Month: August

ISSUE FOR CONSIDERATION

Section 244A(1) provides for the grant of
simple interest in cases where refund is due to the assessee – simple interest
at the rates prescribed for different circumstances and for the periods
specified in the section. No interest is payable if the amount of refund is
less than 10% of the tax as determined u/s 143(1) or on regular assessment. In
a case where the return of income is not filed by the due date specified u/s
139(1), the interest is payable for the period commencing with the date of
filing the return. Ordinarily, interest is calculated at the rate of 0.5% for
every month or part of a month. Additional interest at the rate of 3% per annum
is granted in cases where the refund due as the result of appellate or
revisional orders is delayed beyond the period of the time allowed u/s 153(5)
of the Act. The amount of interest granted gets adjusted on account of
subsequent orders which have the effect of varying the amount of refund.

Where the proceedings resulting in the
refund are delayed for reasons attributable to the assessee, wholly or in part,
the period of the delay attributable to him is excluded from the period for
which interest is payable as per the provisions of sub-section (2) of section
244A. In deciding the question as to the period to be excluded, the decision of
the Commissioner shall be final.

Often, the refund arises or its amount
increases where a claim for deduction is made after filing the return of income
by filing a revised return, or placing the claim in the assessment or appellate
proceedings. In such cases, an interesting issue arises about deciding whether
the period for which the claim is deferred can be excluded for calculation of
the interest due to the assessee. Conflicting views of the courts are available
on the subject of excluding the period or otherwise. Gauhati and a few other
high courts have taken a view that the refund can be said to have been delayed
due to the failure of the assessee in claiming the deduction in time and the
period in question should be excluded while granting the interest on refund.
The Bombay, Gujarat and the other high courts have held that such situations of
deferred claims cannot be held to reduce the period for which the interest is
otherwise allowable to the assessee under
sub-section (1).

THE ASSAM ROOFING LTD. CASE

The issue came up for consideration in the
case of Assam Roofing Ltd. vs. CIT, 11 taxmann.com 279
(Gauhati). In that case the assessee filed its return of income on 31^st
December, 1992 for the assessment year 1991-92, including the receipt of the
transport subsidy in the total income. In the note it was claimed to be a
capital receipt, though during the assessment proceedings completed on 16^th
May, 1994 u/s 143(3) no separate representation was made by the assessee
claiming that subsidy was not taxable. An appeal was filed against the
assessment order for contesting the addition on account of the said subsidy
which was decided in its favour by the Commissioner (Appeals) by an order dated
27^th October, 1994 directing that the transport subsidy amounting to
Rs. 98,79,266 be deleted from the total income. The AO passed an order dated 13^th
December, 1994 to give effect to the appellate order, deleting transport
subsidy amounting to Rs. 98,79,266. He also allowed interest u/s 244A on the
amount of refund that was found due to the assessee as a result of the
appellate order for a period of 33 months, i.e., from 1^st April,
1992 to 13^th December, 1994.

Subsequently, in the rectification
proceedings, the AO held that the grant of refund was delayed for reasons
attributable to the assessee and, as a consequence, interest on refund was held
to be payable only for a period of eight months, that is, from 16^th
May, 1994 (date of completion of assessment) to 13^th December, 1994,
that is, the date of order giving effect to the appellate order. The appeal by
the assessee against the order reducing the interest was allowed by the
Commissioner (Appeals) and his order was confirmed by the Tribunal. The
following substantial question of law was raised: ‘Whether on the facts and
in the circumstances of the case, the Tribunal was justified and correct in
allowing interest u/s 244A of the Income-tax Act, 1961 to the assessee for the
period of delay in granting refund of tax where such delay is due to reasons
attributable to the assessee?’

The Revenue contended that the assessee had
voluntarily included the amount received on account of transport subsidy as
taxable income and on the said basis the assessment was made; at no point of
time in the course of the assessment proceedings had the assessee taken the
stand that the amount received on account of transport subsidy was not taxable;
the issue was raised by the assessee only in the appeal filed before the
Commissioner (Appeals) which was disposed of by the order dated 27^th October,
1994; thereafter, on 13^th December, 1994 the amount of transport
subsidy earlier included in the taxable income of the assessee was deleted and
orders were passed for the refund.

Relying on the provisions of section 244A(2)
of the Act, it was contended that the payment of refund was made at the
particular point of time only because of the conduct of the assessee in not
raising the said issue at any earlier point of time and the payment of refund, therefore,
got delayed for reasons attributable to the assessee; consequently, the
assessee was not entitled for interest for the period for which he was at
fault.

In reply the assessee contended that the
provisions of Chapter XIX of the Act made it abundantly clear that the grant of
refund was not contingent on any application of the assessee and such refund
u/s 240 of the Act was consequential to any order passed in an appeal or other
proceedings under the Act; no claim for refund was required to be lodged; the
provisions of section 244A(2) of the Act had no application to the case
inasmuch as the refund was consequential to the appellate order, no proceeding
for refund could be visualised so as to hold the assessee responsible for any
delay in finalisation of such a proceeding.

Relying on the decision in Sandvik
Asia Ltd. vs. CIT, 280 ITR 643, it was contended by the assessee that
there was a compensatory element in the interest that was awardable u/s 244A of
the Act and that such interest mitigates the hardship caused to the assessee on
account of wrongful levy and collection of tax. Reliance was also placed on the
decision of the Punjab and Haryana High Court in the case of National
Horticulture Board vs. Union of India, 253 ITR 12 to contend that interest
on refund was automatic and consequential and did not depend on initiation of a
proceeding for refund or on raising a claim for refund, as the case may be.

Section 244A of the Act, the Court observed,
contemplated grant of interest at the specified rate from the first day of
April of the assessment year to the date on which refund was granted in case of
payments of tax as contemplated by sub-clauses (a) and (b) of sub-section (1).
It further noted that under sub-section (2) of section 244A if the ‘proceedings
resulting in the refund’ were delayed for reasons attributable to the assessee,
no interest was to be awarded for the period of such delay for which the
assessee was responsible. Significantly, the Court took note of the expression ‘proceedings
resulting in revision (to be read as “refund”)’ appearing in sub-section
(2) of Section 244A to hold that the scope of section 244A(2) was not limited
to the cases of sections 238 and 239 but covered the cases of the refunds
arising on account of any order under the scheme of the Act; the expression
‘proceeding’ referred to in sub-section (2), more reasonably, would mean any
proceeding as a result of which refund had become due; viewed thus, the
expression ‘proceeding’ might take within its ambit an appeal proceeding
consequential to which refund had become due. The Court supported its decision
by relying on the decision of the Punjab and Haryana High Court in the
National Horticulture Board case (supra).

The Court in
deciding the issue noted the fact that the assessee itself declared the amount
of transport subsidy received by it to be taxable and voluntarily paid the tax
and no claim to the contrary was raised in the course of the assessment
proceeding; it was only in the appeal filed that the issue was raised and was
allowed by the Commissioner (Appeals) and a consequential refund was granted.

The Court ruled that in the above
circumstances, it could not but be held that the assessee was responsible for
the delay in grant of refund and it would be correct to hold that the interest
was payable only with effect
from 16th May, 1994 till the date of payment of the refundable amount.

The Gauhati High Court allowed the appeal of
the Revenue and reversed the order of the Tribunal by holding that the delay in
grant of refund was attributable to the assessee and as a consequence the
period for which interest on refund was to be granted required to be reduced.

MELSTAR INFORMATION TECHNOLOGIES LTD. CASE

The issue recently arose in the case of the CIT
vs. Melstar Information Technologies Ltd., 106 taxmann.com 142 (Bom.).
In this case, the assessee had not claimed certain expenditure before the AO
but raised such a claim before the Tribunal which remanded the proceedings to
the Commissioner (Appeals) who allowed the claim of expenditure. The deduction
so allowed resulted in a refund of taxes paid and it is at that juncture that
there arose the question u/s 244A of payment of interest on such refund.

It appears that there was a dispute about
the period for which the interest was to be granted to the assessee, or about
the eligibility of the assessee to interest. The AO seemed to be of the view
that no interest was payable to the assessee for the reason that the delay in
granting the refund was entirely attributable to the assessee inasmuch as he
had delayed the claim for deduction. The AO, while granting refund, seemed to
have denied the interest by relying on the provisions of section 244A(2) after
taking the approval of the Commissioner. The Tribunal, on an appeal by the
assessee, held that an appeal was maintainable against the order refusing the
interest on refund and further held that the delay could not be held to be
attributable to the assessee and, therefore, the Tribunal directed the payment
of interest.

The Revenue, aggrieved by the order of the
Tribunal had raised the following question for the Court’s consideration: ‘Whether
on the facts and circumstances of the case and in law, the ITAT has erred in
law in assuming jurisdiction to hear the appeal when no such appeal lies before
the ITAT or before CIT(A) because as per the provisions of Section 244A(2) of
the Income Tax Act, decision of CIT is final as held by Kerala High Court in
the case of Kerala Civil Supplies 185 taxman 1?’

The Court noted that the issue pertained to
interest payable to the assessee u/s 244A of the Act where the Revenue did not
dispute the assessee’s claim of refund and its eligibility to interest thereon
in ordinary circumstances. However, since the delay in the proceedings
resulting in the refund was attributable to the assessee, by virtue of
sub-section (2) of section 244A of the Act the assessee was not entitled to
such interest.

The Court observed that there was no
allegation or material on record to suggest that any of the proceedings were
delayed in any manner on account of reasons attributable to the assessee and
therefore the Tribunal was correct in allowing the interest to the assessee.

The Court, in deciding that there was no substantial
question of law involved in the appeal of the Revenue, relied on the decision
in the case of Ajanta Manufacturing Ltd. vs. Deputy CIT, 391 ITR 33
(Guj.) wherein a similar issue was considered. In that case, the
assessee had made a belated claim for deduction during assessment on filing a
revised return of income, and the Revenue had denied the interest by
attributing the delay in grant of refund to the assessee on applying the
provisions of sub-section (2) of section 244A of the Act. The Court noted with
approval the following observations of the said decision:

“16. We would also examine the order
of the Commissioner on merits. As noted, according to the Commissioner the
assessee had raised a belated claim during the course of the assessment proceedings
which resulted into delay in granting of refund and therefore, the assessee was
not entitled to interest for the entire period from the first date of
assessment year till the order giving effect to the appellate order was passed.
We cannot uphold the view of the Commissioner. First and foremost requirement
of sub-section (2) of Section 244A is that the proceedings resulting into
refund should have been delayed for the reasons attributable to the assessee,
whether wholly or in part. If such requirement is satisfied, to the extent of
the period of delay so attributable to the assessee, he would be disentitled to
claim interest on refund. The act of revising a return or raising a claim
during the course of the assessment proceedings cannot be said to be the
reasons for delaying the proceedings which can be attributable to the assessee.
(The) mere fact that the claim came to be granted by the Appellate Commissioner
would not change this position. In essence, what the Commissioner (Appeals) did
was to allow a claim which in law, in his opinion, was allowable by the
Assessing Officer. In other words, by passing order in appeal, he merely
recognised a legal position whereby the assessee was entitled to claim certain
benefits of reduced tax. Surely, the fact that the assessee had filed the
appeal which ultimately came to be allowed by the Commissioner, cannot be a
reason for delaying the proceedings which can be attributed to the assessee.

17. The Department does not contend that
the assessee had needlessly or frivolously delayed the assessment proceedings
at the original or appellate stage. In absence of any such foundation, (the)
mere fact that the assessee made a claim during the course of the assessment
proceedings which was allowed at the appellate stage would not ipso facto imply
that the assessee was responsible for causing the delay in the proceedings
resulting into refund. We may refer the decision of the Kerala High Court in
case of CIT vs. South Indian Bank Ltd., reported in (2012) 340 ITR 574 (Ker)
in which the assessee had raised a belated claim for deduction which was
allowed by the Commissioner (Appeals). The Revenue, therefore, contended that
for such delay, interest should be declined under Section 244A of the Act. In
the said case also, the assessee had not made any claim for deduction of
provision of bad debts in the original return. But before completion of the
assessment, the assessee had made such a claim which was rejected by the
Assessing Officer. The Commissioner allowed the claim and remanded the matter
to the Assessing Officer. Pursuant to which, the assessee became entitled to
refund. Revenue argued that the assessee would not be entitled to interest in
view of Section 244A(2). In this context, the Court held in Para. 6 as under
(page 578 of 340 ITR):

‘6.
Sub-section (2) of section 244A provides that the assessee shall not be
entitled to interest for the period of delay in issuing the proceedings leading
to the refund that is attributable to the assessee. In other words, if the
issue of the refund order is delayed for any period attributable to the
assessee, then the assessee shall not be entitled to interest for such period.
This is of course an exception to clauses (a) and (b) of section 244A(1) of the
Act. In other words, if the issue of the proceedings, that is, refund order, is
delayed for any period attributable to the assessee, then the assessee is not
entitled to interest for such period. Further, what is clear from sub-section
(2) is that, if the officer feels that delay in refund for any period is
attributable to the assessee, the matter should be referred to the Commissioner
or Chief Commissioner or any other notified person for deciding the issue and
ordering exclusion of such periods for the purpose of granting interest to the
assessee under section 244A(1) of the Act. In this case, there was no decision
by the Commissioner or Chief Commissioner on this issue and so much so, we do
not think the Assessing Officer made out the case of delay in refund for any
period attributable to the assessee disentitling for interest. So much so, in
our view, the officer has no escape from granting interest to the assessee in
terms of section 244A(1) (a) of the Act’.”

OBSERVATIONS

The issue under consideration revolves in a
narrow compass; whether the claim for deduction, made subsequent to the filing
of return of income, can be held to be attracting the provisions of sub-section
(2) of section 244A for excluding the period of delay in claiming the deduction
from the period for which interest is granted u/s 244A on the amount of refund
that has resulted or has increased due to the grant of deduction pursuant to
the delayed claim.

The relevant sub-section reads as under: (2)
If the proceedings resulting in the refund are delayed for reasons
attributable to the assessee, whether wholly or in part, the period of the
delay so attributable to him shall be excluded from the period for which
interest is payable under sub-sections (1) or (1A), and where any question
arises as to the period to be excluded, it shall be decided by the Principal
Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner whose decision thereon shall be final.

The requirement of sub-section (2) is that
the proceedings resulting into refund should have been delayed and the delay
should be for the reasons attributable to the assessee. Only where such
requirement is satisfied, the interest relating to the period of delay so
attributable to the assessee would be denied.

On a careful reading of the provision of
sub-section (2) it is gathered that the said provisions are attracted only in
cases where the twin conditions are cumulatively satisfied: the proceedings
resulting into refund have been delayed, and further that the delay is for
reasons that are attributable to the assessee. Non-satisfaction of any one of
the conditions would not disentitle the assessee from the claim of interest on
refund; for this purpose it may be essential to appreciate the contextual
meaning of the term ‘proceedings’. Can the acts of filing the revised return or
claiming the reliefs in assessment or appellant proceedings be construed to be
‘proceedings’ for attracting the provisions of sub-section (2)? May be not. The
proceedings referred to in sub-section (2) should, in our opinion, mean and
co-rate the proceedings in respect of assessment or adjudication of appeals and
it is here that the assessee should be found to have delayed such proceedings
in any manner for disentitling him from the claim of interest.

Revising the return or placing the claim
during such proceedings cannot be considered to be part of proceedings
resulting in refund. It is essential that the proceedings in question should
further result in refund. Only assessment, rectification, revision or appellate
proceedings can be considered to be proceedings that result in refund. It is
such proceedings that should have been delayed and not the claim of deduction
or refund, and further the delay in such proceedings should be attributable to
the assessee. It is for these reasons some of the Courts have given emphasis to
ascertain whether the assessee had contributed to delay the assessment
proceedings on frivolous grounds without placing their analysis of provisions
in so many words in the orders.

Our understanding is further strengthened by
the amendments of 2016 for insertion of clause “a” in sub-section (1) of
section 244A with effect from 1^st June, 2016 to provide that the
interest would be paid for the period commencing from the date of filing of
return of income where such return is filed outside the due date prescribed u/s
139(1). In the absence of such an amendment, interest could not have been
denied to the assessee for the delay in filing the return of income as was held
by some of
the Courts.

The Court in the Assam Roofing Limited
case rightly held that the meaning of the term ‘proceedings resulting in
refund’ was not limited to cases of sections 238 and 239 of the Act but also
cover the other cases of refund and would include any proceedings resulting in
refund and such proceedings also included the appellate proceedings. Having
held that, the Court failed in appreciating that the assessee was not
responsible for delaying any of the proceedings that resulted in refund or said
to have been delayed. Instead, the Court held that the act of filing the claim
in the appellate proceedings was to be construed as an act of delaying the
proceedings that resulted in refund. It therefore held that putting a claim at
the appellate stage was responsible for delay in grant of refund and therefore
the interest for the period up to the date of putting the claim was not
allowable. It is respectfully submitted that this was a classic case of missing
the wood for the trees; the case where the Court was preoccupied with the delay
in placing the claim for deduction, overlooking the important fact that what
was relevant for the application of sub-section (2) was delay in the proceeding
and not the delay in grant of refund as a consequence of the delayed claim. It
might be that the assessee was responsible for making belated claim but
certainly not delaying
the proceedings.

It is required to be appreciated that the
interest is the consequence of payment of excess tax. Accordingly, once excess
tax is found to have been paid at whatever stage, the tax was required to be
refunded. And as a consequence interest was bound to be paid unless the
assessee is shown to be responsible for delaying the proceedings and not the
refund. Putting a delayed claim for the deduction, otherwise allowable under
the Act, under no circumstances could be construed as an act of delaying the
‘proceedings’, when it was otherwise the duty of the authorities to compute the
correct total income by allowing all deductions that were allowed under the Act
and simultaneously excluding all such receipts that were required to be
excluded. (Please see circular No. 26 dated 7^th July, 1955.)

The act of revising a return or raising a
claim during the course of the assessment proceedings cannot be said to be part
of the proceedings for refund and cannot also be said to be the reasons for
delaying the proceedings which can be held to be attributable to the assessee.
This understanding will not change on account of the claim for deduction
outside the return of income. What happens on allowing the claim is something
which is otherwise required to be allowed as per the law by the AO. In other
words, by passing an order he merely recognises a legal position whereby the
assessee is entitled to claim certain benefits of reduced tax. Surely, the
claim in the proceedings ultimately resulting in refund cannot be construed as
an act of delaying the proceedings that can be attributed to the assessee. In
the absence of any finding that the assessee was responsible for delaying the
proceedings, the mere fact that the assessee made a claim during the course of
the assessment proceedings which was allowed at the appellate stage would not ipso
facto imply that the assessee was responsible for causing the delay in the
proceedings that resulted into refund.

In the case of Ajanta Manufacturing
Limited, 72 taxmann.com, 148 (Guj.), the assessee company had included
the receipt of subsidy in total income and paid tax thereon while filing the
return of income. During the course of assessment, a claim was made under a
letter for excluding the subsidy for receipt from income. The claim of the
assessee was allowed in appeal by the Commissioner (Appeals) and the reduction
in income resulted in refund. In deciding the period for which the interest
should be allowed for such refund, the High Court held that the disabling
provisions of sub-section 2 and section 244A were not attracted in the facts of
the case and the interest should be granted for the full period as per the
provisions of section 244(1) of the Act.

In the case of Sahara India Savings
& Investments Corporation Limited, 38 taxmann.com 192 (All.) the
refund was not granted for not filing TDS certificates with the return of
income. Subsequently, the refund became due on filing of the certificates;
while the refund was granted, the interest thereon was denied on the ground
that the refund was delayed due to non-filing of TDS certificates with the
return of income. The Allahabad High Court held that a delay in application for
refund could not be construed as a delay attributable to the assessee and the
provisions of sub-section (2) were not attracted in the facts of the case.

In the case of Larsen & Toubro,
330 ITR 340 (Bom.), again in the circumstances where the TDS
certificates were not filed with return of income, the Court upheld the order
of the Tribunal holding that interest u/s 244A could not be denied only on the
ground that certificates were not filed with the return of income.

The Supreme Court in the case of H.E.G.
Limited, 334 ITR 331 (SC), held that interest was payable to the
assessee u/s 244A for withholding of the refund by the AO on account of denial
of credit for TDS.

The Punjab and
Haryana High Court in the case of National Horticulture Board, 253 ITR 12
(P&H), held that the interest u/s 244A could not be denied on the
ground of the delayed application for refund of the taxes paid.

In the case of South Indian Bank
Limited, 340 ITR 574 (Ker.), the Commissioner (Appeals) had allowed the
related claim for deduction. The interest on resulting refund was denied by the
income tax authorities on the ground of the delayed claim for deduction which
was made, outside the return of income, in the assessment proceedings. The
Kerala High Court held that the AO had no escape from granting interest to the
assessee.

The Kerala High Court, in the case of Pala
Marketing Co-Op. Society Limited, 79 taxmann.com 438 (Ker.), however,
held that the assessee was not entitled to interest on refund where he had
delayed the filing of return of income even where such delay was condoned
following its own decision in the case of M. Ahammadkutty Haji, 288 ITR
304. However, the Rajasthan High Court in the case of Dariyavie
Singh Karnavat, 18 taxmann.com 180, held that the interest was payable
in similar circumstances ignoring the decision of the Kerala High Court in the M.
Ahammadkutty case cited before
the Court.

Interestingly, the Karnataka High Court in
the case of Dinakar Ullal, 323 ITR 452 (Kar.), ruled out the
application of circular No. 12 dated 30^th October, 2003 and circular
No. 13 dated 22^nd December, 2006 issued by CBDT. In granting the
interest on refund due on an application for condonation of delay in claiming
the refund of taxes paid, the said circulars provided that no interest on
refund should be granted in cases where the delay in application of refund was
favourably condoned.

Recently, the Bombay High Court in the case
of State Bank of India in ITA No. 1218 of 2016 held that interest
on refund could not be denied in a case where the refund arose on account of
the claim for deduction made during the assessment proceedings… following its
own decision in the case of Chetan M. Shah, 53 taxmann.com 18.

The better view appears to be the
one in favour of granting interest for the full period commencing from the
first day of the assessment year to the date of the grant of refund.

shailesh.kwebmaker

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 1^st 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)[1].
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[2]
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.

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