Rate of tax on sale of Funds

If sold after 3 years from purchase date, long term capital gain tax will be applicable. Current tax rate is the lower of (a) 10 per cent of profit or (b) 20 per cent of profit adjusted after indexation benefits. Any cess/surcharge is not included. One has to calculate long term capital gain by considering the Indexation or by calculating 10 per cent of profit, the HUF can adopt the beneficial method of calculation of long-term capital gains.

Transfer of property from HUF to its Members

As per section 47(i) of the Income -tax Act, 1961 (Act) Nothing contained in section 45 of the Act shall apply to any distribution of capital assets on the total or partial partition of a Hindu undivided family.

In case the HUF totally partition the property and divide amongst the members the amount received will not be taxable in the hands of the members.

Cost of acquisition in the hands of the members

As per section 49(i) of the Act, the cost of acquisition, where the capital asset became the property of the assessee, on any distribution of assets on the total or partial partition of a Hindu undivided family; the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. However, when member sells or surrenders, he will be liable to pay capital gains tax. The member will get the indexation and period of holding by the HUF

Stamp Duty implications

As per The Maharashtra Stamp Act, 1958 – Schedule 1, No. 46, Duty of a deed on an “instrument of partition”, the rate shall be Two per cent of the amount or the market value of the separated share or shares of the property. largest share remaining after the property is partitioned (or, if there are two or more shares of equal value and not smaller than any of the other shares, then one of such equal shares) shall be deemed to be that from which the other shares are separated.

The asset held by the HUF being moveable property. It can be transferred by handing over of the moveable property . For the purpose of getting order under section 171 of the Act it may be desirable to record the terms of conditions of total partition which does not require stamp duty, it can be done in Rs. 1,000 stamp paper.

By way of Will

In case the Karta makes will and the total property is distributed amongst the members as per the will when members are liable to be taxed on the long-term capital gains subject to indexation and period of holding.

According to us the Karta cannot write a will distributing the entire property of HUF, he can only bequeath to the extent of his share in the HUF.

The Hon’ble Andhra Pradesh High Court in the case of Commissioner of Gift-tax v. P. Hanumanthappa [1968] 68 ITR 363 (Andhra Pradesh) has held that it is an elementary proposition that a karta of a HUF cannot gift or alienate property except to extent recognized under Hindu law.

Implications of section 56(2)(x) of the Act

As per the Proviso to section 56(2(x) of the Act, the provisions therein are not applicable to a ‘relative’ as defined in the explanation to section 56(2)(vii) of the Act.

According to the definition of “relative” inter alia, in case of an HUF relative means any member thereof. However, it doesn’t cover a revers scenario where a member receives cash or kind from an HUF. Therefore, any receipt by an individual from HUF in which he is a member is not specifically exempt under section 56(2)(x) of the Act, subject to fulfilment of other conditions. This certainly appears to be incongruous. Receipt by HUF from member is exempt whereas in a vice versa scenario, the transaction would become taxable. This is certainly not envisaged.

The Hon’ble ITAT Hyderabad Bench in the case of ITO v. Dr. M. Shobha Ravhuveera ITA 47/Hyd/2013 dated March 3, 2014 and the Hon’ble ITAT Ahmedabad Bench in the case of Harshabhai Dahyalal Vaidhya (HUF) v. ITO (155 TTJ (Ahd) 71) held that an HUF is nothing but the group of relative. Merely because it has given a legal status as a HUF, the individual does 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 of the Act.

Further, The Hon’ble ITAT Mumbai in the case of DCIT v. Ateev V. Gala ITA 1906/Mum/2014 dated April 18, 2017 on the question of chargeability of tax on a question whether a gift received from relative held that it is exempt from tax under the provision of section 56(2)(vi) of the Act as an HUF is a group of relatives.

Further, reliance is placed on the decision of the Hon’ble ITAT Chandigarh Bench in the case of Pankil Garg v. PCIT [2019] 108 taxmann.com 337 (Chandigarh – Trib.) wherein it was held that provisions of section 56(2)(vii) are not attracted in case an individual member receives any sum either during
subsistence of HUF for his needs or on partition of HUF in lieu of his share in
joint family property. therefore, amount received by assessee from as gift from
HUF, being its member, was a capital receipt not exigible to tax.

Similarly, the Hon’ble ITAT Rajkot Bench in the case of Vineetkumar Raghavjibhai Bhalodia v. ITO [2011] 12 ITR(T) 616 (Rajkot) (Tri) held that an HUF is a group of relatives and therefore, gift received from HUF would be exempt from tax under section 56(2)(vi) of the Act.

Therefore, in light of judicial precedents it is clear that if all the members of the HUF are “relatives” as per the Act. Then section 56 (2)(x) of the Act should not be attracted.