CLUBBING OF WIFE’S INCOME WITH THAT OF THE ASSESSEE

[Mr. M. GOVINDARAJAN]

Clubbing of wife’s income

The clubbing income provision was introduced to prevent individuals from avoiding tax payments by transferring income or assets to others without genuine substance. This includes scenarios like transferring income without actually transferring the asset, revocable transfers, and transferring assets to a spouse. Section 64(1) of the Income Tax Act, 1961 (‘Act’ for short) provides that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly-

• to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest
• subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.

Section 54F(1) of the Act provides that subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house, and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-

• if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ;
• if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45.

Section 54F(4) provides that the amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall, subject to the second proviso to sub-section (1) be deemed to be the cost of the new asset.

In SIMRAN BAGGA, C/O CA ANSHUL KUMAR/ CA SATISH KUMAR LALIT VANJANI & CO., CA VERSUS ACIT, CIRCLE-1 (1) (2) , INTERNATIONAL TAXATION, NEW DELHI - 2024 (1) TMI 271 - ITAT DELHI the Income Tax Appellate Tribunal (‘ITAT’ for short) held that new house purchased in the name of the spouse of the assessee was eligible for claiming deduction under section 54F. The provisions of Section 54F are pari-materia with the provisions of section 54 of the Act and thus, the principle derived equally applies to section 54 as well. Section 54F/ 54 of the Act are the beneficial provisions which should be interpreted liberally in favour of the Simran Bagga exemption/deduction to the taxpayer and deduction should not be denied.

In COMMISSIONER OF INCOME-TAX AND ANOTHER VERSUS D. ANANDA BASAPPA - 2008 (10) TMI 99 - KARNATAKA HIGH COURT, the High Court held that Hindu undivided family’s residential house is sold, the capital gain should be invested for the purchase of only one residential house in an incorrect proposition. After all, the Hindu undivided family property is held by the members as joint tenants. The members keeping in view the future needs in event of separation, purchase more than the residential building, it cannot be said that the benefit of exemption is denied under section 54(1) of the Income-tax Act. it is shown by the assessee that the apartments are situated side by side. The builder has also stated that he has affected modification of the flats to make it as one unit by opening the door in between two apartments. The fact that at the time when the inspector inspected the premises, the flats were occupied by two different tenants is not the ground be hold that the apartment is not a one residential unit. The fact that the assessee could have purchased both the flats two premises in one single sale deed or could have narrated the purchase of purchase of two premises as one unit is not the ground to hold that the assessee had no intention to purchase the two flats as one unit.

In VIVEK GANGADHAR MEHENDALE VERSUS INCOME TAX OFFICER, WARD 22 (3) (1) , PIRAMAL CHAMBERS, MUMBAI - 2024 (10) TMI 1558 - ITAT MUMBAI the assessee is working in a merchant navy. On 14.06.1991 he purchased a flat in his wife’s name at the value of Rs.5.12 lakhs. On 02.05.2013 he sold the said property and purchased 2 flats in the name of his wife. While filing the income tax return for the relevant assessment, the assessee declared the capital gains of the property in his wife’s name in his return. He claimed exemption under Section 54F of the Act for the purchase of new flats on exploitation of the sale consideration. The Assessing Officer rejected the same and added the entire amount of Rs.1.08 crore to his income. The Assessing Officer further held that the assessee purchased 2 flats instead of one which is the violation of Section 54F of the Act.

The assessee filed appeal before the Commissioner of Income Tax (Appeals) against the order of the Assessing Officer. The Commissioner of Income Tax (Appeals) upheld the order of the Adjudicating Authority. Therefore, the assessee filed the present appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).

In the appeal, the appellant raised the following grounds of appeal before ITAT-

• The Commissioner of Income Tax (Appeals) erred in facts and in law in disallowing appellant’s claim of exemption under section 54.
• The learned Commissioner of Income Tax (Appeals) erred in not applying the provisions of section 64(1) of the Act in their correct import and amplitude.
• The Commissioner of Income Tax (Appeals) erred in not appreciating that the exemption under section 54 was clearly allowable on two counts namely the appellant being the beneficial owner of the residential house purchased and the house sold or alternatively if the income was to be computed in the hands of the wife for clubbing the income computed would be NIL after the claim of section 54 in her hands.
• The Commissioner of Income Tax (Appeals) erred in not appreciating that owing to the appellant’s nature of profession, he stayed outside India for most of his time and therefore the transactions in relation to immovable property were carried out in the spouse's name.
• The Commissioner of Income Tax (Appeals) erred in facts and in law in not appreciating that the two residential units were intended to be used as a single house and therefore were eligible to be treated as investment made in a residential house.
• The Commissioner of Income Tax (Appeals) erred in not appreciating that prior to amendment made to section 54 by the Finance Act 2014, investment made in more than one residential house was eligible for claim of exemption under Section 54.
• The Commissioner of Income Tax (Appeals) erred in disregarding various judicial precedents which upheld that investment in new property in the name of spouse could not be a reason for disallowance of exemption under section 54 of the Act.
• The Commissioner of Income Tax (Appeals) erred in not preferring purposive interpretation over literal interpretation more so even literal interpretation does not say that house, must be purchased in the name of assessee.
• The appellant craves leave to add, alter or amend any of the grounds of the appeal, at any time before or at the time of hearing.

The appellant further submitted the following before the ITAT-

• the flat was purchased in the name of assessee’s wife and entire amount was invested by the assessee himself.
• the assessee calculated long term capital gain u/s 54 of the Act read with section 64(1) of the Act.
• Section 54F was amended with effect from 01.04.2015 allowing purchase of one house is exempted. But the same is not applicable to the cases previous to 01.04.2015.
• He invested Rs. 1,25,00,000/- which is fully in the name of his wife, so the assessee is eligible for deduction.

The Department contended the following before the ITAT-

• The Department rejected the contentions of the appellant that the income of his wife was clubbed in the income tax return filed by him and therefore reinvestment made by him in the name of his wife is allowable.
• The appellant did not file any details evidencing the clubbing of income of his wife in his hands.
• The deduction towards capital gains is only eligible for the owner of the property who, after sale of the property shall reinvest the sale proceeds in his own name.

The ITAT considered the submissions of both the parties in the present appeal. The ITAT observed that the provisions of section 54F of the Act, the amendment of ‘one house’ is implemented with effect from 01/04/2015, so the relevant section 54F is not application for the A.Y. 2014-15. The sale deed of the flat reveals that both the flats are adjacent flats and not in the open sky. Therefore, both the units are taken as a single unit which is not contrary to section 54F of the Act. The ITAT, from the judgment relied on by the appellant, the assessee is eligible for deduction under section 54F of the Act for purchasing two new flats in the name of his wife. The Revenue has not pointed out any contrary decision against the proposition laid down above. The ITAT found no justification in rejection of the claim under Section 54F. The ITAT set aside the order of Assessing Officer as confirmed by the Commissioner of Income Tax (Appeals) and deleted the addition made in the income of the appellant.