Gift Received from HUF are Tax Free

No doubt receiving a gift which has a monetary value in these times of recession is always welcome and a person has a reason to cheer if it does not raises any income tax liability. Now since year 2004 income tax authorities also agree that Gift Received from HUF are Tax Free. As per the new provision introduced in Section 56 of the Income Tax Act (effective from September 2004), any money received without consideration by an individual or a Hindu Undivided Family (HUF) shall not be taxable if it is received from a relative.

The term relative has been defined in law to include spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents, any lineal ascendants or descendents of the individual, any lineal ascendants or descendents of the spouse, and spouses of all of the persons mentioned above. A plain reading of the definition seems to convey that it has overlooked reference to relatives for the purpose of HUF. Also, HUF has not been included as a relative for the individual. In case of HUFs, the concept of relatives may not make sense since the joint family consists of all family members. But the exclusion of this term could mean that the exemption is available for the gifts received by HUF from any person related to the Karta or any other family member. It could also mean that since HUF cannot have relatives, gifts received by HUF would be taxable. This question came up before the IT Tribunal in a recent case.

A taxpayer had accepted a gift of Rs 60 lakh from his father’s HUF. The tax officer held that the said gift was taxable as HUF was not covered in the definition of relative under section 56 of the Act. At the first appellate level, the authority confirmed the tax officer’s view and stated that if the legislative intent was to exempt the amount received from HUF, then HUF would have been specifically mentioned in definition of relatives. The taxpayer then submitted that the amount received from the father’s HUF is as good as money received from relatives as the father and all other members comprising the HUF are relatives within the definition of relatives given in section 56(2). It was also contended that the term individual would include a group of individuals and hence HUF should be covered under the term individual.

Relying on an earlier Supreme Court decision, the taxpayer contended that in case of any ambiguity in the language of any provision, the same must be interpreted in a manner that benefits the taxpayer. The tribunal, in its order, clarified that an HUF is a person within the meaning of the term person as defined in the Act. The term HUF is not defined anywhere under the law, but is well defined under the Hindu law. The HUF constitutes all persons lineally descended from a common ancestor and includes mothers, wives or widows and unmarried daughters.

It was further stated that an HUF is a ‘group of relatives’ and with this view in mind, the question that needed clarity was whether only the gift given by the individual relative from an HUF would be exempt or even a gift collectively given by the ‘group of relatives’ from the HUF? The Tribunal, further held that, on a plain reading of the relevant provision along with the explanation provided therein coupled with an understanding of the intention of the legislature from the provision, it is noted that a gift received from the relative, irrespective of whether the same is from an individual relative or a group of relatives is exempt from tax.

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