Gift received from HUF is not taxable

Gifts received by taxpayers is taxable under the Income Tax Act ['the Act'] in case the same is received from non-relatives and is in excess of Rs 50,000. Relatives have been defined under the relevant provisions of the Act to include spouse, brothers, sisters, parents, grandparents, and spouse of all of these relatives. It is interesting to note that a Hindu Undivided Family (HUF) is not expressly included in the above definition of relatives. Will any gift received by a taxpayer from his HUF be then taxable under the Act? Let's check in this week's case.

A taxpayer filed his return of income for the assessment year 2011-12 on March 9, 2012, declaring a total income of Rs 14.32 lakh. The assessment was completed by the tax officer on the basis of the return filed without any additions. However, the case was reopened on the ground that the taxpayer had received during the year a gift of Rs 5.90 lakh from his HUF. As the gift received was in excess of Rs 50,000, the taxman was of the view that the same is taxable as income from other sources. The taxpayer argued that there are judicial precedents wherein it has been held that HUF to an individual is nothing but a gift from a group of relatives and hence this gift is not taxable. The taxman, however, was of the view that although the definition of a relative in case of HUF has been extended to include any member of the HUF by way of an explanation in Budget 2012, the said definition has not expressly mentioned HUF in the list of relatives for an individual.

When the matter came up for hearing before the Chandigarh Tax Tribunal, the taxpayer also argued that as the money received is out of the income of HUF, the same is also exempt under the provisions of section 10 of the Act. The Tribunal observed that as long as the taxpayer is a member of the HUF and he receives any sum from the HUF, even if the same is out of income of the earlier years, and not the current year, then too, the income received shall be exempt u/s 10 and thus held that the taxpayer is not liable to pay tax on the amount of Rs 5.90 lakh.

Further, the Tribunal addressed the specific observation made by the taxman that a HUF cannot be regarded as a relative of an individual. The Tribunal observed that although a HUF is defined as a separate taxable entity under the Act, HUF is not defined anywhere under the Act. A HUF is not created for any business purposes, rather, it is a normal condition of the Hindu society and prevalent throughout India based on social necessity. The Hindu law does not recognise a HUF as a separate entity from the members of the family, thus making the HUF collectively owned by its members.

The Tribunal further commented that unlike a partnership firm engaged in business, members of the HUF do not have any definite share in the estate of the HUF nor is any member entitled to any share in the profits of the HUF, if it is engaged in business. As HUF income is literally one common income pool of the family, amounts received by a member of HUF cannot be said to be income liable to taxation. Also, every member has the pre-existing right in the property of HUF, amount received from HUF cannot be said to be a gift without consideration by the HUF or by members of HUF to that member. Hence, the relevant provisions that bring a gift to tax won't be applicable to members receiving sums from HUF.

However, when a member converts his individual property as HUF property, it cannot be said to be exempt as other members don't have a pre-existing right in the individual member's property. Hence, the amendment in the definition was provided to include HUF in the definition of a relative, so as to exempt such receipts by HUF from taxation. The Tribunal opined that it is because of this salient feature of HUF, that in the case of individuals, HUF has not been expressly included in the definition of relatives.

The Tribunal thus ruled this case in favor of the taxpayer.

The writer is a Sebi registered investment adviser