HUF Gift to Member – Why It Should Be Treated as Exempt Under Section 10(2) of the IT Act?

 

Core Legal Position

Section 10(2) exemption

1.  Any sum received by an individual as a member of a Hindu Undivided Family is exempt if such amount is paid out of the income of the HUF or from its estate.

2.  Thus, three ingredients:

The assessee is a member of the HUF.

The HUF has income / corpus / estate.

The payment is out of such income or estate.

Why s.56(2)(vii) of the IT Act cannot override s.10(2)

1.  The misinterpretation often arises because of the Explanation to s.56(2)(vii) where the word “relative” includes “any member of an HUF if the HUF is the donee”.

2.  When HUF is receiving, a member giving to HUF is a relative. The Explanation does not deal with HUF as a donor.

3.  Therefore the transaction falls back on s.10(2), which is the specific exemption for HUF to member receipts.

How ITAT in Seema Sureka (ITA No. 2682/Kol/2024) has handled this

The ITAT ruled that:

1.  There are conflicting ITAT rulings on whether HUF can be a “relative” under s.56(2)(vii). However, there is no High Court or Supreme Court ruling against HUF.

2.  The Tribunal preferred the rationale of Gyanchand M. Bardia (Jaipur ITAT) holding that the word “relative” in s.56(2)(vii) describes who can be treated as a relative of the donee, and for HUF being donor, the proper provision is s.10(2).

3.  Hence, the ITAT set aside the addition and directed the AO to examine exemption afresh under s.10(2) after verifying evidence of HUF corpus and membership.

Conclusion:

1.  This is highly favourable — the ITAT did not approve taxability; it only asked AO to verify conditions of s.10(2).

2.  HUF-to-member gifts could fall within the protective scope of section 10(2). If and when the factual conditions satisfied, the exemption is automatic and the receipt cannot be brought to tax under section 56(2)(vii).

The copy of the order is as under:

1763966070-trcUmw-1-TO