IS INCOME TAX APPLICABLE ON THE GIFT MADE BY THE HUF TO KARTA

 INTROUCTION

 

Hindu Undivided Family As The Name Suggest Is A Structure Of Family Which Exist In Hindu Community. It Is Vital To Understand Here That A Hindu Joint Or Undivided Family Is Not Created For Any Business Purposes, Rather, It Is A Normal Condition Of Hindu Society And Prevalent Throughout India Based On The Social Necessity. An HUF Cannot Be Created Under A Contract, It Is Created Automatically. An HUF Is A Family Set-Up Which Consists Of All Persons Lineally Descended From Common Ancestor And It Also Includes Wives And Unmarried Daughters Of Male Descendant. It Also Includes Minor Children. An Undivided Family Is A Normal Condition Of A Hindu Society Which Is Ordinarily Joint Not Only In Estate But Also In Food And Worship.

 Karta Is The Generally The Oldest Male Member Of The Family. But, A Celebrated Judgment Pronounced By The Hon’ble Delhi High Court In The Case Of Mrs. Sujata Sharma V Shri Manu Gupta & Ors.  [CS (OS) 2011/2006], Has Held That The Eldest Woman Member Of A Mitakshara Hindu Undivided Family (HUF) Can Be Its “Karta / Manager”.

 It Is Vital To Understand That The Position Of A Karta Is Sui Generis. A Position Of Karta To The HUF Is Not Of A Partner, Trustee, Manager, Principal, Agent, It Is Needless To Say That He Is The Head Of The HUF And His Position Is Unique. While The Title Of The Karta Is Reserved For The Oldest Member Of The Family, The Rest Of The Members Are Called Coparceners. The Term Hindu As Defined Under The Hindu Succession Act, 1956 Gives An Inclusive Definition To Hindu And Includes, Inter Alia, Buddhist, Jain Or Sikh By Religion. Therefore, Even Jain, Buddhist And Sikh Families Can Have HUFs.

 

HOW HUF IS CREATED?

 

An HUF Cannot Be Created By Executing A Deed Like Partnership. An HUF Is A Creation Of Law. An HUF Will Be Created And Come Into Existence After Marriage As Soon As A Child Is Born. Existence Of Property Or Multiple Members Is Not A Pre-Requisite To Create HUF. A Family Which Does Not Own Any Property May Still Have The Character Of Hindu Joint Family. This Jointness Is Understood In Terms Of Faith And Food. This Is Because In The Hindu Society, There Is A Presumption That Hindu Families Are Living In A State Of Union Unless The Contrary Is Established.

 It Is Worth Mentioning That The Hindu Law Has Developed A Lot Over The Period Of Time. Now, Even The Concept Of Adoption Is Widely Recognised In The Hindu Law. A Person Can Also Be Introduced To The HUF Through Adoption. [CIT Vs. M.M. Khanna (1963) 49 ITR 232 (Bom)].

 

HUF UNDER INCOME TAX

 

Under Income Tax Act, A Tax Can Only Be Exigible On “Person” As Defined Under Sec 2(31) Of The Act. An HUF Falls Under The Definition Of “Person” As Enumerated In The Act And Therefore, It Is Treated As A Separate Entity For The Purpose Of Tax Assessment. This Gives An Added Cushion For Tax Relief To A Joint Family.  Suppose, A Family Consists Of 10 Members Then Income Earned Shall Be Paid By 10 People, But If The Family Is A HUF Under The Eyes Of Law Then Income Earned Will Be Paid By 11 Persons Bringing Down A Tax Liability To Some Extent.

 In Income-Tax Officer V. Bachu Lal Kapoor [1966] 60 ITR 74, 80 (SC), K. Subba Rao J. Observed :

 “That Apart, Under Section 3 Of The Act, In The Matter Of Assessment, There Is No Question Of Any Election Between A Hindu Undivided Family And A Member Thereof In Respect Of The Income Of The Family. If A Hindu Undivided Family Exists, Under Section 3 Of The Act The Income-Tax Officer Has To Assess It In Respect Of Its Income. Indeed, Under Section 14(1) Of The Act, Any Part Of Income Received By Its Members Cannot Be Assessed Over Again. While Section 3 Confers An Option On The Income-Tax Officer To Assess Either The Association Of Persons Or The Members Of The Association Individually, No Such Option Is Conferred On Him Thereunder In The Case Of A Hindu Undivided Family, As Its Existence Excludes The Liability Of Its Members In Respect Of The Income Of The Former Received By The Latter.”

It Is Pristinely Clear That An HUF Is A Separate Entity Different From Its Coparcener Including Karta, Under Sec 2(31) Of The Act.

 The Tax Slab For The HUF And An Individual Is Same. It Is Important To Understand That The An HUF Can Be Formed Be Two Members Also. But, To Be Taxed Under The Act There Shall Be At Least Two Coparceners. A Coparcenary Is Must To Be Assessable Under The Act. There Is A Key Difference Between A Member And A Coparcener. All Coparcener Are Members But All Members Are Not Coparcener. Member Term Is Much Wider Then Coparcener. The Key Difference Between Coparcener And Member Is That A Coparcener Has A Right To Claim Partition Whereas A Member Has No Right To Claim For Partition.

 

CHARACTERISTICS OF COPARCENERY

 

A Hindu Coparcenery Has Following Essential Characteristics As Under According To CED V. Alladi Kuppuswamy (1977) 108 ITR 439 (SC):

 

1. The male descendants as well as female descendants after the Succession (Amendment) Act, 2005, up to the third generation acquire an independent right of ownership by birth and not representing their ancestors. After the commencement of Hindu Succession (Amendment) Act, 2005, a daughter of a coparcener shall have the same right in the coparcenary as she would have had if she had been a son.

 

2. The members of the coparcenary have the right to work out their rights by demanding partition.

 

3. Until partition, each member has got ownership extending over the entire property co-jointly with the others and so long as no partition takes place, it is difficult for any coparcener to predict the share which he might receive.

 

4. As a result of such co-ownership, the possession and enjoyment of the property is common.

 

5. There can be no alienation of the property without the concurrence of the other co-parceners unless it is to be for legal necessity.

 

6. The interest of a deceased member lapses on his death and merges in the coparcenary property.

 

Now, When The Coparcener And HUF Are Two Different Entity Then How Taxation Will Work If There Is A Gift By An HUF To Its Coparcener/Karta. Let Us Analyse It In Detail.

 

To Answer The Question As To What Will Be Tax Implication When An HUF Gifts To Its Coparcener/Karta, It Is Important To Understand What All Assets Can Be Possessed By An HUF In The First Place. If An HUF Has Some Asset Then Only It Can Gift To Coparcener/Karta. There Is A Difference Between An Assets Of An HUF And Asset Of Coparceners. A Personal Asset Earned By A Coparcener By Utilising His Own Skills And Knowledge Will Not Form A Part Of HUF Property.

 

WHAT COMPRISES INCOME OF AN HUF?

 

For An HUF, The Income Sources Are Almost Similar To Individual Taxpayers Such As Profits From Business Or Profession, Income From House Property, Capital Gains, Income From Other Sources And So On. Even Though Under The Act, An HUF Is A Person And Further Has A Separate Entity And Existence Other Than The Coparceners, But Still It Cannot Earn Income From Salary. Further, All Income That Arises On The Investment Of The HUF’s Funds And Utilisation Of Its Assets Is Regarded As Income And Is Separately Assessed And Taxed.

 

Therefore, An HUF Has Ample Opportunity To Earn Income. The Income From Property Of HUF Can Be Further Invested In Instruments Such As Shares, Mutual Funds, Etc. ,And Will Be Assessed Under HUF. This In Turn Will Be Added To The Wealth Of The HUF.

 

ASSETS RECEIVED IN THE FOLLOWING SITUATIONS WOULD BE REGARDED AS THE ASSETS OF AN HUF:

 

·         Assets Received On The Partition Of A Larger HUF Of Which The Coparcener Was A Member (Like An HUF In Which The Coparcener’s Father Or Grandfather Was The Karta).

·         Assets Received As Gifts By The HUF. Such Gifts Could Be Received From Close Relatives Or Close Friends.

·         Assets Bequeathed By A Will That Specifically Favours The HUF. In The Absence Of A Will, Assets Received On The Death Of A Benefactor After 1956 (When The Hindu Succession Act Came Into Force) Would Not Be Regarded As HUF Property, But As Individual Property Even Though Such Assets Have Been Inherited.

 

The Above Enumerated Instances Are Only A Glimpse. There Can Be Umpteen Number Of Situations In Which An HUF Can Hold Asset. Assets Can Be Transferred By A Coparcener To The HUF Also.

 

PROPERTIES WHICH ARE GENERALLY ACCEPTED AS JOINT FAMILY PROPERTY:

1. Ancestral property;
2. Property allotted on partition;
3. Property acquired with the aid of joint family property;
4. Separate property of a co-parcener, blended with the family property. The provisions of S.64 (2) of the I.T. Act have superseded the principles of Hindu Law, in a case where the co-parcener impresses his property with the character of joint family property.

A Female Member Cannot Pool In Her Property With The Joint Family Property. However, She Can Make A Gift Of It To The HUF As Was Held In Puspadevi Vs. CIT 109 I.T.R. P. 730 (SC). A Female Member May Also Bequeath Her Property To An HUF– C.I.T. Vs. G.D. Mukim, 118 I.T.R. P. 930 (P&H).

 

ONCE THE ANSWER TO QUESTION WHETHER AN HUF CAN HOLD PROPERTY OR NOT IS AFFIRMATIVE THEN ARISES ANOTHER QUESTION AS TO WHETHER AN HUF CAN GIFT TO ITS KARTA.

 

Any Gift Received By A Taxpayer Is Exigible To Tax Under The Act. But, There Is A Rider To It. Gifts Up To Rs. 50,000/- In A Financial Year Are Exempt From Tax. A Gift May Include Cash, Gold, Real Estate Or Any Other Valuable Items. However, If A Taxpayer Receives A Gift Higher Than Rs. 50,000/- Then The Entire Gift Will Be Exigible To Income Tax. This Is Provided Under Sec 56 Of The Act.

 

FROM THE TAXATION POINT OF VIEW, GIFT CAN BE CLASSIFIED AS FOLLOWS:

1. Any sum of money received without consideration, it can be termed as ‘monetary gift’.
2. Specified movable properties received without consideration, it can be termed as ‘gift of movable property’.
3. Specified movable properties received at a reduced price, it can be termed as ‘movable property received for less than its fair market value’.
4. Immovable properties received without consideration, it can be termed as ‘gift of immovable property’.
5. Immovable properties acquired at a reduced price, it can be termed as ‘immovable property received for less than its stamp duty value’.

All The Above Instances Are Of Gift. These Are The Broad Heads Under Which A Gift Can Find Its Place.

 

THERE ARE CERTAIN INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THESE INCOMES ARE GIVEN UNDER SEC 10 OF THE INCOME TAX ACT.

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(1) Agricultural Income ;

(2) Subject To The Provisions Of Sub-Section (2) Of Section 64, Any Sum Received By An Individual As A Member Of A Hindu Undivided Family, Where Such Sum Has Been Paid Out Of The Income Of The Family, Or, In The Case Of Any Impartible Estate, Where Such Sum Has Been Paid Out Of The Income Of The Estate Belonging To The Family ;

(2A)……………….

 

In Nut-Shell, The Exemption Under Section 10(2) Is Available If The Following Two Conditions Are Satisfied –

1. The individual is the member of a Hindu Undivided Family; and
2. The amount received is from the income of the Hindu Undivided Family.

The Purpose Of Sec 10(2) Is To Avoid Double Taxation. This Exemption Is Based On The Line Of Partnership Where The Partnership Firm Has Been Assessed To Income Tax Separately, Then, The Share Of Profit Received By An Individual Person Is Not Taxable.

 

GIFT BETWEEN HUF AND COPARCENERS AND VICE VERSA

 

If Income Is Not Determinable In Any Of The Four (4) Major Heads Of The Income I.E. Salary, House, Business Or Profession And Capital Gains Then It Finds A Place Under The Head Income From Other Sources. Sec 56 Of The Act Provides For Income From Other Sources. Sec 56(2)(Vii) Provides For Where An Individual Or A Hindu Undivided Family Receives, In Any Previous Year, From Any Person Or Persons On Or After The 1st Day Of October, 2009 But Before The 1st Day Of April, 2017 Will Be Chargeable To Income Tax.

 

(Vii) Where An Individual Or A Hindu Undivided Family Receives, In Any Previous Year, From Any Person Or Persons On Or After The 1st Day Of October, 2009 But Before The 1st Day Of April, 2017,—

(A)  Any Sum Of Money, Without Consideration, The Aggregate Value Of Which Exceeds Fifty Thousand Rupees, The Whole Of The Aggregate Value Of Such Sum;

(B)  Any Immovable Property,—

 (I)  Without Consideration, The Stamp Duty Value Of Which Exceeds Fifty Thousand Rupees, The Stamp Duty Value Of Such Property;

(Ii)  For A Consideration Which Is Less Than The Stamp Duty Value Of The Property By An Amount Exceeding Fifty Thousand Rupees, The Stamp Duty Value Of Such Property As Exceeds Such Consideration:

Provided That Where The Date Of The Agreement Fixing The Amount Of Consideration For The Transfer Of Immovable Property And The Date Of Registration Are Not The Same, The Stamp Duty Value On The Date Of The Agreement May Be Taken For The Purposes Of This Sub-Clause:

Provided Further That The Said Proviso Shall Apply Only In A Case Where The Amount Of Consideration Referred To Therein, Or A Part Thereof, Has Been Paid By Any Mode Other Than Cash On Or Before The Date Of The Agreement For The Transfer Of Such Immovable Property;

(C)  Any Property, Other Than Immovable Property,—

(I)  Without Consideration, The Aggregate Fair Market Value Of Which Exceeds Fifty Thousand Rupees, The Whole Of The Aggregate Fair Market Value Of Such Property;

(Ii) For A Consideration Which Is Less Than The Aggregate Fair Market Value Of The Property By An Amount Exceeding Fifty Thousand Rupees, The Aggregate Fair Market Value Of Such Property As Exceeds Such Consideration :

Provided That Where The Stamp Duty Value Of Immovable Property ……….

 

Provided Further That This Clause Shall Not Apply To Any Sum Of Money Or Any Property Received—

 (A)  From Any Relative; Or

 (B)  ……….

 (C)  ……….

 (D)  ……….

 (E) ……..

 (F) ……..

 (G)  ……….

 (H)  ……….

Explanation.—For The Purposes Of This Clause,—

(A)  ……….

 (B)  ……….

 (C)  ……….

(D)  ……….

 

 (E)  “Relative” Means,—

 (I)  In Case Of An Individual—

(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); And

 (Ii)  In Case Of A Hindu Undivided Family, Any Member Thereof;

 

Sec. 56(2)(Vii) Brings Under The Income Tax Any Sum In Excess Of Rs 50,000/- Or Any Immovable Property Received By An Individual Or HUF From Any Person/S. This Section Only Comes Into Action When Such Property Or Sum Is Received By An Individual Or HUF Without Any Consideration.

 Second Proviso To Sec 56(2)(Vii) Provides For A List Of Conditions Under Which The Said Clause Shall Not Apply To Any Sum Of Money Or Any Property Received By An Individual Or HUF. The Article (A) Of The List Provides For Relative. Any Sum Or Property, Irrespective Of Whether Value Is Above Rs. 50,000/- Or Not Shall Not Be Exigible To Tax If It Is Between Relatives.

 The Term Relative For Sec 56(2)(Vii) Is Defined Under The Explanation (E) Of Sec 56(2)(Vii). In Respect Of HUF It States That “(Ii) In Case Of A Hindu Undivided Family, Any Member Thereof;”. Here Two Views Arise As To:

 

·         Whether The Gifts Given By The Members To The HUF Is Only Exempt Or

·         Whether The Gift Given By The HUF To The Members Are Also Exempt.

 

The Hon’ble Chandigarh ITAT In The Case Of Shri Pankil Garg V. PCIT, ITA No. 773/C HD /2018, Dated 17.072019 Held That: –

 

Family Income Flows Into A Common Pool From Which Resources Are Drawn To Meet Needs Of All The Members Which Are Regulated By The Head Of The Family. In Such Circumstances, 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 Such A Member Himself Has A Pre-Existing Right In The Property Of The ‘HUF’, Hence, It Cannot Be Said To Be A Gift Without Consideration By The ‘HUF’ Or By The Other Members Of The ‘HUF’ To That Recipient Member. In Such Circumstances, The Provisions Of Section 56(2)(Vii) Are Not Attracted In Case 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.

 The Hon’ble Tribunal Held That 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. So, It Is Clear That Any Gift From The HUF To Members Or From Members To The HUF Are Both Exempt

From The Income Tax. A Similar Conclusion Was Also Drawn By The Hon’ble Mumbai ITAT In Case Of CIT V. Ateev V. Gala, ITA NO.1906/Mum/2014.

 In The Eyes Of Law, There Is No Difference Between The Status Of Karta Or Coparcener When It Comes To Gift Received From HUF. Even Though The Karta Is The One Who Is All Mighty In Respect Of His HUF. The Exemption Provided By Conjoint Reading Od Sec 56(2)(Vii) And 10(2) Will Equally Apply On The Karta Also.

 

PRECAUTIONS TO BE TAKEN WHILE ACCEPTING GIFTS

 

There Are Few Safeguards That One Should Bear In Mind Before Accepting Any Gift. These Are As Follows:

 

·         The Intention Of Gift And The Declaration Thereon Shall Be Clear And Cogent And It Should Be Through An Affidavit. {C.N. Arunachala Mudaliar Vs C.A. Muruganatha Mudaliar & Anr. AIR 1953 SC 495: (1954) SCR 243 (SC)}

·         The Material Asset Which Is Gifted Shall Be Valid & Genuine.

·         There Is No Restrictions In The Act To A Gift Made By The Father To The HUF Of His Son, His Wife & Minor Children. However, To Avoid Getting Caught By The Hands Of Sec 64 (1)(Vi) Of The Act, Such Gifts Shall Better Be Avoided.{CIT Vs Smt. T. Suryamani Kothavalasala (2003) 263 ITR 271; CIT Vs S.N. Malhotra (1989) 178 ITR 380 (Cal)}

·         HUF Can Accept Gifts From Relative Who May Not Be The Member Of The Family.

 

 WAY FORWARD

 

As It Can Be Seen That The Operation Of The Sec 56 (2)(Vii) Was For A Limited Period From 1st Day Of October, 2009 But Before The 1st Day Of April, 2017. After 2017, The Gifts Are Taxed Under Sec 56(2)(X). The Definition Of Relative Is Akin To That Of The Clause (Vii) And Therefore, There Is Nothing Much Which Can Bring The Gift To Tax Between A Karta Or Coparcener And HUF.

 It Is To Bear In Mind That In Case Of Gift, There Has To Be A Gift Deed. One Cannot Gift To Self. There Should Be Two Parties. One Has To Be Donor And The Other Will Be Done. Gift Is An Instrument Which Need To Be Accepted. Therefore, Donee Should Expressly Give Consent Accepting The Gift In The Gift Deed.

 Gift Received And Accepted Is Easily Said Than Done. Gifts Are Very Vulnerable To Litigation. Hence, It Is Advisable And Only Prudent To Maintain Documentary Evidence In Respect Of The Gifts Received, To Avoid Any Dispute With Tax Authorities At A Later Stage. The Documentary Evidences Become Even More Important When The Amount Of Gift Is Substantial And Also Where It Is Received From Relatives. It Is Also Advisable To Keep Gift Deed, Letter Of Understanding Or Any Other Document Shall Be Kept Safe In Record For Future Reference.

Co-Authors

Veena Goenka (CA)

Abhishek Kumar (Adv)