Gifts are always special to the recipient and it would be extra-special if there is no tax payable on these. The taxman believes so, too. In the provision introduced in Section 56 of the Income Tax Act, if any sum of money is received gratis by an individual or Hindu Undivided Family (HUF) during any year, it shall not be taxable if from a relative. The law has already defined the term 'relative' and HUF.

However a case that came up before the Income Tax Tribunal shows that some clarifications were still needed.

Background

The law also exempts gifts during special occasions like marriage of an individual or under a will or by way of inheritance and even in contemplation of death of the payer. Money received as grants or loans from educational institutions/universities, charitable trusts or similar institutions is also exempt.

The term relative has been defined in the law to include spouse of the individual, brother or sister of the individual, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, any lineal ascendants or descendents of the individual, any lineal ascendants or descendents of the spouse of the individual, and spouses of all of the persons mentioned above.

However, a plain reading of the above definition seems to convey it has overlooked reference to relatives for the purpose of an HUF. Also, an HUF has not been included as a relative for the individual.

In the 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 in the provision could mean the exemption is available for the gifts received by the HUF from any person related to the karta or any other family member. Alternatively, it could mean that since an HUF cannot have relatives, any/all gifts received would be taxable.

Issue posed

This question came up before the Income Tax Tribunal in a recent case. The tax payer had accepted a gift of ~ 60 lakh from his fathers HUF. During the assessment, the tax officer held the gift to be taxable, as an HUF was not covered in the definition of relative under Section 56. At the first appellate level, the authority confirmed the tax officers view and stated that if the legislative intent was to exempt the amount received from an HUF, this would have been specified in the definition of relatives.

During the proceedings, the tax payer said the amount received from the fathers HUF was as good as money received from relatives, as the father and all other members comprising the HUF were relatives within the meaning of the definition given in section 56(2). It was also contended that the term individual would include a group of individuals and, hence, an HUF should be covered under the term individual. And, that an HUF was aconglomeration of relatives as defined above and should be interpreted in a way to avoid any absurdity. Relying on an earlier Supreme Court decision, the tax payer contended that in case of any ambiguity in the language of any provision, it must be interpreted in a manner that benefits the taxpayer.

The tribunal order clarifies that an HUF is a person within the meaning of the term as defined in the Act and is, thus, distinctively assessable. The term HUF is not defined anywhere under the law, but is well defined under Hindu law and is widely acceptable and recognised. The HUF constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these people fall within the definition of relatives as provided in the relevant provision of the Act.

It was further stated that 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 would be exempt.

Illustration

To better comprehend this, the Tribunal used a simple illustration. In case an employee retires, and in token of their affection and affinity for him, the secretary of the staff club on behalf of the members presents the retiring employee with a gift. Could this gift presented by the secretary on behalf of the staff club be termed a gift from the secretary alone and not from all the members of the club? Using the same example, the Tribunal stated the gift presented by the secretary represents the gift given by him on behalf of all the members; it is the collective gift from all the members and not the secretary in his individual capacity.

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, a gift received from a relative, irrespective of whether this is from an individual relative or agroup of relatives, is exempt from tax. A group of relatives definitely falls within the meaning of relatives as given under the relevant provision.

Nowhere has the provision expressly defined that the word relative represents a singular person, and many a time, singular can mean more than one. The term Hindu Undivided Family, though sounding singular in its form and assessed to tax for income tax purposes, is at the end made up of a group of relatives.

So, the Tribunal held that the term relative as explained in the relevant provision of the Act includes relatives and as the tax payer received the gift from an HUF, which is a group of relatives, the gift received by the tax payer should be interpreted to mean the gift was received from relatives. And, therefore, would not taxable.

According to the Income Tax Act, relatives are on a par with Hindu Undivided Family leading to such exemptions

|HUF not included in the definition of relatives for gift provisions under Income Tax law |

HUF is also not defined in the Income Tax Act but the meaning as per the Hindu law is well accepted and recognised |

HUF should be looked at as a group of relatives |

Gift received from HUF is similar to gift received from the group of relatives |

The term relative used in the Act should be interpreted to include more than 1 relative