Gifts from a Hindu Undivided Family (HUF) to its members often trigger confusion, especially when Assessing Officers try to apply section 56(2)(vii) to tax such receipts. However, the law is clearer than it seems. Section 10(2) offers a specific exemption for precisely these situations, and recent tribunal rulings reaffirm this position.

This article breaks down the legal framework, the interpretational conflict, and what the latest ITAT decision in Seema Sureka means for taxpayers.

The Core Legal Position Under Section 10(2)

Section 10(2) explicitly exempts:

Any sum received by an individual, as a member of a Hindu Undivided Family, out of the income of the HUF or from its estate.

To claim this exemption, three factual conditions must be satisfied:

(A) The assessee must be a member of the HUF

The recipient must demonstrate valid membership in the HUF.

(B) The HUF must have income, corpus, or estate

There must be identifiable HUF property or accumulated income.

(C) The payment must be made out of such income or estate

The sum received should originate from the HUF’s legitimate funds.

Once these conditions are met, the exemption applies automatically. Section 10(2) is a specific charging exclusion, and such sums cannot be brought to tax under other general provisions.

Why Section 56(2)(vii) Cannot Override Section 10(2)

The confusion arises due to the Explanation to section 56(2)(vii), which defines “relative.” The relevant part says:

When the HUF is the donee, any member of the HUF is a relative.

This definition only clarifies the relationship when HUF receives a gift, not when HUF gives a gift.

Key interpretation points

1. The Explanation deals with HUF as the donee, not as the donor.
2. It does not prohibit or tax gifts given by the HUF to its members.
3. For HUF-to-member receipts, the only applicable provision is section 10(2).
4. Section 10(2) is a specific exemption, and specific exemptions prevail over general anti-abuse provisions like section 56(2)(vii).

Hence, section 56 cannot override, dilute, or render redundant the statutory exemption provided in section 10(2).

3. How the ITAT Handled This in Seema Sureka (ITA No. 2682/Kol/2024)

The Kolkata ITAT’s decision is particularly important because it addresses the exact conflict between section 10(2) and section 56.

(A) ITAT recognised conflicting tribunal rulings

Various ITATs have differed on whether an HUF can be considered a “relative.” There is no binding High Court or Supreme Court judgment holding HUF as non-relative.

(B) Tribunal adopted the view in favour of the taxpayer

Relying on the Jaipur ITAT ruling in Gyanchand M. Bardia, the Tribunal held:

• The term “relative” in section 56(2)(vii) is to be interpreted from the perspective of the donee.
• When HUF is a donor, the proper provision to test the taxability is section 10(2).

(C) The Tribunal did not affirm taxability

Instead, the matter was remanded back to the AO with specific directions:

• Verify whether the assessee is a member of the HUF.
• Verify whether the HUF has a corpus or estate.
• Verify whether the gift came from such corpus/estate.
• If yes, exemption under section 10(2) must be allowed.

This is a very protective approach for taxpayers.

Why This Ruling Strengthens the Case for HUF-to-Member Exemption

The Seema Sureka decision carries significant interpretational clarity:

1. Section 10(2) is the governing provision for gifts received by a member from the HUF.
2. Section 56(2)(vii) cannot be invoked unless section 10(2)’s conditions fail.
3. The ITAT acknowledges that HUF-to-member transfers are incident to joint family law, not transactions of bounty.
4. The AO’s role is limited to verifying membership and source, not questioning the applicability of section 10(2).
5. If the conditions are met, the exemption is mandatory, not discretionary.

Conclusion

Gifts from an HUF to its members are fundamentally distributions of joint family property. The Income-tax Act recognises this through section 10(2), which provides a clear and specific exemption. Attempts to tax such receipts under section 56(2)(vii) ignore the legislative structure and the long-established principles of Hindu law.

The ITAT’s decision in Seema Sureka reaffirms the correct position:

• HUF-to-member gifts are exempt provided the payment comes from the HUF’s income or estate.
• Section 56(2)(vii) does not apply to override this exemption.
• AO can only verify facts, not question the exemption’s availability.

For taxpayers and practitioners, this ruling is a welcome clarification and a strong precedent for defending HUF-to-member gifts from unwarranted additions.