of Police, (2009) 6 SCC 787 it held that in the absence of
any statutory definition, the term must be assigned a meaning as is commonly
understood. Ordinarily, it would include the father, mother, husband or wife,
son, daughter, brother, sister, nephew or niece, grandson or granddaughter of
an individual. The meaning of the word ‘relative’ would depend upon the nature
of the statute. It principally includes a person related by blood, marriage or
adoption. The expression ‘relative of the husband’ came up for consideration in
the case of Vijeta Gajra vs. State of NCT of Delhi (2010)11 SCC 618
where it was held that the word relative would be limited only to the blood
relations or the relations by marriage.

Interestingly, the succession laws
such as the Hindu Succession Act, 1956 do not use the term ‘relative’. Instead,
they use the word ‘heir’ which has a different connotation altogether. An heir
is a relative who comes into being only on the death of a person, whereas a
person would have relatives even when he is alive.

Let us analyse the definitions
under a few crucial Acts and try and bring out the similarities and the
dissimilarities between the different meanings.

Income-tax
Act, 1961

The Big Daddy of all laws has the
biggest list of relatives, no pun intended! The notorious section 56(2)(x) of
the Act taxes certain receipts of property in the hands of the recipient.
However, any receipt of property from a relative is exempt from tax. Hence, it
becomes very essential that the list of relatives is long. This section provides
an exhaustive definition under which the following persons would be treated as
a relative of the donee / recipient:

(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;

(vii) spouse of the person referred to in clauses (ii) to (vi).

The term lineal ascendant or
descendant is also an often-used term but never defined in various Indian laws.
It means a straight line of relationship either upwards or downwards. For
instance, a son, his father and grandfather would constitute a lineal
ascendancy. One prevalent myth is that it only refers to male relations. A
daughter, her mother and her grandmother or a son, his mother and his
grandmother would also constitute a lineal relationship. All that is required
is that the relatives should be in a direct straight line. Parallel /
horizontal relations, such as cousins and uncles, would not constitute a lineal
line. One of the most interesting facets of the above definition is that an
uncle / aunt is a relative for a nephew / niece but the converse is not true.
So a nephew can receive a gift from his uncle but the very same uncle cannot
receive a gift from his nephew without paying tax on the same. Strange are the
ways of the taxman, but then law and logic never went hand-in-hand! In this
connection there have been conflicting decisions of the courts as to whether a
gift received by a person from his sibling but made from the bank account of
his sibling’s son would attract the rigours of this section – PCIT vs.
Gulam Farooq Ansari, ITA 230/2017, Raj HC order dated 22^nd November,
2017 and Ramesh Garg vs. ACIT, [2017] 88 taxmann.com 347 (Chandigarh – Trib.)

Again, a cousin (e.g., the
recipient’s mother’s sister’s son) does not constitute a relative under this
section – ACIT vs. Masanam Veerakumar, [2013] 34 taxmann.com 267 (Chennai
– Trib.) An interesting decision was delivered by the Mumbai ITAT that
a relative of a father did not become the relative of a minor recipient just
because the minor’s income was clubbed with his father. Since the minor received
the gift, the relationship of the donor should be with reference to the minor
who was to be treated as ‘the individual’ – ACIT vs. Lucky Pamnani [2011]
129 ITD 489 (Mumbai). The Act also defines a child in relation to an
individual to include a step-child and an adopted child. Interestingly, this
Act is the only one where one’s in-laws are included in the list of relatives.

This section has become a hindrance
to the untangling of several jointly owned family businesses on account of
certain relatives not being included in the list of exemptions.

Companies
Act, 2013

The new avatar of the
Companies Act has also seen a new meaning to the term ‘relative’. Several old
relations have been severed and the new list in the Companies Act, 2013 is
quite a pruned one compared to the lengthy list contained in the Companies Act,
1956. Given below is a comparison of the definition under the two Acts:

HOW TWO ACTS DEFINE A ‘RELATIVE’

The definition under the Companies
Act is relevant not just under that law but even under other statutes which
rely on the definition contained therein. Some of the important places where
the term relative is used in the Companies Act include the ‘related party’
definition; the ‘interested director’ definition; disqualification from being
appointed as an auditor if his relative is an interested party / employee;
disqualification from being appointed as an independent director if his
relative has a pecuniary relationship / is a key managerial personnel; loan by
a company to its director or his relative, etc.

Maharashtra
Stamp Act, 1958

Gifts between relatives carry a
concessional stamp duty as opposed to gifts to non-relatives. Gifts to defined
relatives carry a stamp duty @ 3% + 1% on the market value / ready reckoner
value of the property. The defined relatives for this purpose are spouse,
sibling, lineal ascendants or descendants of the donor. Thus, the list is quite
small as compared to the list u/s 56(2)(x) of the Income-tax Act. Hence, it is
essential to note that what may be exempt from income-tax may not also carry a
concessional stamp duty rate.

In addition to the above, for two
types of properties and six relatives the stamp duty is only Rs. 200 + 1% of
the market value of the property and a registration fee of just Rs. 200. This
concession is available only for residential or agricultural property and only
for the husband, wife, son, daughter, grandson, granddaughter of the donor. Any
other relative not covered within the above six relations would attract the 4%
duty, provided the relation is covered within the above larger list. For
instance, a gift of property to one’s brother would attract 4% duty on the gift
deed. Similarly, even for gift to the six relations if it is a gift of
commercial property / non-agricultural land, then the duty would be 4%, e.g.,
gift of an office to one’s son would attract 4% duty. Unlike section 56(2)(x),
the relatives need to be viewed in relation to the donor and not in relation to
the recipient. Hence, if a son gifts a residential house to his father, then
the gift deed would not attract a concessional duty of Rs. 200 + 1% but would
be covered by the 4% duty!

SEBI
Laws

SEBI Regulations have various ways
of dealing with relatives. The SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 which prescribe the requirements for
making an offer document for public issues, rights issues, etc., define who
constitutes a promoter group of a company making an issue. It includes the
promoter and his immediate relatives, i.e., any spouse or any parent, brother,
sister or child of the promoter or of the spouse. Thus, step-children have also
been covered.

The SEBI (Substantial
Acquisition of Shares and Takeover) Regulations, 2011 exempts any
transfer of listed shares inter se immediate relatives from the
requirements of making an open offer. The definition is the same as given
above.

On the other hand, the SEBI
(Prohibition of Insider Trading) Regulations, 2015 treats the immediate
relative of an insider as a connected person and it is defined to mean the
spouse of a person, and includes parent, sibling, and child of such person or
of the spouse, any of whom is either dependent financially on such person, or
consults such person in taking decisions relating to trading in securities.

The SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 prescribe the meaning of
an independent director for a listed company. For this purpose, a person whose
relative has a pecuniary relationship with / is a KMP of the listed company,
etc., cannot be appointed. Again, beginning 1^st April, 2020, the
Chairmen of certain listed companies cannot be related to the MD / CEO. The
definition of relative for these purposes is the same as contained in the
Companies Act, 2013. Thus, different SEBI Regulations have dual definitions
with the term immediate relative being much smaller in ambit than a relative.

FEMA
Regulations

The FEMA Regulations notified by
the RBI under the FEMA Act, 1999 use the concept of relative at various places:

a)   A
gift of shares from a resident to a non-resident requires the RBI approval and
is allowed only for gift to relatives;

b)  Individuals
resident in India are permitted to include a non-resident Indian close relative
as a joint holder in all types of resident bank accounts on ‘either or survivor’”
basis;

c)   Resident
relatives can be added as joint account holders along with the primary holder
in Resident Foreign Currency (RFC) Accounts and Non-Resident (External) / NRE
Accounts;

d)  NRIs/
PIOs can remit up to USD 1 million per financial year in respect of assets
acquired under a deed of settlement made by his / her relatives provided the
settlement takes effect on the death of the settler;

e)   An
NRI or an OCI can acquire by way of gift any immovable property (other than
agricultural land / plantation property / farm house) in India from a person
resident in India or from an NRI or an OCI who is a relative;

f)   An
NRI or an OCI may gift any immovable property (other than agricultural land or
plantation property or farm house) to an NRI or an OCI who should be a relative
of the donor;

g)  Under
the Liberalised Remittance Scheme of USD 250,000, a resident can meet the
medical expenses in respect of an NRI close relative when the NRI is on a visit
to India; maintain close relatives abroad;

h)   Under
the LRS, residents can extend interest-free loans in Indian rupees to NRI / PIO
relatives.

The definition of relatives under
the Companies Act, 2013 is adopted for all of the above purposes.

However, the FEMA Regulations have
a different definition when it comes to acquisition of immovable property
abroad. They provide that a resident can acquire immovable property abroad
jointly with a relative who is a person resident outside India, provided there
is no outflow of funds from India, and for this purpose the definition of
relative means husband, wife, brother or sister or any lineal ascendant or
descendant of that individual.

Agricultural
land laws

The Maharashtra Tenancy and
Agricultural Lands Act, 1948 seeks to govern the relationships between
tenants and landlords of agricultural lands. A person lawfully cultivating any
land belonging to another person is deemed to be a tenant if such
land is not cultivated personally by the owner. Land is said to be
cultivated personally if a (parcel of) land is cultivated on one’s own account
by labour of family members, i.e., spouse, children or siblings in case of a
joint family. A joint family is defined to mean an HUF and in case of other
communities, a group or unit the members of which are by custom joint in estate
or residence. In one case, even a married sister living with her husband has
been regarded as a part of the family – Case No. 8953 O/154 of 1954.
No land purchased by a tenant shall be transferred by him by way of sale, gift,
exchange, etc., without the previous sanction of the Collector. Rule 25A
provides the circumstances in which, and conditions subject to which, sanction
shall be given by the Collector u/s 43. One of them is for a gift in favour of
a member of the landowner’s family.

The Maharashtra Agricultural
Lands (Ceiling on Holdings) Act, 1961 imposes a ceiling on holding of
agricultural land in Maharashtra. Under section 4 of the Act, the ceiling on
the holding of agricultural lands is per ‘Family Unit’. This is a unique
and important concept introduced by the Act. It is very essential to have a
clear picture as to who is and who is not included in one’s ceiling computation
since that could make all the difference between holding and acquisition of the
land. A family unit is defined to mean the following – a person; his spouse or
more than one spouse if that be the case (thus, if a person dies leaving two or
more widows, then they would constitute one consolidated family unit for
considering the ceiling [State Of Maharashtra vs. Smt. Banabai and
Anr.(1986) 4 SCC 281]; his minor sons; his minor unmarried daughters;
and if his spouse is dead then the minor sons and minor unmarried daughters
from that spouse.

Thus, the married daughter of a
person, whether minor or major, would constitute a separate family unit and
hence any land held by such a daughter would not be included in computing the
ceiling of a person. This is the reason why many people transfer excess
agricultural land to their married daughters so as to exclude it from the
ceiling limits. Since a daughter is a relative u/s 56(2)(x) of the Income-tax
Act, the transaction is out of the purview of that section. Similarly, a
daughter is a relative under the Maharashtra Stamp Act, 1958 and hence a gift
of agricultural land to one’s married daughter attracts a concessional stamp
duty of Rs. 200 + 1% of the market value. Further, it is important to note that
a person’s parents are not included in his ceiling and hence, if either or both
of one’s parents are alive and holding land, then the same would not be
included in the person’s ceiling computation. Similarly, land held by one’s
major son and / or his wife is not included in a person’s ceiling computation.

Benami
Act

The Benami Property Transactions Act,
1988 is an Act which has gained a lot of prominence of late. Attachment orders
are being issued by the Competent Authority in respect of benami properties. In
such a situation, it becomes very important to understand what are the
exceptions to benami property. The Act provides for three situations when
property held for the benefit of relatives would not be treated as benami:

(i) Property held by a Karta, or a member of an HUF, as the case
may be, and the property is held for his benefit or the benefit of other
members in the family and the consideration for such property has been provided
or paid out of the known sources of the HUF;

(ii)  Property held by any individual in the name of his spouse / any
child of such individual and the consideration for such property has been
provided or paid out of the known sources of the individual; and

(iii) Property held by any person in the
name of his sibling or lineal ascendant / descendant, whose names and the
individual’s name appear as joint-owners in any document, and the consideration
for such property has been provided or paid out of the known sources of the
individual.

Rent
Act

The
Maharashtra Rent Control Act, 1999 defines a tenant to include, when the tenant
dies, any member of the tenant’s family who is residing with him in case of a
residential property. However, the Act does not define the term family member.
The Supreme Court in S.N. Sudalaimuthu Chettiar vs. Palaniyandavan, AIR
1966 SC 469 has defined the term family (in the context of an
agricultural land law) to mean ‘a group of people related by blood or marriage,
relatives’. Accordingly, the son-in-law was held to be a tenant since he was
residing with the tenant.

Accounting
Standards

For the purposes of the related
party definition, the Accounting Standards also give a definition of the term
relative. AS-18 on Related Party Disclosures defines it as an individual’s
spouse, child, sibling, parent who may be expected to influence or be influenced
by that individual in his / her dealings with the entity. On the other hand,
Ind AS 24 on Related Party Disclosures uses the term close members of the
family of a person and defines it to include the person’s children, spouse /
domestic partner, sibling, parent; children of that person’s spouse / domestic
partner and dependants of that person or his / her spouse / domestic partner.
Thus, the definition under Ind AS is much wider than the one found under Indian
GAAP.

IBC,
2016

The latest law to come out with its
own definition of the term ‘relative’ is the Insolvency and Bankruptcy Code,
2016 as amended by the 2018 Amendment Act. The Act provides that a relative of
a person or his spouse would constitute a related party in relation to that
person. The list of relatives included by the Code for this purpose is very
long:

(i)    members
of an HUF

(ii)    spouse

(iii)   parents

(iv)   children

(v)   grandchildren

(vi)   grandchild’s children

(vii)  siblings

(viii)  sibling’s children

(ix)   parents of either parent

(x)   siblings of either parent 

(xi)  wherever the relation is that of a son, daughter, sister or
brother, their spouses are also included in the definition of relative.

CONCLUSION