Clubbing of Income

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Rohan

CA Finalist

299 Points Posted on 05 October 2009

Mr.X a)gives his wife an interest free loan of Rs.10 Lacs. She uses the money to invest in shares of Y Ltd.The company declares a 1:1 bonus. Or, b)gifts his wife cum bonus shares in Y Ltd who have declared a bonus of 1:1 Mrs.X,after the record date sells the non-bonus shares and books a loss of lets say,Rs.5 lacs. She holds onto the Bonus shares for a year and then sells them off,the income being exempt from Capital gains. Now... If the Income Tax Officer sees the (a)interest free loan/(b)gift as diversion and clubs the income, he shall be only clubbing a negative income(Loss) of Rs.5Lacs,which Mr.X can carry forward for 8 years. ITO cant club the bonus shares as shares received as bonus is not under the purvue of clubbing. But, If ITO ignores clubbing the wife walks away with a STCL which she can carry forward for 8 years. Am I Right? Please clarify. Thank you :)

Replies (7)

Manmohan ACA, CS

Chartered Accountant

11622 Points Posted on 05 October 2009

8 years STCG shall be allowed in hands of Mr. X

CA Lovenish Bansal

JOB

314 Points Posted on 05 October 2009

Clubbing Provisions always attracts even there is loss in the hand of assessee. It donot depends upon the A.O Regards Lovenish Bansal

Rohan

CA Finalist

299 Points Posted on 05 October 2009

Thank you Manmohan!

Rohan

CA Finalist

299 Points Posted on 05 October 2009

Thank you Lovenish! Bless you.

Rohan

CA Finalist

299 Points Posted on 05 October 2009

Isnt this a bit of tax planning that can be used by salaried individuals and Individuals who are in the highest tax bracket?

Rajeev

www.rkmco.com

952 Points Posted on 06 October 2009

Income includes loss as well rohan , so i guess the loss will be clubbed with husbands income . I am not sure if the carry forward provisions will apply , he may even be denied the benefit of carry forward , cos he is not claiming carry forward of loss in his return .

Both husband and wife will be denied carry forward of loss .

So its not tax planning , its putting the client in a mess.

Rohan

CA Finalist

299 Points Posted on 06 October 2009

Originally posted by :Rajeev
"	Income includes loss as well rohan , so i guess the loss will be clubbed with husbands income . I am not sure if the carry forward provisions will apply , he may even be denied the benefit of carry forward , cos he is not claiming carry forward of loss in his return . Both husband and wife will be denied carry forward of loss . So its not tax planning , its putting the client in a mess.	"

Hi Rajeev,

Supreme Court in CIT Vs. P. Doraiswamy 183 ITR 559

Follows the principle laid down in Gotla ’s case(Supreme court - JC GOTLA). The Supreme Court had to consider whether the assessee was entitled to carry forward to the subsequent years not only his share but also the share of loss of his wife from a firm in which both were partners. The revenue was of the view that the clubbing provision would apply only to income and not a loss which contention was rejected by the High Court and on further appeal by the Supreme Court.

Well, as they say in most respected corporate circles...'dhan te naan'!!! :)