Direct Tax (Article) Taxability of Gift received/given by HUF

Transcription

1 Direct Tax (Article) Taxability of Gift received/given by HUF The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

2 Background Gift is an important subject not only for the law makers and tax consultants but also for the general public. It is one of the most favored modes of transferring movable as well as immovable property. The tax department often look to the gift as dubious, as in several cases, the gifts are used as a tool for avoiding the tax liability. The gift tax was levied in India in the year The term 'gift' was defined in sec. 2(xii) of the Gift Tax Act, 1958 to mean 'transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth and included the transfer or conversion of any property referred to in section 4, deemed to be gift under that section'. The Finance Act, 1998 abolished the Gift Tax Act. The Finance Minister in his Budget Speech stated that revenue yield from this tax was insignificant. It was also stated that the Gift-Tax Act has also not been successful as an instrument to curb tax evasion and avoidance. However, to ensure that there are no leakages of income-tax revenue through the mechanism of gifts, the Income Tax Act, 1961 introduced sec. 56(2)(v) by Finance Act, 2004 w.e.f whereby it is made liable for tax in the hands of the recipients. The Present Law - Section 56(2)(vii) inserted by Finance (No. 2) Act, 2009 w.e.f provides that where an individual or a HUF receives, in any previous year, from any person or persons, any sum of money, without consideration, the aggregate value of which exceeds Rs. 50,000/-, the whole of the aggregate value of such sum will be chargeable to income tax under the head Income from other sources. The section also taxes the gift of any immovable property or any property, other than immovable property received without consideration or inadequate consideration where the difference between the stamp value/fair market value and the actual consideration exceeds Rs.50,000/-. However, certain exceptions are provided from the operation of this law. One such exception is that if any sum of money or any property is received from any relative, then no tax would be chargeable in the hands of the recipient. - The meaning of relative has been given in the Explanation to section 56(2) as follows:- In case of an Individual (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 descendent of the individual; (vi) any lineal ascendant or descendent of the spouse of the individual; (vii) spouse of the person referred to in clauses (ii) to (vi) In case of a HUF, any member thereof (By the Finance Act, 2012 w.r.e.f )

3 Controversies Issue No. 1 Taxability of gift received by HUF i. There is no definition of HUF in any enacted legislation. It is a legal expression, which has been used in the Indian taxation laws like the Income Tax Act and the Wealth Tax Act. Unlike a corporation, the HUF has no legal entity distinct and separate from its members. Therefore, the controversy is whether any gifts received by the HUF from Karta or its members or relative of these persons are liable to tax or not. ii. This issue has been considered by the Hon ble ITAT, Ahmadabad Bench in case of Harshadbhai Dahyalal Vaidya (HUF) Vs. ITO (2013) 144 ITD 605/88 DTR 288. In this case, pertaining to A.Y , assessee-huf received certain sum of money as gift from a relative of its Karta. The AO brought the said amount to tax under the head income from other sources by holding that the word relative defined in the Explanation annexed to section 56(2)(v) is applicable only in the case of an individual and not to the HUF. The Hon ble ITAT after examining the definition of relative concluded as under: - The definition of relative in the year under consideration i.e., A.Y is in respect of relationship by an individual donee with close relatives as defined therein. However, it is very pertinent to note that the operative section i.e., sec. 56(2)(v) is in respect of (i) individual and (ii) HUF. Meaning thereby, the legislature has clear intention to include both the status i.e., individual as well as HUF within its scope and operation. - The proviso prescribes that the charging of the gifted amount shall not apply to any sum of money received as a gift from a relative. Naturally, the proviso does not restrict to an individual but it governs individual as well as an HUF. - Therefore, since the assessee-huf has undisputedly received a gift from a relative who is an uncle of the Karta of this HUF, i.e., as per Explanation, sub clause (iv) brother or sister of either of the parents of the individual, hence falls within the category of the relative prescribed in the Act, therefore not chargeable to tax in the hands of the assessee. iii. However, Finance Act 2012 w.r.e.f has specifically provides that in case of HUF any gifts received from its member only will not be taxable. Therefore, the gift received by HUF from the relatives of its member would be taxable and the above case may not hold good. Issue No. 2 Applicability of section 64(2) on income arising from gift received by HUF from its members This section provides that where there is a transfer by individual, directly or indirectly, to the family otherwise than for adequate consideration, then notwithstanding anything contained in any other provision of this Act, the income derived from such converted property shall be deemed to arise to the individual and not to the HUF. Therefore, even when a member gives a gift to the HUF, the income arising from such gifted amount would be clubbed in the hands of the individual and such income would not be taxed in the hands of the HUF Issue No. 3 Taxability of gift given by HUF to its members In case of Vineetkumar Raghavjibhai Bhalodia Vs. ITO (2011) 58 DTR 412 (Rajkot) (Trib.), the assessee, a member of HUF received gift from its HUF. The AO held that since HUF is not covered in the definition of relative, gift received from HUF is

4 taxable. It was held that an HUF consists of all the persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall within the definition of relative as provided in Explanation to s. 56(2)(vi). Thus, an HUF is a group of relatives. Intension of the legislature as evident from a plain reading of s. 56(2)(vi) read with Explanation thereto is that gift received from relative whether from an individual relative or from a group of relatives is exempt from tax u/s 56(2)(vi). It is not expressly stated in the Explanation that the word relative connotes a single person. Sometimes a singular can mean more than one, as in this case. Therefore, the term relative explained in Explanation to s. 56(2)(vi) includes relatives. Hence, gift received by the assessee, a member of HUF, from the HUF is gift received from relatives and it is not taxable u/s 56(2)(vi). Therefore, as per this decision if any gift is given by the HUF to its member, it will not be taxable, though, under the common law gift by HUF to its member can be of only a reasonable amount as held by Supreme Court in case of R. Kuppayee Vs. Raja Gounder (2004) 135 Taxman 37 and CIT Vs. K.N. Shan Mughasundaram (1998) 232 ITR 354. Concluding Comments Gift can be an efficient tool for creation of funds of HUF. The HUF enjoys the basic exemption limit of Rs. 2 lakhs. Therefore, even when an outsider during a financial year gives the gift to be used for the family of a person exceeding Rs. 50,000/-, it though liable for tax u/s 56(2)(vii) would have no effect provided the HUF has no other source of income or else it would be taxed at a lower rate according to the slab basis.

5 Udyog has been successful in integrating itax with following ERP SAP E.C.C. 6.0 SAGE Accpac ERP 100 v 5.6 MFG-QAD eb 2.1 ABAS BPCS Adage BAAN FP 7 Oracle Updated and written by, CA P.C. Parwal pparwal@kalanico.com CA Sneha Parwal sparwal@kalanico.com Consultant to Udyog Software (India) Ltd. Visit Call us on sales@udyogsoftware.com Udyog Software (India) Ltd Phone: sales@udyogsoftware.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.