Section 56(2)(vii) – The amount received by the assessee from the HUF, being its member, is a capital receipt in his hands and is not exigible to income tax If the decisions passed by the higher authorities are not followed by the lower authorities, there will be chaos resulting in never-ending litigation and multiplication of cases

12.  Pankil Garg vs. PCIT ITAT Chandigarh; Members: Sanjay Garg (JM) and Ms Annapurna Gupta (AM) ITA No.: 773/Chd./2018 A.Y.: 2011-12 Date of order: 3^rd August, 2019; Counsel for Assessee / Revenue: K.R. Chhabra / G.S. Phani Kishore

Section 56(2)(vii) – The amount received by the assessee from the HUF, being its member, is a capital receipt in his hands and is not exigible to income tax

If the decisions passed by the higher authorities are not followed by the lower authorities, there will be chaos resulting in never-ending litigation and multiplication of cases

FACTS

For the assessment year under consideration, the AO completed the assessment of total income of the assessee u/s 143(3) of the Act by accepting returned income of Rs. 14,32,982. Subsequently, the AO issued a notice u/s 147 on the ground that the assessee has received a gift of Rs. 5,90,000 from his HUF and since the amount of gift was in excess of Rs. 50,000, the same was taxable u/s 56(2)(vii) of the Act.

In the course of reassessment proceedings, the assessee contended that the amount received by him from his HUF was not taxable and relied upon the decision of the Rajkot Bench of the Tribunal in Vineetkumar Raghavjibhai Bhalodia vs. ITO [(2011) 46 SOT 97 (Rajkot)] which was followed by the Hyderabad Bench (SMC) of the Tribunal in Biravel I. Bhaskar vs. ITO [ITA No. 398/Hyd./2015; A.Y. 2008-09; order dated 17^th June, 2015] wherein it has been held that HUF being a group of relatives, a gift by it to an individual is nothing but a gift from a group of relatives; and further, as per the exclusions provided in clause 56(2)(vii) of the Act, a gift from a relative is not exigible to taxation; hence, the gift received by the assessee from the HUF is not taxable. The AO accepted the contention of the assessee and accepted the returned income in an order passed u/s 147 r.w.s. 143(3) of the Act.

Subsequently, the Ld. PCIT, invoking jurisdiction u/s 263 of the Act, set aside the AO’s order and held that the HUF does not fall in the definition of relative in case of an individual as provided in Explanation to clause (vii) to section 56(2) as substituted by the Finance Act, 2012 with retrospective effect from 1^st October, 2009. Though the definition of a ‘relative’ in case of an HUF has been extended to include any member of the HUF, yet, in the said extended definition, the converse case is not included. In the case of an individual, the HUF has not been mentioned in the list of relatives.

The PCIT, thus, formed a view that though a gift from a member to the HUF was not exigible to taxation as per the provisions of section 56(2)(vii) of the Act, a gift by the HUF to a member exceeding a sum of Rs. 50,000 was taxable.

The PCIT also held that the decisions of the Rajkot and the Hyderabad Benches of the Tribunal relied upon by the assessee were not in consonance with the statutory provisions of sections 56(2)(vii) and 10(2) of the Act and, thus, the AO had made a mistake in not taking recourse to the clear and unambiguous provisions of section 56(2)(vii) of the Act and in unduly placing reliance on judicial decisions which were not in accordance with the provisions of law.

The order passed by the AO was held by the PCIT to be erroneous and prejudicial to the interest of Revenue and was set aside. The AO was directed to make assessment afresh.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the AO had duly applied his mind to the issue and followed the decisions of the co-ordinate Benches of the Tribunal; hence, the order of the AO cannot be held to be erroneous and, therefore, the PCIT wrongly exercised jurisdiction u/s 263 of the Act and the same cannot be held to be justified and is liable to be set aside on this score alone.

The Tribunal held that the PCIT neither had any power nor any justification to say that the AO should not have placed reliance on the judicial decisions of the Tribunal. The Tribunal held that if such a course is allowed to subsist, then there will be no certainty and finality to the litigation. If the decisions passed by the higher authorities are not followed by the lower authorities, there will be chaos resulting in never-ending litigation and multiplication of cases. The Tribunal held that the impugned order of the PCIT is not sustainable as per law.

On merits, the Tribunal, after discussing the concept of HUF and the provisions of sections 56(2)(vii) and 10(2), held that any amount received by a member of the HUF, even out of the capital or estate of the HUF cannot be said to be income of the member exigible to taxation. Since a member has a pre-existing right in the property of the HUF, it cannot be said to be a gift without consideration by the HUF or by other members of the HUF to the recipient member. The Tribunal observed that provisions of section 56(2)(vii) are not attracted when an individual member receives any sum either during the subsistence of the HUF for his needs or on partition of the HUF in lieu of his share in the joint family property. However, the converse is not true, that is, in case an individual member throws his self-acquired property into the common pool of an HUF. The HUF or its members do not have any pre-existing right in the self-acquired property of a member. If an individual member throws his own / self-acquired property in the common pool, it will be an income of the HUF; however, the same will be exempt from taxation as the individual members of an HUF have been included in the meaning of relative as provided in the Explanation to section 56(2)(vii) of the Act. It is because of this salient feature of the HUF that in case of an individual the HUF has not been included in the definition of relative in Explanation to section 56(2)(vii), whereas in the case of an HUF, members of the HUF find mention in the definition of relative for the purpose of the said section.

In view of the above discussion, the amount received by the assessee from the HUF, being its member, is a capital receipt in his hands and is not exigible to income tax.

The Tribunal allowed the appeal of the assessee.