Kolkata ITAT holds Husband's HUF not falling in the definition of ‘Relative’ of a Wife for gift-tax purposes under Income-tax

 Kolkata Tribunal has recently ruled that HUFs cannot be treated as “relatives” under the gift-tax provisions of the Income-tax Act, thereby disallowing exemption for gifts received by individuals from an HUF.

In the instant case, the Assessee had received a gift from her husband’s HUF and claimed that the amount was not taxable under the Income-tax on the ground that an HUF falls within the definition of “relative.” However, the Assessing Officer and the CIT(A) held the amount taxable under Section 56(2) of the Act (commonly referred to as the gift-tax provision), observing that an HUF is a separate entity and not an individual, and therefore cannot be regarded as a “relative” for the purpose of claiming exemption.

The Hon’ble Kolkata Tribunal held that the statutory definition of “relative” under the Income-tax Act applies only to individuals, and that an HUF being a distinct entity cannot itself have “relatives”. Accordingly, an HUF cannot qualify as a donor for the purpose of claiming exemption from gift tax when the recipient is an individual. This interpretation is consistent with the earlier Ahmedabad ITAT ruling in Gyanchand M. Bardia [93 taxmann.com 144 (Ahmd)]. The Tribunal further noted that the amendment introduced by the Finance Act, 2012 specifically recognised an HUF only as a donee (i.e., eligible to receive exempt gifts from its members) but did not extend similar recognition to an HUF as a donor.

In view of the above findings, the Tribunal held that exemption under the gift-tax provisions is not available to the assessee. However, acknowledging the Assessee’s alternative claim under Section 10(2) of the Act which exempts sums received by a member from the income of the HUF, the Tribunal observed that such exemption may be available if the amount received represents distribution of HUF income to a member. To examine this, the matter was remanded back to Assessing Officer with directions to verify the facts in light of the exemption under 10(2) of the Act.

The ruling provides important clarity for families using HUF structures for internal financial transfers and underscores the need to evaluate the tax implications before undertaking any distribution of funds.