Pankil Garg vs. PCIT (ITAT Chandigarh)

IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, ‘B’ , CHANDIGARH

BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND
Ms . ANNAPURNA GUPTA, ACCOUNTANT MEMBER

./ ITA No. 773/CHD/2018
/ Assessment Year : 2011-12
Shri Pankil Garg,
Aggarwal Bhawan,
Shahbad (M)

The Pr. CIT,
Karnal

PAN No. AFOPG2875E
Appellant /Respondent
Assessee by : Shri K.R. Chhabra, Advocate
Revenue by : Sh. G.S. Phani Kishore, CIT DR

Date of Hearing : 15.07.2019
Date of Pronouncement : 17.07.2019
Order
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the
order dated 19.3.2018 of the Pr. Commissioner of Income Tax, Karnal
[hereinafter referred to as’ PCIT’] against the revision order passed u/s
263 of the Act , whereby, the Ld. PCIT has set aside the assessment
order passed by the Assessing Officer wi th a direct ion to make
assessment afresh u/s 143(3) read wi th sect ion 147 of the Income Tax
Act , 1961 (in shor t ‘ the Act ‘).
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2. The appeal of the assessee is barred by limi tat ion period of 06
days. A separate appl icat ion for Condonat ion of Delay has been moved
by the assessee pleading that the counsel for the assessee due to medical
reasons could not fi le the appeal wi thin the stipulated per iod. The
averments made in the applicat ion have been corroborated wi th the
affidavi t of the counsel for the assessee.
Considering the grounds mentioned in the appl icat ion for
Condonat ion of Delay which are duly supported wi th the affidavi t and
also consider ing the shortness of the delay period of only 06 days, the
delay in fil ing the present appeal is hereby condoned.
3. Brief facts relat ing to the issue are that the assessee fi led his
return of income on 9.3.2012 declaring an income of Rs. 14,32,982/-.
The assessment was completed by the Assessing Officer vide order dated
13.3.2014 u/s 143(3) of the Act accepting the returned income.
Subsequent ly, the Assessing Officer reopened the assessment u/s 147
read wi th sect ion 148 of the Act on the ground that the assessee during
the year under considerat ion had received a gi ft of Rs. 5,90,000/- from
his ‘Hindu Undivided Family’ (‘HUF’). The Assessing Officer was of
the view that since the amount of said gift was more than Rs. 50,000/-,
hence, the same was exigible to tax as ‘income from other sources’ u/s
56(2)(vi i) of the I.T. Act. However, the assessee in the reopened
assessment proceedings rel ied upon the decision of the Coordinate
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Rajkot Bench of the Tribunal order dated 17.5.2011, in the case of
‘Vineetkumar Raghavjibhai Bhalodia vs ITO’ passed in ITA No.
583/Rjt /2007 for assessment year 2005-06, which has been further
fol lowed by the Hyderabad Bench (SMC) of the Tribunal , order dated
17.6.2015 in ‘Mr.Biravel l i Bhaskar vs ITO’ ITA No. 398/Hyd/2015
for A.Y. 2008-09, wherein, it has been held that ‘HUF’ being a group of
relat ives, hence, the gi ft by the ‘ ‘HUF’’ to an individual is nothing but a
gi ft from group of relat ives and further as per the exclusion clause
56(2)(vi i) of the Act , a gift from relat ive is not exigible to taxat ion,
hence, the gift received by the assessee from the ‘HUF’ was not taxable.
The Assessing Officer accepted the content ions raised by the assessee
and accordingly assessed the income of the assessee at the returned
income.
However, subsequently, the Ld. PCIT invoking his jurisdict ion u/s
263 of the Act , set aside the order passed by the Assessing Officer and
held that the ‘HUF’ does not fal l in the defini t ion of relat ive in case of
an ‘individual’ as provided in Explanation to clause (vi i) to section
56(2) as subst i tuted by Finance Act, 2012 wi th retrospect ive effect from
1.10.2009. That though, the defini t ion of a relat ive in case of a ‘HUF’
has been extended to include any member of the ‘HUF’ , yet, in the said
extended defini t ion, the converse case is not included that is to say in
the case of individual , the ‘HUF’ has not been ment ioned in the list of
relat ives. Ld. PCIT, thus, formed a view that though a gift from a
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member thereof to the ‘HUF’ was not exigible to taxat ion as per the
provisions of sect ion 56(2)(vi i ) of the Act, however, a gift by the ‘HUF’
to a member exceeding a sum of Rs. 50,000/- was taxable. She also
rejected the content ion of the assessee that the aforesaid gi ft amount
was received by the assessee from the income of the ‘HUF’ and thus
was exempt from taxat ion u/s 10(2) of the Act , holding that to claim
exempt ion u/s 10(2) of the Act , the member ‘HUF’ must receive any
amount for a considerat ion out of the income of the ‘HUF’. That since
the assessee had received the aforesaid amount of Rs. 5,90,000/- wi thout
consideration, hence, the same was not tax exempt. She also held that
the decision of the Coordinate Rajkot Bench of the Tribunal in the case
of ‘Vineetkumar Raghavj ibhai Bhalodia vs ITO’ (supra) and Hyderabad
Bench in ‘Mr.Bi ravell i Bhaskar vs ITO’ (supra) were not in consonance
wi th the statutory provisions of sect ion 56(2)(vi i) and sect ion 10(2) of
the I.T. Act and, thus, the Assessing Officer had made a mistake in not
taking recourse to the clear and unambiguous provisions of sect ion
56(2)(vi i) of the Act and in unduly placing rel iance on the judicial
decisions which were not in accordance wi th the provisions of law. She,
therefore, held that the order passed by the assessing officer was
erroneous and prejudicial to the interest of Revenue. She, accordingly,
set aside the order of the Assessing Officer and directed the Assessing
Officer to make assessment afresh.
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4. Being aggrieved by the above order of the Ld. PCIT, the assessee
has come in appeal before us.
5. We have heard the rival content ions and have also gone through
the record. In this case, or iginal ly, the assessment was framed u/s
143(3) of the Act accepting the returned income. The assessment was
reopened u/s 147 of the Act only to examine the issue as to the
taxabi l i ty of the amount of gi ft received by the assessee from his ‘HUF’ .
The issue was examined by the Assessing Officer and he accepted the
returned income holding that the gift received from ‘HUF’ was not
exigible to tax by relying upon the decisions of the Coordinate Rajkot
Bench of the Tribunal in the case of Vineetkumar Raghavjibhai Bhalodia
vs ITO’ (supra) and Hyderabad Bench of the Tr ibunal in ‘Mr.Biravel l i
Bhaskar vs ITO’ (supra).
The decisions of the higher judicial authori t ies were binding upon the
Assessing Officer and the Assessing Officer accordingly fol lowed the
same. In view of this, the Assessing Officer took a possible view in the
l ight of the direct judicial decisions on the issue. Under the
circumstances, the order of the Assessing Officer cannot be said to be
erroneous. The Hon’ble Supreme Court in the case of ‘Malabar
Industries Co. Ltd. vs CIT’ (2000) 243 ITR 83 has held that for
exercise of jurisdict ion by the Commissioner u/s 263 of the Act, prerequisi
te condi tion is that the order of the Income Tax officer is
erroneous in so far as i t is prejudicial to the interest of Revenue. Thus,
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the Commissioner has to be sat isfied i f the twin condi t ions namely (i)
the order of the Assessing Officer sought to be revised is erroneous
and; ( ii ) i t is prejudicial to the interest of Revenue. The Hon’ble
Supreme Court has further held that i f one out of the aforesaid twin
condi t ions is absent, the recourse cannot be had to sect ion 263(1) of the
Act by the Commissioner. As observed above, since the Assessing
Officer had duly appl ied his mind to the issue and fol lowed the
decisions of the higher judicial authorit ies i .e. Coordinate Benches of
the Tr ibunal (supra), hence, in the l ight of the decision of the Hon’ble
Supreme Court in the case of ‘Malabar Industries Co. Ltd. vs CIT’
(supra), the order of the Assessing Officer cannot be held to be
erroneous and, therefore, the Ld. PCIT wrongly exercised jurisdict ion
u/s 263 of the Act and the same cannot be held to be just i fied. The order
of the Ld. PCIT is l iable to be set aside on this score alone.
6. We would l ike to further add that the Ld. PCIT whi le passing the
impugned order, held that the decisions of the Coordinate Rajkot and
Hyderabad Benches of the Tribunal (supra) were not correct decisions
which, in our view, tantamount to judicial indiscipl ine. When there
were direct decisions of the higher cour ts avai lable wi th the assessee
which were duly ci ted before the Ld. PCIT and also which were duly
discussed in the impugned order of the Assessing Officer, the Ld. PCIT
nei ther had any power nor any justi ficat ion to say that the Assessing
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Officer should not have placed rel iance on the said judicial decisions. If
such a course is al lowed to subsist , then there wi l l be no certainty and
final ity to the l i t igat ion. I f the decisions passed by the higher
authori t ies are not fol lowed by the lower authori ties, there wi l l be chaos
resul t ing into never ending l it igat ion and mul t ipl icat ion of the cases. In
view of the above discussion, the impugned order of the Ld. PCIT is non
sustainable as per law.
7. Now coming to the observat ions made by the Ld. PCIT on the
meri ts of the case. The assessee in this case has taken a plea that the
aforesaid gift has been received by the assessee out of the income of the
‘HUF’ and that the same was exempt u/s 10(2) of the I.T. Act . There is a
direct decision of the Coordinate Rajkot and Hyderabad Benches of the
Tribunal (supra) on this issue, holding that for get ting any exempt ion
u/s 10(2) of the Act , the individual assessee must sat isfy two condi t ions,
first ly, he is a member of the ‘HUF’ and, secondly, he receives a sum
out of the income of the such ‘HUF’, may be of ear lier years. The Ld.
PCIT in the impugned order passed u/s 263 of the Act , however, held
that the word ‘paid out ’ means that sum must be paid out either in return
of ‘goods’ or ‘services’ or that the same must be for some
consideration. Such an interpretation by the Ld. PCIT of sect ion 10(2)
of the Act is whol ly misconceived. There is no rebuttal or denial ei ther
in the order of the Assessing Officer or in the order of the Ld. PCIT in
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respect of the content ion of the assessee that amount in quest ion was
received out of the income of the ‘HUF’. In view of this, the assessee,
otherwise, is ent i t led to exempt ion u/s 10(2) of the Act .
8. Now coming to the findings of the Ld. PCIT that as per the
provisions of section 56 (2) (vi i) of the Act , though the members of the
‘HUF’ are to be taken relat ives of the ‘HUF’ for the purpose of the said
sect ion, however, the converse is not true that is to say that ‘HUF’ is
not a relat ive of the individual member as per meaning of relat ive given
in the case i f individual under explanat ion to sect ion 56(2)(vi i) of the
Act .
Before further del iberat ing on this quest ion, we deem it necessary to
first discuss as to what const i tute ‘HUF’ (Hindu Undivided Fami ly). The
‘HUF’ has been included within the meaning of word ‘person’ in
sect ion 2(31) of the Income Tax Act , 1961 as a separate taxable ent ity
but ‘HUF’ has not been defined in the Income Tax Act , whereby, i t
means that the expression ‘HUF’ in the Act is used in the sense in which
a ‘Hindu Joint Family’ or a ‘Hindu Undivided Fami ly’ ( ‘HUF’) is
understood in the personal laws of Hindus. A Hindu joint or undivided
fami ly is not created for any business purposes, rather, it is a normal
condi t ion of Hindu society and prevalent throughout India based on the
social necessi ty. Subject to the subsequent amendments in Hindu
Succession Act , as per the Hindu Law and Usage, a ‘Hindu Joint Fami ly’
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consists of male members descended lineally from a common male
ancestor, together wi th their mothers, wives or widows and unmarr ied
daughters bound together by the fundamental principle of ‘sapindaship’
or family relat ionship which is the essence and distinguishing feature of
the inst i tut ion. I t is purely a creat ion of law and cannot be created by
an act of part ies except in the case of adopt ion or a marr iage, only when
a stranger can become a ‘HUF’ member. An undivided fami ly is a normal
condi t ion of a Hindu society which is ordinari ly joint not only in estate
but also in food and worship. The cord that knits of the fami ly together
is not property but relationship. There is no presumption that a fami ly
is joint because i t is possessed of joint property. If the persons in the
fami ly l ive together and are joint in food and worship, irrespective of
the fact that there is joint proper ty of the fami ly, i t const i tutes ‘HUF’ . It
is a fluctuating body, i ts size increases with birth of a member in the
fami ly and decreases on death of a member in the fami ly. Females go
and come into the ‘HUF’ on marriage. A ‘coparcenary’ is a narrower
body than a joint fami ly and consists of only persons who take by birth
an interest in the joint fami ly property and can enforce a part i t ion
whenever they l ike. Though, members of ‘HUF’ are ent i t led to be
maintained out of the joint fami ly funds, however, the members of the
narrower body within ‘HUF’ cal led ‘Coparcenary’ have birth rights in
the joint fami ly property. Hindu Law does not recognize an ‘HUF’ as an
ent ity separate from the members of the family. In an ‘HUF’, the
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members col lect ively own i t. The interest and share of the members in
the estate of the fami ly is undivided and undetermined. Al l the members
col lect ively own and enjoy the property wi thout determinat ion of their
shares unt i l the same is part i t ioned. There is communi ty of interest and
uni ty of possession between al l the members and upon the death of any
of them, the others take by survivorship and not by succession. An
‘HUF’ though treated as a separate ent i ty for taxat ion purposes, i t
di ffers in several respects from a ‘corporat ion’ and from a ‘partnership
firm’ as the later ent i t ies can be formed by an act of part ies and
strangers can be their members, however, ‘HUF’ is a creat ion of law and
the members having natural relat ionship and a stranger cannot become
i ts member except by adopt ion or marriage. Apart from that , in a
partnership fi rm, each of the members of the partnership firm has a
defini te and determined share in capi tal as well as in the profi ts of the
firm. A member of the firm subject to the terms of the agreement /
partnership deed may deposi t or wi thdraw his capi tal but that is not so
in the case of a ‘HUF’ . Nei ther there is any defini te share of any of the
members in the estate of the ‘HUF’ nor any member is ent i t led to any
share in the profi ts if the ‘HUF’ is engaged in any business. The income
of the ‘HUF’ goes to the common ki t ty. The property and the income of
the ‘HUF’ is managed by ‘Kar ta’ or Manager of the ‘HUF’ who general ly
is a senior most male member of the fami ly. The powers of the ‘Karta’
of management to the propert ies of the ‘HUF’ are wide and he is not
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l iable to give day to day accounts of the propert ies to the members of
the ‘HUF’. Since the property of the ‘HUF’ does not belong solely to an
individual member and the shares of the members are not determined,
hence, the ‘HUF’ is made a taxable ent i ty in itself. As per the provisions
of sect ion 10(2) of the I.T. Act , any sum received by an individual , as a
member of ‘HUF’, which has been paid out of the income of the family
or out of the income of the estate of the fami ly is not exigible to
taxat ion. The said exempt ion has been given on the pat tern of a
partnership firm to avoid double taxation of the same amount . In the
case of partnership fi rm, when the partnership firm has been assessed to
income tax separately, then, the share of profi t received by an individual
person is not taxable. I f a member does not opt to receive his share out
of the profi ts of the firm and opts that the same be added towards his
capital in the firm, even then, when the said par tner either on
dissolut ion of the firm or otherwise receives back his capi tal, the said
capital is not taxable as an income of the partner, rather, the same is
taken as a capital receipt . However, in the case of ‘HUF’ , or to say in the
strict sense in case of ‘coparcenary’, the individual members receive
their share on part i t ion. However, dur ing the subsist ing coparcenary or
to say broadly ‘HUF’, no member is ent i t led to receive any defini te
share out of the income of the ‘HUF’ . It is left to the prudence and
wisdom of the manager who has to manage the affai rs of the ‘HUF’, he
may spend the money or property of the ‘HUF’ in the case of a need of a
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member, such as on the marriage of a unmarried female member or in
case of certain treatment of any disease of the member or in case of
educat ional needs of any chi ldren in the ‘HUF’. The amount spent may
be more than that the member may have gotten on the part i t ion of the
‘HUF’. The Kar ta of the ‘HUF’, even can gi ft of the ‘HUF’ property for
pious purpose and even he can contract a debt for the legal necessity and
for fami ly purposes and can bind the other members to the extent of
their interest in the fami ly property.
In the above scenario, the property of the ‘HUF’ nei ther cannot be said
to belong to a third person nor can be said to be in ‘corporate enti ty’,
rather, the same is the property of the members of the fami ly. It is
because that the share of each of the individual member in the property
or income of the ‘HUF’ is not determinate, hence, the family, as such,
is treated as separate ent i ty for taxation purposes. ‘HUF’ otherwise is
not recognized as a separate jur ist ic person dist inct from the members
who const i tute i t . A member of the ‘HUF’ has a pre-existing r ight in the
fami ly propert ies. A Coparcener has a pre-exist ing r ight and interest in
the property and can demand part i t ion also, however, the other members
of the ‘HUF’ have right to be maintain out of the ‘HUF’ proper ty. On
division, the share in the estate / capi tal of the ‘HUF’ cannot be treated
as income of the recipient, rather, the same wi l l be a capi tal receipt in
his hands. However, in the case of a partnership firm, if a member
receives an amount which is more than his share in the capi tal or in the
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profi ts of the firm, the amount received in excess of the share can be
treated as a gift by the fi rm or by other partners to that individual which
wi ll be exigible to income tax. However, in the case of an ‘HUF’ , since
there is not any determined share of any member in the fami ly property,
any amount received by a member of a ‘HUF’ from proper ty of ‘HUF’
cannot be said to be more than his share in the property, rather, the
same is given to him in the normal course of management of family
affai rs as is deemed fi t or prudent by manager / ‘karta’ of the ‘HUF’ and
i t cannot be said that such an amount received by a member of ‘HUF’ is
the income of the said member. I t is received out of the common ki t ty in
which such a member has also a joint interest along wi th other fami ly
members. Al l the ancestral proper ty belong to the fami ly managed by
the head of the fami ly and once income of the fami ly is assessed or
subjected to tax as per the provisions of the Income Tax Act , then, the
distribut ion / payment out of the joint fami ly property to any member of
the fami ly cannot be said to be income of such a member. The
just ificat ion of the payment or the quantum of amount paid to any
member by the ‘Karta’ / manager of the ‘HUF’ is though subject to
challenge by other members of the HUF , if found to be not genuine or
not for fami ly good, however, a third person cannot question i t. Family
income flows into a common pool from which resources are drawn to
meet needs of al l the members which are regulated by the head of the
fami ly. In such circumstances, any amount received by a member of the
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‘HUF’, even out of the capi tal or estate of the ‘HUF’ cannot be said to
be income of the member exigible to taxation. Since such a member
himsel f has a pre-existing right in the property of the ‘HUF’ , hence, i t
cannot be said to be a gi ft without consideration by the ‘HUF’ or by the
other members of the ‘HUF’ to that recipient member. In such
circumstances, the provisions of sect ion 56(2) (vi i) are not at tracted in
case an individual member receives any sum ei ther during the
subsistence of the ‘HUF’ for his needs or on par ti t ion of the ‘HUF’ in
l ieu of his share in the joint fami ly property.
However, the converse is not true i.e. to say in case an individual
member throws his self-acquired property into common pool of ‘HUF’.
The ‘HUF’ or other members of the ‘HUF’ do not have any pre-exist ing
right in the sel f-acqui red property of a member. If such an individual
member throws his own/sel f-earned or self-acqui red property in common
pool , i t wi ll be an income of the ‘HUF’, however, the same wi l l be
exempt from taxat ion as the individual members of an ‘HUF’ have been
included in the meaning of ‘relat ive’ as provided in the explanat ion to
sect ion 56(2)(vi i) of the Act . It is because of this sal ient feature of the
HUF that in case of individual, the HUF has not been included in the
defini t ion of relat ive in explanat ion to sect ion 56(2) (vi i ) as i t was not
so requi red whereas in case of HUF, members of the HUF find ment ion
in the defini t ion of ‘relat ive’ for the purpose of the said sect ion.
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In view of the above discussion, the amount received by the assessee
from the ‘HUF’, being its member, is a capi tal receipt in his hands and
is not exigible to income tax.
In view of our observat ions made above, the appeal of the assessee
stands al lowed on al l the three counts as discussed above.
Order pronounced in the Open Court on 17.07.2019.
Sd/- Sd/-
($%
 &’# / ANNAPURNA GUPTA)
() / Accountant Member
(  / SANJAY GARG)
 / Judicial Member
Dated : 17.07.2019