Taxability on Transfer of Assets by HUF to its Members – A Study of Partition, Family Arrangements and Gifts

Taxability on Transfer of Assets by HUF to its Members – A Study of Partition, Family Arrangements and Gifts

Introduction

The transfer of assets by a Hindu Undivided Family (HUF) to its members can occur through partition, family arrangements or gifts. While transfers on partition are generally tax-neutral, gifts by an HUF to its members have given rise to significant controversy due to the interplay between exemption provisions applicable to HUFs and the definition of ‘relative’ under the Income-tax Act. This article examines the tax implications in the hands of both the HUF and its members.

1. Transfer of Assets on Partition of HUF

Section 47(i) of the Income-tax Act, 1961 [Section 70(1)(a) of the Income-tax Act, 2025] provides that distribution of capital assets on total or partial partition of a HUF shall not be regarded as a transfer.

In the hands of the HUF, no capital gains tax arises. In the hands of the member, receipt of assets on partition is not taxable. Further, upon subsequent transfer, the cost of acquisition and period of holding of the HUF are generally carried forward to the member.

2. Transfer Pursuant to Family Arrangement

A family arrangement is distinct from a gift. The Supreme Court in Kale v. Deputy Director of Consolidation, 1976 recognized that family arrangements are intended to preserve family harmony and settle existing or potential disputes. Since the arrangement merely recognizes or settles pre-existing rights, the receipt is generally not regarded as a taxable gift. Future income arising from the asset is taxable in the hands of the recipient member.

3. Transfer by way of Gift – Taxability in the Hands of HUF

Section 47(iii) of the Income-tax Act, 1961 (corresponding provisions under the Income-tax Act, 2025) provides that transfer of a capital asset under a gift, will or irrevocable trust shall not be regarded as a transfer. Accordingly, no capital gains tax arises in the hands of the HUF on such transfer.

Where cash is transferred, no capital gains issue arises because money itself is not a capital asset for this purpose. Gift taxation provisions operate in the hands of the recipient and not the transferor.

Validity of Gift under Hindu Law

The more fundamental question is whether the Karta possesses the authority to make such a gift. The Supreme Court in Guramma Bhratar Chanbasappa Deshmukh v. Mallappa Chanbasappa Deshmukh, 1964 and Ammathayee alias Perumalakkal v. Kumaresan alias Balakrishnan, 1966 held that the Karta is not the absolute owner of HUF property.

Reasonable gifts may be made for marriage of daughters, maintenance obligations, religious purposes, charitable purposes and established customs. However, substantial gifts made merely out of affection may be challenged as being beyond the powers of the Karta.

4. Taxability in the Hands of Members – The Controversy

The controversy arises because the definition of ‘relative’ specifically provides that, in the case of a HUF, any member thereof is a relative. However, the provision does not expressly state that a HUF is a relative of its member.

View 1 – Exempt: In Vineetkumar Raghavjibhai Bhalodia v. ITO, the Tribunal held that an HUF is merely a collective body of relatives and therefore a gift received by a member from the HUF should qualify for exemption. In Pankil Garg v. Pr. CIT, the Tribunal further observed that a member possesses a pre-existing interest in HUF property and therefore receipts from the HUF cannot always be equated with gifts received from strangers.

Additional Support – Section 10(2):

Section 10(2) of the Income-tax Act, 1961 (and Sec 11 read with schedule III, entry no.1 under the Income-tax Act, 2025) exempts any sum received by an individual as a member of a HUF out of the income of the family. Accordingly, distributions made out of current year income or accumulated income may enjoy direct statutory exemption without resorting to the ‘relative’ argument.

View 2 – Taxable:
A contrary view was adopted in Gyanchand M. Bardia v. ITO. The Tribunal held that while the statute specifically provides that a member is a relative of the HUF, it does not provide that the HUF is a relative of its member. Accordingly, a gift received by a member from the HUF may not automatically qualify for exemption under the relative clause.

Conclusion

The controversy surrounding gifts from an HUF to its members arises from the absence of an express provision recognizing an HUF as a relative of its member. While judicial authorities such as Vineetkumar Raghavjibhai Bhalodia and Pankil Garg favour exemption by adopting a purposive interpretation, the contrary view in Gyanchand M. Bardia demonstrates that the issue is not entirely free from doubt.

Nevertheless, where the amount is distributed out of the income of the HUF, the specific exemption under Section 10(2) provides a strong statutory basis for non-taxability. The controversy is therefore more relevant in cases involving transfer of capital assets or corpus of the HUF by way of gift rather than ordinary distributions of HUF income.