Subodh Gupta (HUF) Vs Pr CIT (ITAT Delhi)
Whether the gift of 75,000 equity shares of a private limited company received by assessee HUF from Mrs. Sneh Gupta is chargeable to tax under section 56 (2) (vii) of the act. According to provisions of section 56 (2) (vii) , where any individual or Hindu undivided family receives in any previous year from any person or persons on or after the 1st day of October 2009 but before the 1st day of April 2017, any sum of money or property without consideration, aggregate fair market value of which exceeds Rs. 50,000, the whole of the fair market value of such property, shall be chargeable to income tax under the Income From Other Sources, as Income of the recipient. As per explanation (d) in the definition of ‘property’, several types of assets are listed including shares and securities. It is not denied that assessee is an HUF, during the year it has received from mother of the Kaka of the assessee HUF a gift of 75,000 shares of a private limited company. Therefore, apparently the provisions of section 56 (2) applies in the case of the assessee. However, proviso to the above section provides that the above clause shall not apply to any sum of money or any property received from any ‘relative’. Therefore, 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 Hindu undivided family as any member thereof. Therefore, if the above assessee, HUF, receives any sum from any member of the HUF then such sum or property received by the HUF 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 HUF. If she is, then the gift of share is not chargeable to tax in the hands of assessee as income.
Assessee has provided gift deed which is placed at page no 148 of the paper book. In para no 2 of that deed , it is stated that out of natural law and affection which Mrs. Sneh have Gupta bear towards the family of her son , namely Sh. Subodh Gupta, his wife Sonal Gupta and three children, Stuti Gupta, Sachi Gupta and Shreyans Gupta jointly forming Subodh Gupta HUF, she has given 75,000 equity shares of the Triveni polymers private limited. Therefore It is apparent from the declaration that assessee HUF 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 HUF. The contention of the assessee that the above gift deed would show that the shares have been gifted to the above said persons collectively and each of them would clearly fall within the definition of term ‘relative’ as per the provisions of section 56 (2) (vii), therefore the gift is not chargeable to tax. It was further stated that clause defining ‘relatives’ with respect to HUF was only for the reason to enable the HUF assessees to claim exemption of the gift as would be clear from the ‘notes on clauses’ to the amendment made by The Finance Bill, 2012, wherein it has been mentioned that the definition of ‘relative’ shall also include any sum or property received by a Hindu undivided family from its members apart from the persons referred to in explanation clause (vi) of subsection (2) of the said section. It was further the contention of the Ld. authorized representative that HUF can receive gift without attracting tax liability from its members as well as from the persons defined as relatives. Therefore, the argument was that all the persons, which are mentioned in explanation (e), if the HUF receives sum of money or property from them it is not chargeable to tax. Hence, 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. The above contentions deserves to be rejected because the proviso to section 56 (2) (vii) provides definition of ‘relatives’ in case of individual and HUF separately. It provides that above clause for taxability shall not apply to any sum of money or property received from any ‘relative’. The ‘relative’ have been mentioned separately with respect to an individual, and with respect to a Hindu undivided family. Therefore, in case of Hindu undivided family, 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. Therefore, earlier the issue was that if the gift is received by an HUF from its members, probably it was taxable. To remove that lacuna and to give benefit to the HUF, the above amendment was made. The amendment also speaks through ‘ notes on clauses’ that now the definition of ‘relative’ shall also include any sum or property received by an Hindu undivided family from its members apart from the persons referred to in the explanation with respect to an individual. It 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. If such a view were accepted, then gift to HUF would never be chargeable to tax if it were received from the “relatives” of the members of such HUF. We are afraid that is not the language as well as the intention of the legislature. Even otherwise, When the language of the law is clear, support of the ‘notes on clauses’ to the amendment does not help the assessee. Further, the contention of the Ld. authorized representative that where all the members of the HUF are individuals related to the donor , then they very much also fall within the definition of the term ‘relative’ on collective basis also deserves to be rejected reason being that here the assessee is an HUF and not to those individual members of HUF. HUF is a distinct assessable entity and section 2 (31) defines the ‘person’ where Hindu undivided family is a separate taxable entity from its members who are ‘individual’. Further, the Id AR has relied up on the plethora of judicial precedents. We deal with each of them turn by turn. The decisions relied upon by the Ld. authorized representative on Vinitkumar Raghavji Bhalodia V ITO 140 TTJ 58, Harshadbhai Dayalal V ITO and in ITA number 1906/MUM/2014 in DCIT versus Ateev V Gala. We have perused them and find that they do not help the case of the assessee because in those particular cases, the gift was given by the HUF to the individual assessee where all the members of the HUF were also eligible to make tax-free gift in the hands of the assessee individual. Hence, reliance placed on those judgments is rejected, as they are distinguishable on facts. Further, the Ld. authorized representative relied on the decision of Hon’ble Karnataka High Court in 202 ITR 678, where the question was whether the exemption provided under the section 5(1)(xvia) of The Wealth Tax Act is also applicable to HUF or not. The Hon’ble court held that the word ‘individual’ includes group of individuals and therefore benefit of exemption would be available to HUF. The above decision also does not apply here. In the section 56 (2) (vii) there are two specific and different types of exclusions provided for ‘individual’ and ‘HUF’. In case of individual different set of ‘relatives’ have been defined and in case of an ‘HUF’ there are different set of ‘relatives’ defined. By relying on that decision, the argument of the assessee is to expand the benefit available to an HUF of tax-free gift from members of HUF as well as from the non-members as applicable to the individual. Before the Hon’ble Karnataka High Court, there was no benefit available to an HUF in wealth tax act for that particular section and therefore such a view was taken, Whereas in the present case the legislature has defined ‘relative’ differently for individual and HUF. In section 56 of the act, 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 section 56 of the act. In view of this, the reliance placed by the assessee on the decision of the Hon’ble Karnataka High Court is misplaced. Similarly, the reliance placed on CIT versus Gunvantlal Ratanchand 208 ITR 1028 (Gujarat) also deserves to be rejected because the issue before the Hon’ble court was that when the exemption is granted to individuals whether such exemption is available to an HUF or not When the such exemption was not provided by the legislature to an HUF. The Ld. authorized representative further relied upon the decision of the Hon’ble Supreme Court in case of Surjeet laL Chhabra versus CIT [101 ITR 776] (SC) and submitted that Income Tax Act does not define expression Hindu undivided family, whereas it is well-defined area under Hindu law and therefore the expression Hindu undivided family must be construed under the income tax law, in the sense in which it is understood under the Hindu law. Here it is not the issue that what constitutes Hindu undivided family, but whether the property received from a non-member is exempt when the law itself provides that sum or property received from member of an HUF only is not chargeable to tax.in that cae Hon Supreme court was concerned under the Income-tax Act with the question whether the assesse’s wife and unmarried daughter can with him be members of a Hindu undivided family and not of a coparcenary. The assessee further relied on the decision of the Hon’ble Supreme Court in 247 ITR 192 wherein it has been held that an interpretation of statutory provisions, which will result into an absurd situation, cannot be accepted. Before us, The Ld. authorized representative could not show that exclusion provided in respect of an ‘individual’ separately and in respect of a ‘Hindu undivided family’ results into any absurdity. We also do not see any such absurdity in those provisions. The next argument of the Ld. authorized representative was that Mrs. Sneh Gupta (donor) being mother of Sh. Subodh Gupta is also member of Subodh Gupta HUF as she being lineal ascendant of Sri Subodh Gupta. For this proposition, he submitted that under the Hindu law, Hindu undivided family constitute all persons lineally ascendant or mother, wives, widows and unmarried daughter, sisters and more importantly, all these persons fall under the definition of ‘relative’ as provided in explanation (e) of section 56 (2) (vii) of the act. Therefore, according to him, the mother of the karta of the assessee HUF is also member of his HUF. For this proposition, he relied on the decision of the Hon’ble Rajasthan High Court in 29 ITR 165 and on the decision of the Kolkata bench of ITAT in ITA No. 1298/K/2011. The Hon. Rajasthan High court held that Wives or widows of male members of an undivided Hindu family and unmarried daughters of male members are members of the family, though they may not be coparceners, hence does not address the question before us. We also reject the reliance on the above decision of the coordinate bench because the assessment year involved in that year is 2005 – 06 and further it was a case of an individual who received gift from HUF. It is on similar lines of earlier decisions relied upon by the assessee. In the present case, the assessee is a HUF who received the gift from a non-relative. The Id-authorized representative also could not show us any commentary on Hindu law or any other authoritative material, which says that mother of Karta of assessee HUF, is member of his HUF. Therefore, we reject the arguments of the assessee that the gift of 75,000 equity shares received by the assessee is not chargeable to tax under section 56 (2) (vii) of the act. Hence, we do not find any infirmity in the order of the Ld. PCIT in holding that gift of 75,000 equity shares received by the assessee received from Mrs. Sneh Gupta is chargeable to tax under section 56 (2) (vii) of the act. Accordingly, Ground no 3 & 4 of the appeal are dismissed.
The 3rd issue is with respect to the valuation of the equity shares received by the assessee as gift from Mrs. Sneh Gupta. In the present case, the assessee HUF has received this gift of 75,000 equity shares of an unlisted company. The provisions of section 56 (2) (vii) (c) provides that where an individual or Hindu undivided family receives from any person any property other than immovable property without consideration, then the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property is chargeable to tax as income under the head income from other sources. Explanation (b) defines that ‘fair market value’ of a property other than any movable property means the value prescribed. Rule 11 UA has been notified w.e.f. 8/4/2010, which provides for valuation for the purposes of section 56 of the act. With respect to the ‘fair market value’ 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. The Ld. PCIT has adopted the definition of ‘fair market value’ as provided under section 2 (22B) of the act. According to us when the specific rule for determination of ‘fair market value’ for section 56 has been notified, same shall be applied and not as defined under section 2 (22B)of the act. Furthermore, the notification issued by the Central government also speaks that determination of fair market value under rule 11 UA shall be applied for the purposes of section 56 of the act. Therefore, we reject the valuation adopted by the Ld. PCIT applying provisions of section 2 (22B) of the act. According to the assessee such computation u/r 11UA of Income tax Rules, 1962 works out at Rs. 234.82 per share. However, neither the Ld. PCIT nor the assessing officer has verified this computation of the fair market value of the shares. Therefore, we set aside the issue of computation of the fair market value of the shares back to the file of the Ld. assessing officer. We direct assessee to produce the valuation before the Id AO as per rule 11UA of IT Rules. He shall examine and verify the computation determining the fair market value of equity share at Rs. 234.82 for each equity shares. If it sound found in accordance with law, then AO may determine amount taxable under section 56 (2) (vii) of the act on account of gift received by the assessee HUF from Mrs. Sneh Gupta.