2020 (1) TMI 822 - AT - Income Tax

Clubbing of income - Non-allowing of set off of business loss - computation of total income that the assessee clubbed loss from the business of his spouse - HELD THAT - Assessee gifted certain Fixed Deposit receipts and other amounts to his wife not only in this year but also in the earlier years. Interest income arising from such FDRs amounting to ₹ 7,21,547/- in addition to Venture capital income of ₹ 1,11,252/- accruing to wife from such gifts has been religiously clubbed by the assessee in his hands and offered for taxation. Two possible situations of utilization of the assets transferred by husband to wife triggering the clubbing provisions. The first, which is covered within the main part of section 64(1)(iv) of the Act, is where the amount of assets received by wife are invested exclusively in an asset attracting clubbing of full income therefrom. Interest income arising from FDRs amounting to ₹ 7,21,547/- is an illustration of such positive income, which has been promptly offered by the assessee. The second, which is covered within section 64(1)(iv) read with the Explanation 3 of the Act, is where the assets received by wife as gift from husband are invested by her in a business, in which she has her own separate investment as well, thereby attracting clubbing of income to the extent it is relatable to the investment of gifts received from husband in the common business. Loss (negative income) of ₹ 31,56,429/- from F O business is an illustration of such income, which was rightly clubbed by the assessee but wrongly denied partly. Going by the Explanation 3 read in conjunction with section 64(1)(iv) of the Act, the entire amount of loss resulting from the business of F O started by Mrs. Priti Bhaskarwar with the gifts received from the assessee is liable to be clubbed in the hands of the assessee. Assessee is entitled to club full loss of ₹ 31.53 lakh arising during the year from the business of F O carried on by Mrs. Priti Bhaskarwar, in his personal income. Appeal allowed.

Summary

Issues Involved:
1. Non-allowing of set-off of business loss in full amounting to ?31,56,429/-.

Issue-wise Detailed Analysis:

Non-allowing of Set-off of Business Loss in Full Amounting to ?31,56,429/-
The primary issue in this appeal is the non-allowance of the full set-off of business loss amounting to ?31,56,429/- incurred by the assessee's spouse.

Factual Matrix:
The assessee filed a return declaring total income of ?4,59,830/-, which included business income. During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had clubbed a business loss of ?31,56,429/- from his spouse’s Futures and Options (F&O) business, started on 18-09-2013, under section 64 of the Income-tax Act, 1961. The AO accepted the loss incurred but did not agree to the full set-off against the assessee’s income. Instead, the AO computed the eligible loss for set-off as ?9,72,563/- based on the proportion of the investment out of the gift made by the assessee to the total investment in the business as on the first day of the previous year.

Legal Provisions:
Section 64(1) of the Income-tax Act includes provisions for clubbing of income, including losses, arising directly or indirectly to the spouse from assets transferred by the individual. Explanation 3 to section 64(1) specifies that the income to be clubbed should be proportionate to the value of the assets transferred by the individual to the spouse relative to the total investment in the business.

Tribunal’s Analysis:
The Tribunal examined the provisions of section 64(1) and Explanation 3. It was noted that the business of F&O was started by the assessee’s wife on 18-09-2013, and the relevant figures for the formula provided in Explanation 3 should be taken as on that date. The Tribunal found that the total investment in the business as on 18-09-2013 was ?2,21,589/- (margin money) plus a loss of ?5,309/-, fully financed from the gifts made by the assessee. Thus, the numerator (amount of gift invested) and the denominator (total investment) in the formula were equal.

Further Observations:
The Tribunal also noted that the assessee had made additional gifts in earlier years, which were eligible for inclusion in the numerator if invested in the business. The assessee had already clubbed the interest income from Fixed Deposit Receipts (FDRs) and venture capital income arising from such gifts in his hands, indicating compliance with the clubbing provisions.

Conclusion:
The Tribunal concluded that the entire amount of loss from the F&O business, financed by the gifts received from the assessee, was liable to be clubbed in the hands of the assessee. Therefore, the assessee was entitled to set off the full loss of ?31,53,429/- against his personal income.

Judgment:
The appeal was allowed, and the assessee was granted the right to set off the entire business loss of ?31,53,429/- against his income. The order was pronounced in the Open Court on 20th January 2020.