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Clubbing Provisions In Case Of Gifts Received By HUF

It is pertinent to refer to the provisions of Section 64(2) of the Act which read as follows:-

  1. Where, in the case of an individual being ‘a member of a Hindu undivided family, any property having been the separate property of the individual has, at ny time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the characterof property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971,—

    1. the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;

    2. the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family;

    3. where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly:

Provided that the income referred to in clause (b) or clause (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be the spouse of the individual.

Explanation 1.—For the purposes of sub-section (2),—
“property” includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property.

Explanation 2.—For the purposes of this setion, “income” includes loss.
Thus, it is not possible for an individual being a member of HUF to convert his separate property into property belonging to HUF in view of the clubbing provisions contained in Section 64(2) of the Income-tax Act, 1956. In such a case, the income generated from such property would be assessable as his individual income only and not as HUF income. However, the income which is so generated remains with the HUF and HUF is free to invest this income and any income generated out of such reinvested income is not liable for clubbing and remains with the HUF. Thus, though the initial income is clubbed in the hands of the person who has given the gift, income from income in future years is not to be clubbed.

In case of say shares which are gifted as such, the dividend on such shares is to be clubbed with the person who has gifted the shares. However, if any bonus shares are issued on these shares and any dividend is received on these bonus shares, the said dividend is income of HUF only.

1. Whether Individual Property of Coparcener when clothed as HUF property amounts to Gift to HUF

Here it is important to note the decision of the Apex Court in the case of  Goli Eswariah vs CGT (1970) 2 SCC 390 [=(1970) 76 ITR 6751 , wherein the  Apex Court considered the issue regarding applicability of the provisions of the Gift tax Act,1958(as was in force at that time) and held as follows:

It must be remembered that a Hindu family i not a creature of a contract.  As observed by this Court in Mallesappa Bendeppa Desni vs Desai Ma/la ppa that the doctrine of throwing into common stock inevitably postulates that the owner of a separate property is a coparcener who has an interest in the coparcenary property and desires to blend his separate property with the coparcenary property. The existence of a coparcenary is absolutely necessary before a coparcener can throw into the common stock his self-acquired properties. The separate property of a member of a joint Hindu family may be impressed with the character of joint family property if it is voluntarily thrown by him into the common stock with the intention of abandoning his separate claim therein. The separate property of a Hindu ceases to be a separate property and acquires the characteristic of a joint family or ancestral property not by any physical mixing with his joint family or his ancestral property but by his own volition and intention by his waiving and surrendering his separate rights in it as separate property. The act by which the coparcener throws his separate property to the common stock is a unilateral act. There is no question of either the family rejecting or accepting it. By his individual volition he renounces his individual right in that property and treats it as a property of the family. No longer he declares his intention to treat his self acquired property as that of the joint family property, the property assumes the character of joint family property. The doctrine of throwing to the common stock is a doctrine peculiar to the Mitakshra School of  Hindu law. When a coparcener throws is separate property into the common stock, he makes no gift under Chapter VII of the Transfer of Property Act. In such a case there is no donor or donee. Further no question of acceptance of the property thrown into the common stock arises.

It is true that the assessee by throwing his self-acquired property into the common stock gave up his exclusive right in that property and in its place he was content to own that property jointly with the other members of his family. We do not think that it is necessary in this case to consider whether the act of the assessee can be said to have “diminished directly or indirectly the value of his own property and increased the value of the property” of his joint family because in our opinion that act cannot he considered as a “transaction entered into”. Clause (d) of Section 2 (xxiv) contemplates a “transaction entered into” by one person with another. It cannot apply to a unilateral act. It must he an act to which two or more persons are parties. It is true that for the purpose of the Act, a Hindu undivided family can be considered as a “person”. But the assessee did not enter into any transaction with his family. Therefore we are unable to agree with. the High Court that the act of the assessee fell within the scope of Section 2 (xxiv) (d) of the Act.

Thus, in the light of the above judgement, inspite of the applicability of provisions of Section 64(2), HUF cannot be said to have received any gift in case an individual member of HUF throws his self acquired property in the common hotchpot.

2. Applicability of Clubbing Provisions in case Karta of a HUF is a Partner in a Firm

The Hon’ble Apex Court in the case of Commissioner of Income-tax Etc vs Omprakash Etc (1995) 217 ITR 785 had the occasion to consider a situation where the Karta of a HUF was partner in a firm in the capacity of Karta of the HUF and not in his individual capacity and considering the applicability of the then existing clubbing provisions, the Hon’ble Apex Court held as under:-

We hold that where a person is a partner in a partnership firm not in his individual capacity but as the Karta of the HUF, neither the income accruing to his wife on account of her being a partner in the same partnership firm nor the income accruing to his minor children on account of their being admitted to the benefits of such partnership firm, can be included in the total income of such person - neither in his individual assessment nor in the assessment of the HUF. Our holding is confined to the above situation alone.

The above decision of the Apex Court was later on referred to in the Constitution bench judgement in the case of CIT vs Omprakash (1999) 238 ITR 1044 wherein the Apex court observed as follows:

When a Karta of the HUF is a partner in a partnership firm, he has a dual capacity; qua the partnership, he functions in his personal capacity and qua third parties, in his representative capacity. The Apex Court also considered the implications of the term “individual” as appearing in the definition of the term “Person” in Section 2(31) of the Income-tax Act, 1961 and held that the term “individual” as used in Section 64 as dealing with the clubbing provisions did not include HUF within its ambit. The Constitution bench thus settled the diverse high court decisions in this regard by holding that a Karta of the HUF does not fall within the term “individual” for the purpose of then existing Section 64(1) (i) and (ii) of the Income-tax Act, 1961.
Gift of HUF Property to Stranger or to any Person who is a Alien to HUF
Applicability of Clubbing Provisions in case Karta of a HUF is a Partner in a Firm

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