Section 10(2)

Section 10(2) — the law in short

What the courts have decided on section 10(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Gyanchand M. Bardia v ITO — a sum received by a member from his HUF is not received 'without consideration' at all, and the Tribunal's own contrary order for the earlier year was distinguished ITATHelps taxpayer
  The Tribunal decided this very issue against my client in an earlier assessment year. Same facts, next year. Am I bound by it?
  Not necessarily. The Ahmedabad Bench, on the same assessee and the same issue, declined to follow the Tribunal's order for AY 2012-13 and deleted the addition, holding — following the Chandigarh Bench in Pankil Garg — that a member has a pre-existing right in the property of the HUF, so an amount given to him from that property is not a sum received without consideration or a gift at all, and section 56(2)(vii) is not attracted. The earlier order was distinguished on the footing that it had proceeded on the premise that the payment was a gift, a premise held incorrect in law.
• Pankil Garg v PCIT ITATHelps taxpayer
  I received money from my HUF. Is it taxable because an HUF is not my 'relative'?
  No. A sum received by a member from his HUF, even out of its capital or estate, is a capital receipt in his hands and not income, and s.10(2) was also available. The s.263 revision built on the contrary view was set aside.
• Vinitkumar Raghavjibhai Bhalodia v ITO — a gift by an HUF to its member is a gift from 'relatives', and is in any event exempt under section 10(2) ITATHelps taxpayer
  My client received Rs 60 lakh from his own HUF. The Assessing Officer says an HUF is not a 'relative' in the Explanation, so it is taxable. What is the answer?
  There are two answers and the Rajkot Bench gave both. First, an HUF is not a body of individuals but 'a group of relatives' — every person who composes it falls within the Explanation's list — so a gift from the HUF to a member is a gift from relatives and is outside the charge. Second and independently, a sum received by a member out of the income of the family is exempt under section 10(2), which requires only that he is a member and that the sum came out of the income of the family.
• Statutory position — s.64(2): converting self-acquired property into HUF property does not move the income, and on a partition the spouse's share is clubbed too CBDT Circulars & InstructionsCuts both ways
  A client wants to transfer a rental property he owns personally into his family HUF so that the rent is taxed in the HUF's lower slab. He says the HUF will be a separate assessee with its own basic exemption. Does that work?
  No. Section 64(2) applies where an individual who is a member of a Hindu undivided family converts property that was his separate property into property belonging to the family — by impressing it with the character of family property, or by throwing it into the common stock, or by transferring it to the family otherwise than for adequate consideration. From the assessment year beginning 1 April 1971, and notwithstanding anything in any other provision of the Act or in any other law, the income derived from the converted property is deemed to arise to the INDIVIDUAL and not to the family. And the clubbing survives a partition: where the converted property has been the subject-matter of a partition, whether partial or total, the income from so much of it as is received by the SPOUSE on partition is deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse, and s.64(1) then applies so as to bring it back into the individual's hands.
• Statutory position — s.10(2): a member's receipt out of family income is exempt, but the clause is subject to s.64(2) and is overridden by s.171(4)(b) CBDT Circulars & InstructionsCuts both ways
  My client received money from his family HUF during the year. The Assessing Officer wants to tax it in his hands. Is it exempt, and if so is there anything that can take the exemption away?
  Section 10(2) exempts, in computing the total income of a previous year of any person, "any sum received by an individual as a member of a Hindu undivided family, where such sum has been paid out of the income of the family, or, in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family". Two qualifications sit on the face of the Act and both are routinely missed. The clause opens with the words "subject to the provisions of sub-section (2) of section 64", so where the family's income is itself income the individual is deemed to derive under the conversion rules of s.64(2), the exemption gives him nothing. And s.171(4)(b) imposes joint and several liability on members for tax on the family's income up to the date of a recorded partition expressly "notwithstanding anything contained in clause (2) of section 10".
• Statutory position — s.171: the fiction that a family assessed as undivided continues until a finding of partition is recorded, the s.171(3) order, and what the Explanation means by "partition" CBDT Circulars & InstructionsCuts both ways
  Our family divided years ago and each of us has been showing his own income since. The Assessing Officer has issued a notice to the HUF for those very years and says the HUF is still alive. Can he do that when we have actually separated?
  Yes, unless and until a finding of partition has been recorded under s.171. Section 171(1) creates a fiction: a Hindu family hitherto assessed as undivided is deemed for the purposes of the Act to continue to be a Hindu undivided family, except where and in so far as a finding of partition has been given under the section. The machinery is s.171(2) and (3) — a claim made at the time of an assessment under s.143 or s.144, an inquiry after notice to all the members, and a finding recorded by the Assessing Officer as to whether there has been a total or partial partition and the date on which it took place. Severance of status is not enough: the Explanation defines "partition" as a physical division of the property where the property admits of a physical division, and expressly provides that a physical division of the income without a physical division of the property producing the income shall not be deemed to be a partition.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.