Question: If Karta from a HUF transfers money from his personal account to the HUF account. How should it be treated? What happens to the revenue the HUF derives from it?
Money transferred by Karta from HUF can be treated either as a loan if it is intended to be repaid, or as a donation if the money is not intended for repayment. In accordance with Section 56 (2), any gift received from specified relatives is exempt from tax in the hands of the recipient. A HUF member is treated as a relative of the HUF, so there is no tax implications when receiving money for the HUF. However, due to the clubbing provision, income earned by HUF from money donated by its Karta will be treated as Karta income and will be added to its income year after year. The clubbing provisions will apply until HUF assets are fully shared. Please note that only income on the transferred asset will be subject to the clubbing provision and not income earned on income that will be clubbed under the clubbing provision.
If the money is treated as an interest-free loan, it is likely that the valuation agent will apply the hype by invoking the provisions of section 60 to transfer the income without transferring the asset, because the granting of loans interest-free can be viewed as a transfer of income without transferring the asset.
The author is a tax and investment expert and can be contacted at [email protected]
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