HEMAL D. SHAH,MUMBAI vs. DCIT 25(3), MUMBAI

Assessee by : Sh. Rajesh Kothari -AR Revenue by : Ms. Pooja Swarup (DR) Date of hearing : 30.01.2017 Date of Pronouncement : 08.03.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by assessee u/s 253 of the Income-tax Act (‘the Act’) is directed against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –35, Mumbai dated 13.01.2015 for Assessment Year (AY) 2010-11. The assessee has raised the following grounds of appeal are that: (i) The ld. CIT(A) erred in confirming the denial of loss of Rs. 1,00,000 from business income. (ii) Ld. CIT(A) erred in confirming the action of AO for taxing the gift of Rs. 44,55,000/- received from Dinesh J. Shah HUF u/s. 56 of the Income-tax Act, 1961. (iii) The ld. CIT(A) erred in taxing the gift of Rs. 14,40,000/- received from Pankaj J. Shah HUF u/s. 56 of the Income-tax Act, 1961

2. Brief facts of the case are related with the grounds of appeal raised in this appeal are that assessee is individual and engaged in the business of trading and speculative activities in share and securities. The assessee filed return of income for relevant AY on 24.09.2010 declaring total income of Rs. 21,48,080/-. The ITA No.2627/M/201 Shri Hemal D. Shah assessment was completed u/s. 143(3) of the Act on 22.03.2013. The Assessing Officer (AO) while passing the assessment order besides the other addition/disallowance disallowed the claim of bad debt of Rs. 1,00,000/- and treated the gift of Rs. 14,40,000/- received from Pankaj J. Shah HUF and Rs.44,55,000/- received from Dinesh J. Shah HUF as income under the head “Income from Other Sources” u/s 56(2)(vi) and brought the amount to tax. On appeal before the ld. CIT(A), the disallowance of bad debt and treating the gift as income u/s 56 was sustained. Thus further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.

off in books. The ld. CIT(A) further concluded that the assessee has not fulfilled the condition no.1. The assessee has not offered in the income in any of the year. The alternative plea of assessee was not examined by the ld CIT(A) under section 37 of the Act, holding that specific provision will override the general provision. We are unable to agree with his view, since section 36(1)(iii) and section 37 operate in different field. Thus, we admit the plea of assessee to consider the allowability of loss under section 37 of the Act and restore the issue to the file of AO. The AO shall examine the issue in accordance with law after giving the opportunity to the assessee. In the result, this ground of appeal is allowed for statistical purpose.

5. Ground No.2 relates to treating the gifts of Rs. 44,50,000/- from Dinesh J Shah HUF as income under the head ‘income from other source’ under section 56(2) (vi). The ld AR for the assessee argued that ground of appeal which relates to gift from Dinesh J Shah HUF is covered in his favour by the decision of Rajkot Tribunal in Vinnet Kumar Raghavhibhai Bhalodia vs ITO (2011) 140 TTJ (Rajkot). Dinesh Shah HUF consist of the father of assessee (Dinesh Shah), mother of assessee(Smt Jyotshna D Shah), Brother of assessee (Gaurav D Shah) and assessee himself. And as per the decision in Vinnet Kumar Raghavhibhai Bhalodia ( supra) the gift received by assessee, a member of HUF, from HUF is gift from relatives and the same is not taxable. The ld AR for assessee further relied on the Hydrabad Tribunal in ITO vs. Dr. M. Shobha Ravhuveera ITA 47/Hyd/13, Harshadbhai Dahyal Vaidya Vs ITO (2013)TTJ (Ahd) 71and Biravelli Basker vs ITO ITA No.398/Hyd/2015. On the other hand the ld DR for the revenue supported the order of the authorities below.

6. We have considered the rival contentions of the parties and have gone through the order of the authorities below. We have noticed that similar issue was considered by the different benches of Tribunal. The Hyderabad Tribunal in ITO vs. Dr. M. Shobha Ravhuveera (supra) while considering the identical ground and relying on the decision of Ahmadabad Bench in Harshabhai Dahyalal Vaidhya (HUF) V/s. ITO (155 TTJ (Ahd) 71) hold that HUF is ITA No.2627/M/201 Shri Hemal D. Shah nothing but the group of relative. Merely because it has given a legal status as a HUF, the individual do not lose their identity as relative and such group of relative, who are member of HUF clearly falls within the definition of term ‘relative’ as prescribed in the Explanation to Clause-5 of sub-section 2 of section 56. The Co-ordinate Bench of Hyderabad Tribunal referred the ratio of Harshabhai Dahyalal Vaidhya (HUF) V/s. ITO (supra) as under: “7.1 For the year under consideration, i.e. AY 2005-06 the definition of "relative" was in respect of the relationship by an individual donee with close-relatives as defined therein. However, it is very pertinent to note that the operative section i.e. section 56(2)(v) was in respect of (i) individual, and (ii) Hindu Undivided Family (HUF). Meaning thereby the legislature has clear intention to include both the statuses i.e. Individual as well as HUF within its scope; as well as; within its operation. Thus, the Section is applicable in respect of money exceeding Rs.25,000/- received without consideration either by an "individual" or by a "HUF". Now we read the proviso annexed to sub-section (v) that the charging clause shall not apply to any sum of money received from any relative. Meaning thereby the proviso is applicable to both of them i.e. "individual" as well as "HUF". The donor–relative can be either relative of "Individual" or "HUF"; as the case may be. In other words, if an amount exceeding Rs.25,000/- is received as a gift either by "individual" or by "HUF", then such an amount is chargeable to income under the head "Income from other sources" but an exception is provided in the first proviso that the said clause of charging the amount to tax should not apply to an amount received from any relative. We hereby thus interpret that the proviso prescribes that the charging of the gifted amount shall not apply to any sum of money received as a gift from a "relative" either by an "individual" or by "HUF". Naturally, the proviso annexed to clause (v) of section 56(2) do not restrict to an "individual" but it governs "individual" as well as a "HUF". With this Dr. M.Shobha Ravhuveera, Hyderabad 5 understanding/interpretation of the main provisions, we have to examine the definition of "relative" given in Explanation annexed to this section. The position shall be absolutely clear that even in case of HUF if a sum of money is received from any relative and that relative is as defined in Explanation, then also fall within the exception as prescribed in this section. 7.2. On our study, we have pondered upon the commentary of Sampath Iyengar "Law of Income Tax" 10th Edition – page 4611 and the comments are reproduced below:- "Explanation to clause (v) The Explanation to clause (v), which defines a relative, is wide enough to include spouse, brother or sister, their spouses, brother or sister of either parents of the individual and lineal ascendant or descendant of both the individual and his/her spouse and the spouse of any of the persons mentioned herein before. Hence, the definition covers only relatives of the individuals, so that the explanation seems to have overlooked the provision in the main section sparing liability for Hindu Undivided Family (HUF) in respect of gifts from relatives. Even the other exemption as for occasion on the marriage of individuals or inheritance could have not application to the HUF. In the case of HUF, since the joint family ITA No.2627/M/201 Shri Hemal D. Shah refers to a group of persons, it either means that the exemption is available for gifts received by the HUF from any person related to the karta or any other family member or it may mean that since HUF cannot have relatives, all the gifts received by the HUF will be taxable. This inference does not obviously fall in line with the intent, because the provision does contemplate exemption of the gifts received by HUF, but has not indicated the relationship that is necessary for the purposes of HUF, because the definition of ‘relative’ in the Explanation refers to the relatives of the individual and not HUF, with the result that the exemption of gift from relatives is alive only to the extent of possible exemption for gifts by will or in contemplation of death." 7.3. Our above view gets support from an order of Respected Rajkot Bench pronounced in the case of Vineetkumar Raghavjibhai Bhalodia vs. ITO reported at (2011) 140 TTJ (Rajkot) 58. In that cited decision, an individual has received a gift from HUF. The AO was of the view that the HUF being not covered within the definition of "relative", therefore the gift received by the individual from the HUF was taxable. The Respected Bench has commented that as per the definition of "person" defined in section 2(31) includes "HUF". Therefore a HUF is distinctly assessable to tax as a person under the IT Act. The Bench has observed that, quote "Therefore, the expression "HUF" must be construed in the sense in which it is understood under the Hindu law as has been in the case of Surjit Lal Chhabda vs. CIT 1976 CTR (SC) 140: (1975) 101 ITR 776 (SC). Actually an "HUF" constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. All these persons fall in the definition of "relative" as provided in Explanation to cl.(vi) of s. 56(2) of the Act. The observation of the CIT(A) that HUF is as good as ‘a BOI’ and cannot be termed as "relative" is not acceptable. Rather, an HUF is ‘a group of relatives’. Now having found that an HUF is ‘a group of relatives’, the question now arises as to whether would only the gift given by the individual relative from the HUF be exempt from taxation and would, if a gift collectively given by the Dr. M.Shobha Ravhuveera, Hyderabad 6 ‘group of relatives’ from the HUF not exempt from taxation." 7.4. The Respected Co-ordinate Bench has also examined the intention of the legislature and thereupon made an observation that, quote "11.2. Further, from a plain reading of s. 56(2)(vi) along with the Explanation to that section and on understanding the intention of the legislature from the section, we find that a gift received from "relative", irrespective of whether it is from an individual relative or from a group of relatives is exempt from tax under the provisions of s.56(2) (vi) of the Act as a group of relatives also falls within the Explanation to s.56(2)(vi) of the Act. It is not expressly defined in the Explanation that the word "relative" represents a single person. And it is not always necessary that singular remains singular. Sometimes a singular can mean more than one, as in the case before us. In the case before us the assessee received gift from his HUF. The word "HUF", though sounds singular unit in its form and assessed as such for incometax purposes, finally at the end a "HUF" is made up of "a group of relatives". Unquote. The above observation has buttressed our view, however, in addition to the above observation of a Coordinate Bench, we have also noted that at some later stage, the legislature became conscious of the problem, therefore while drafting the analogous provisions 5 ITA No.2627/M/201 Shri Hemal D. Shah of section 56(2)(vii), it was added in the definition of "relative" (ii) in case of a Hindu Undivided Family, any member thereof. This section is inserted by Finance (No.2) Act of 2009 w.e.f. 1/10/2009 which prescribes that where an individual or HUF receives in any previous year on or after 1st day of October- 2009 any sum of money without consideration exceeding Rs.50,000/- the whole of the aggregate value of such sum shall be chargeable to income-tax. Provided that the charging clause shall not to apply to any sum of money received from any relative. As per this newly inserted clauses, (a) "relative" means in case of HUF any "member thereof". Although this subsequent change in the Act do not apply for the year under consideration being incorporated by Finance Act, 2009 but it appears that by insertion of these words Hon’ble Legislatures have visualized the difficulty, hence streamlined the provisions by removing the doubt. We therefore hold that since the assessee-HUF has undisputedly received a gift of Rs.7 lacs from a relative who is an uncle of the Karta of this HUF, i.e.; as per Explanation to sub-clause(iv); "brother or sister of either of the parents of the individual", hence fall within the category of the "Relative" prescribed in the Act, therefore not chargeable to tax in the hands of the assessee. Thus the Grounds raised are hereby allowed.”

Considering the decision of coordinate bench of Tribunal as referred above, and respectfully following the decision the ground of appeal raised by assessee is allowed.

7. Ground No.3 relates to treatment of gift of Rs. 14,40,000/- from Pankaj J Shah HUF as income under the head ‘income from other source’ under section 56(2)(vi). The ld AR for the assessee explained that Pankak J Shah HUF consist of Pankaj J Shah ( brother of assessee’s father), Mrs Bharti P Shah ( wife of Pankaj J Shah) and Amish P Shah ( son of Pankaj J Shah) and Mrs. Bharti Shah/ Cousin of assessee. However, on our intervention that if there is any decision in his favour on this issue, since the assessee is not a member of Pankaj J Shah HUF. The ld AR for the assessee fairly conceded that this gift received from Pankaj J Shah HUF in wherein the assessee is not a member. And some of the members are not covered by the definition of ‘relatives’ as prescribed under section 56(2)(vi) of the Act. Considering the contention and fairness of the ld AR for the assessee, we do not find merit in the grounds of appeal raised by the assessee and the same is dismissed.

8. In the result the appeal of the assessee is partly allowed.

ITA No.2627/M/201 Shri Hemal D. Shah