Definition of the term relative Explanation to Section 56(2) (vii)
Issue/Justification
Under the existing provisions of section 56(2)(vii), any sum or property received by an individual or HUF for inadequate consideration or without consideration is deemed as income and is taxed under the head ‘Income from other sources’. However, in case of any individual, receipts from specified relatives are excluded from the purview and hence, are not taxable.
The Explanation to section 56(2)(vii) was amended by the Finance Act, 2012 so as to provide that any sum or property received without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation.
The provisions of clubbing of income as contained in Chapter V of the Income-tax Act, 1961 are attracted in respect of income from any sum of money or value of assets transferred to a nonrelative. Once the sum of money or value of assets are subject to tax under section 56(2) in the hands of the recipient, the income from such assets should not be subject to the clubbing provisions contained in Chapter V.
Further, it may be noted that, in relation to an “individual”, the term relative, as it stands at present, does not include nieces and nephews. This may not be the legislative intent as they also form part of the close circle of relatives and accordingly have been considered as “relative” in the Direct Taxes Code Bill, 2010 and 2013.
Budget 2018 Suggestion by ICAI
(i) The provisions of clubbing of income as contained in Chapter V of the Income-tax Act, 1961 should not be attracted once the sum of money or value of assets are subject to tax under section 56(2) in the hands of the recipient.
(ii) Lineal descendents of brothers and sisters of self and spouse may also be included in the definition of “relative” in line with the provisions of section 13(3).
(iii) The application of the provision should also be extended to the relatives of the members of HUF.
(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)
