2022 (3) TMI 425 - AT - Income Tax

Clubbing of Income - Addition of Rental Income earned by the Spouse of the Assessee, in the hands of the Assessee, U/s 64 - Unexplained investment - disallowing the rent paid to spouse by the Assessee, as his investment/funding towards the purchase of the Property - as per CIT-A no substantial taxable income shown by appellant s wife during the above assessment years Through which she can make investment in her own capacity either in the property or in the mutual funds etc. - HELD THAT - The assessee s wife who has low returned income but received loan from the assessee and she has repaid the loan from the redemption of mutual funds and liquidation of fixed deposits. There is no bar on the part of the assessee to extend loan from his known sources of income to his wife. Similarly, there is no bar on the assessee s wife to repay the loan from her own mutual funds and fixed deposits. The assessee has paid house rent and the recipient, the assessee s wife has declared the same under the head income from house property in her returns which has been accepted by the revenue. The copy of which has been placed before us. The house has been registered in the name of Smt. Shivani Bansal. CIT(A) s observation that the assessee has got meager income hence he cannot afford to purchase a house cannot be accepted as the sources for purchase of the house in the hands of Smt. Shivani Bansal are proved rather never doubted. The ld. CIT(A) s contention that the husband cannot pay rent to the wife is devoid of any legal implication supporting any such contention. Hence, keeping in view the entire facts of the case, we hereby allow the appeal of the assessee.

Summary

Issues:
1. Addition of rental income earned by the spouse of the assessee in the hands of the assessee under Section 64 of the Income Tax Act, 1961.
2. Clubbing provisions and disallowance of rent paid to spouse as investment/funding towards the purchase of property.
3. Taxation of rental income in the hands of both the assessee and the spouse.
4. Consideration of property transfer for inadequate consideration.
5. Claiming HRA deduction when staying with spouse in rented accommodation.
6. Source of income for purchase of property by the spouse.
7. Investments made in the name of the spouse being deemed as made by the assessee.

Analysis:
1. The appeal was filed against the order confirming the addition of rental income earned by the spouse of the assessee in the hands of the assessee under Section 64 of the Income Tax Act, 1961. The Assessing Officer found that the investment for purchasing the property was made without any independent source of income by the spouse. The rental income was clubbed in the hands of the assessee, resulting in an addition of the rental income amount.

2. The CIT(A) upheld the addition, rejecting the claim that the investment in the property was made by the spouse from her own independent resources. The CIT(A) relied on the income summary statement of the spouse for previous assessment years, showing low taxable income. The CIT(A) also noted that the appellant was the second holder in various investments made in the spouse's name.

3. The Tribunal observed that the spouse received a loan from the assessee and repaid it from mutual funds and fixed deposits. The Tribunal found no legal bar on the assessee extending a loan to the spouse or the spouse repaying it from her own funds. The rental income was declared by the spouse and accepted by the revenue. The Tribunal allowed the appeal, emphasizing that the sources for the property purchase were proven and the contention that the husband cannot pay rent to the wife lacked legal basis.

4. The Tribunal concluded that the assessee's appeal was allowed based on the facts presented, and the addition of the rental income in the hands of the assessee was not justified. The decision was pronounced in the open court on the specified date.