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The second of the two-part series on tax treatment of gift received from income of an HUF

Tax treatment of gifts is a recurring and confusing issue, particularly so if the assessee is a member of a Hindu undivided family (HUF). Gift received by an assessee from an HUF falls under Section 10(2) of the Income Tax (IT) Act, 1961. Section 10(2) says tax is not payable by an assessee on any sum received from a member of HUF as this has been paid out of family income or, in the case of an impartible estate, out of the income of the estate belonging to the family, subject to the provisions of Section 64(2) of the IT Act.

The objective of the provision is that an HUF, according to Section 2(31) of the IT Act, is a &145;person’ and a unit of assessment. Income earned by an HUF is assessable in its own hands so as to avoid double taxation of the income, once in the hands of the HUF, which earns it, and again in the hands of the member to whom it is paid. The real consideration in a family arrangement is based on the recognition of a preexisting right. Hence, there is no transfer of property at all. In commissioner of gift tax v NS Getti Chettiar, the Supreme Court observed that, in an unequal family partition, no gift tax liability is attracted as there is no transfer.

The property or the income of HUF belongs to its members, who are either entitled to share in the property on partition or have a right to be maintained. For getting exemption under Section 10(2), two conditions are to be satisfied. First, the assessee must be a member of the HUF. Second, he receives the sum out of the income of the HUF from the earlier year.

In the case of Vedanthanni v commissioner of income tax, the Madras High Court said the petitioner, the widow of a deceased coparcener, was entitled to maintenance as a member of HUF. “Far from having any anomaly, the result is consonant with justice and purposes of the IT Act. The object and scope of Section 14 of the IT Act is to prevent the crown from taxing twice over. If there is any section in the Act enabling the holder of the estate in making his returns to deduct the amounts paid by him to widows of deceased coparceners, then the effect would be to prevent the crown from taxing the income even once. But there is no such provision in the Act. If widows are not exempted, the crown would undoubtedly being taxing twice over. Our construction makes the result with equation of the case.”

Posted By Miserji Research Team On

07/10/2011

Miserji Research Team,
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