By TIOL News Service

NEW DELHI, JAN 24, 2018: THE issue is - Whether, for the purpose of gift, the term 'relative' defined u/s 56(2)(vii) also takes HUF under its sweep. No is the answer.

Facts of the case

The Assessee-a Hindu undivided family (HUF), filed its return for relevant AY. In the course of the assessment proceeding, the AO noted that the Assessee had received 75,000 equity shares of a company from Mrs. Sneh Gupta, mother of the Karta of Assessee. Accordingly, the AO completed the assessment and passed an order u/s 143(3). However, on suo moto a notice u/s 263 was issued by the PCIT wherein it was stated that no enquiry was made as required to be made by the AO. According to PCIT, the AO did not enquire about applicability of section 56(2)(vii) with respect to gift received by the Assessee from Karta of Assessee and therefore, the case of the Assessee was false under Explanation (2) of section 263(1). In reply, the Assessee submitted that the said gift was not covered u/s 56(2)(vii) as the same was from mother of the Karta of the Assessee and hence, was covered under definition of 'relative'. With regard to the valuation, the Assessee submitted that valuation was required to be made as per Rule 11 UA. Nevertheless, the PCIT passed order u/s 263 and directed the AO to modify the assessment order to the extent that the market value of 75,000 equity shares received from the mother of the Karta of the Assessee treating as income u/s 56(2)(vii) which the AO failed to bring to tax as the income of the Assessee. Consequently, the Assessee's income was enhanced.

After hearing the parties, the Tribunal held that,

++ if such sum or property is received from a 'relative' it will not be chargeable to tax under that section. The explanation (e) defines 'relatives' in case of a HUF as any member thereof. Therefore, if the Assessee, receives any sum from any member of the HUF then such sum or property received by the Assessee will not be chargeable to tax. Therefore, the simple issue that arises to be examined that whether Mrs. Sneh Gupta is a member of the Assessee. If she is, then the gift of share is not chargeable to tax in the hands of Assessee as income. It is apparent from the declaration that Assessee consist of Sri Subodh Gupta, his wife and 3 children only. Therefore, as per the declaration furnished it is crystal even Assessee as well as the donor do not consider that Mrs. Sneh Gupta is the member of Assessee. The contention of the Assessee that the said gift deed would show that the shares have been gifted to the said persons collectively and each of them would clearly fall within the definition of term 'relative' u/s 56(2)(vii), therefore the gift is not chargeable to tax. As the donor is the mother of the karta of HUF, she can give gift to each member of such HUF without attracting tax liability in his or her individual hands, therefore, if the gift is given to the collective name of HUF comprising the same individual, it should also not attract tax;

++ in case of HUF, if the gift is not received from member of such HUF then such sum is chargeable to tax. The 'relatives' mentioned with respect to an individual cannot be considered when the recipient of the property is an HUF. Further, it substitutes the earlier definition of the 'relative' when there was no reference about what constitutes 'relatives' with respect to the HUF. It only talks about 'relatives' with respect to an individual. To remove that lacuna and to give benefit to the HUF, the said amendment was made. The amendment through the 'notes on clauses' does not provide that if gift is made to an HUF by any of the 'relatives' of those individuals comprising the HUF, who is not the member of the HUF, then such gift is not chargeable to tax. Therefore, gift to HUF would never be chargeable to tax if it were received from the "relatives" of the members of such HUF. However, this is not the language as well as the intention of the legislature. Hence, when the language of the law is clear, support of the 'notes on clauses' to the amendment does not help the Assessee;

++ in section 56, legislature has given a clear-cut provision that if the recipient is individual or HUF then from whom it can receive property or sum without paying tax under this section. In the present case, the Assessee has received the gift from a non-relative. The Counsel also could not show any commentary on Hindu law or any other authoritative material, which says that mother of Karta of Assessee, is a member of his HUF. Therefore, the arguments of the Assessee that the gift of 75,000 equity shares received by the Assessee is not chargeable to tax u/s 56 (2)(vii) is rejected by this Tribunal. Hence, there is no infirmity in the order of the PCIT in holding that gift of 75,000 equity shares received by the Assessee received from Mrs. Sneh Gupta is chargeable to tax u/s 56(2)(vii);

++ the provisions of section 56(2)(vii)(c) provides that where an individual or HUF receives from any person any property other than immovable property without consideration, then the aggregate FMV of which exceeds Rs. 50,000, the whole of the aggregate FMV of such property is chargeable to tax as income under the head 'income from other sources'. Explanation (b) defines that 'FMV' of a property other than any movable property means the value determined in accordance with the method as may be prescribed. Rule 11 UA has been notified which provides for valuation for the purposes of section 56. With respect to the 'FMV' of unquoted equity shares, the valuation is provided in Rule 11 UA(c)(b). Therefore, the valuation is required to be worked out according to that formula only. Therefore, when the specific rule for determination of 'FMV' for section 56 has been notified, same shall be applied and not as defined u/s 2(22B). However, neither the PCIT nor the AO has verified this computation of the FMV of the shares. Therefore, the issue of computation of the FMV of the shares is set aside back to the file of the AO.

(See 2018-TIOL-141-ITAT-DEL)