Gift given by HUF to its Member is Considered as Income of Member?

Any person receives Gift from any other person, would be consider as income of the recipient as per section 56(2)(x) with certain exemptions. Section 56(2)(x) was inserted by Finance Act 2017 w.e.f.1st April, 2017 read as under:

Where any person receives, in any previous year, from any person or persons on or after 1st day of April 2017.-

(a) any some of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such some;

(b) any immovable property…..

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

 (i)  the amount of fifty thousand rupees; and

(ii)  the amount equal to five per cent of the consideration:

Gift from any relative : Gift received from Relatives is fully exempted from the levy of tax and no income tax would be levied on such Gifts. To remove any confusion regarding the classification of Relatives, the Income Tax Act has very clearly laid down that in case of individual, only the following will be treated as relative for the purpose of claiming exemption:

  • Spouse of the Individual
  • Brother or Sister of the Individual
  • Brother or Sister of spouse of the Individual
  • Brother or Sister of either of the parents of the Individual
  • Any Linear ascendant or descendent of the Individual
  • Any Linear ascendant or descendent of the spouse of the Individual
  • Spouse of the person mentioned above [w.e.f. 01.04.2021]

In case of HUF, all members would be considered its relative.

But as per Section 64(2), the income earn from this gifted property will be considered as income of  Donor. This is known as clubbing of income.

In this matter there are various judgments as under:

Veenitkumar Raghavjibhai Bhalodia Vs. I.T.O.5(4) Rajkot ITA No 583 and 601/Rjt/2008 Asst.Yr. 2005-06 Ahd. Tribunal. Dated 17/05/2011

Brief fact is as under:

The assessee has accepted gift  from Raghavjibhai Bhanjibhai Patel (Bhalodia) HUF. The A.O. was of the view that HUF is not covered in the definition of “ relative “ therefore HUF was held to be taxed.

The CIT(A) confirmed the view of A.O.

Tribunal has observed that, though for taxation purpose, an HUF is considered as a single unit, rather an HUF is a “group of relatives”  as it is formed by the relatives. Therefore in considered view, the ‘ relative’ explained in Explanation to section 56(2)(vi) of the Act includes “relatives” and the assessee has received gift from his HUF which is “a group of relatives”, the gift received by the assessee from the HUF should be interpreted to mean that gift was received from the ‘relatives” therefore the same is not taxable under section 56(2)(vi) of the Act.

Gyanchand M. Bardia Vs. The Income Tax Officer (ITAT Ahmedabad) Appeal No 1072/Ahd/2016 Asst.Yr. 2012-13 Dated 21/02/2018

In this case the fact was same as in the case of Rajkot Tribunal, but the observations of members are different. Their observation was,

As per the provisions of the Act, gift from HUF to any member of the HUF is not exempt from taxable income. It is other way that the gift from member to the HUF is exempt from tax. The appellant contended that it is implied when gift from member to HUF is exempt from tax, same way gift from HUF to member is also tax free. But the appellant forgets the difference that the Karta of the HUF manages the affairs of the HUF as trustee of the HUF on behalf of other members. When the Honorable Parliament brought amendment to the statute declaring gift from member to HUF is tax free, but it was not considered proper to make gift from HUF to member as tax free.

Both the cases are pending at high Court, wait and watch.