Querry regarding clubbing u/s 64 (iv)

The provisions of section 64(1)(vii) are given below with conditions ---

1. The taxpayer is an individual and had transferred an assets which may be direct or indirect.
2. The asset is transferred to a person or an association of person.
3. It is transferred for the immediate or deferred benefit of his/her spouse.
4. The transfer is without adequate consideration.

 

When Section 64(i) (iv) is not applicable

On this basis of the aforesaid discussion and judicial pronouncements, section 64

is not applicable in the following cases:

* If assets are transferred before marriage.

* If assets are transferred for adequate consideration.

* If assets are transferred in connection with an agreement to live apart.

* If on the date of accrual of income, transferee is not spouse of the

transferor

If property is acquired by the spouse out of pin money (i.e. an allowance

given to

the wife by her husband for her dress and usual household expenses).

In the aforesaid five cases, income arising from the transferred asset cannot be

clubbed in the hands of the transferor.

 

 

 

 

Deepak ji thanx for replying but u told only the provisions of the sec which i already know. They query is regarding this particular case law..

no the amount of interest earned on FD will not be clubbed with the income of husband... it will be assessed in the hands of wife only...

 

 

ya u r ryt,

i have seen juz now that k 

the income from the transferred investment is to be clubbed with the earnings of the transferor, any income earned on the income is not. That is treated as the independent income of the transferee and the tax liability is also her

 Rs 90000 will not clubbed in the hand of husband

Follow CA Deepak Rathor

yes any income earned on income is not to be clubbed

 

TAX IMPLICATIONS

 

Gift of Rs 4,00,000 to wife: First of all, taxation of monetary gift is covered by Sec 56(2)(vii)(a) where any sum of money receieved by an individual/HUF during the previous year from any person(s) without consideration is taxable if the aggregate value of such monetary gift exceeds Rs 50,000 . However, as per Proviso 2 to Sec 56(2)(vii) gift from any relative is not taxable and relative includes spouse as per Clause (e) of Explanation to Sec 56(2)(vii), hence The gift of Rs 4,00,000 is not taxable in the hands of Wife.

 

Applicability of Clubbing Provisions:

Section 64(1)(iv) shall apply only in case of clubbing of income from any asset (other than house property covered by Sec 27) transferred by an individual to the spouse directly or indirectly for inadequate consideration or not in connection with an agreement to live apart. In your case, the husband is not transferring the plot, he is only giving cash assistance to purchase the plot, hence no clubbing provision shall apply in respect of any income arising out of the plot.

You might have a doubt, regarding the words "directly or indirectly" used in Section 64(1)(iv), as to whether assisting the wife in purchasing the plot by providing cash gifts amounts to indirect transfer. The answer is no, because the words "directly or indirectly" is used with reference to transactions and not source of acquiring the asset. These words are used in order to bring in cross transfers within the scope of clubbing provisions. To illustrate, For example, Mr. X makes a gift of Rs 50,000 to Mrs. A and Mr. A transfers property worth Rs 50,000 to Mrs. X. This transaction is a cross transfer without consideration from Mr. X to his spouse This is a transaction adopted to evade the implications of section 64(1)(iv). Such transfer is called as indirect transfer/ Cross Transfer. As per the ruling of Hon' Supreme Court in CIT Vs Keshavji Morarji if these two transactions are interconnected in such a way that it can be said the circuitous method was adopted as a device to evade tax, the implication of clubbing provision would be attracted. 

Hence, in your case, clubbing provisions shall not apply even for any income arising from the plot as the plot is not transferred by husband. Therefore capital gains arising from the transfer of plot will not be clubbed in the hands of husband.

 

Accretions are not covered by clubbing provisions:

In your case, since the capital gains arising from plot itself is not clubbed, the interest earned from the deposit of sale consideration is also not clubbed in the hands of husband

However, even assuming that the plot is transferred by husband, there will be no clubbing. Because.   clubbing provisions shall apply only in respect of the assets transferred and income arising therefrom. In other words, what is clubbed is only the income arising from transferred asset and not income arising from the accretion of such property  as there is no transfer of such accretions to the spouse. This is the view expressed by Hon' Bombay High Court in CIT Vs M.P.Birla in relation to Section 64(1)(iv). The same view was given by  Hon' Madras High Court in case of CWT Vs T Saraswathi Achi in relation to clubbing of net wealth u/s 4(1)(a) of Wealth Tax Act.

 

@ sathish ji !! Thanx for repling.. sir plz let attract ur attention to the case of CIT v/s smt pelleti sridevamma (1995) 216 ITR 826 (SC) it was held that if the asset tansferred has changed the shape and identification the income from such such changed asset shall be clubbed.. So in this case also husband gifted CASH (AN ASSET) to his wife which wife utilize to purchase plot now the cap gain from plot should be clubbed ..

 

Dear Mr Varun, I have read this decision, which was given in the context of Sec 16(1)(a)(iii) of the Indian Income Tax Act, 1922. This section is same as that of our present Sec 64(1)(iv). But at that point of time, there was no specific section governing the taxation of gifts like Section 56(2)(vii), hence this decision was given keeping in mind the intention of the law makers to prevent avoidance of tax or reducing the incidence of tax by transfer of his assets to wife/minor child. But, now there is a specific provision covering the taxation of gifts. Hence, as the law stands today after the introduction of Section 56(2)(vii) gift of money and purchase of plot should be considered as two seperate transactions.

However, the answer is bound to change in the case of clubbing under wealth tax act considering the decision of Hon' Kerala High Court in M G Kollankulam Vs CIT 115 ITR 161. It was held in this case that Section 4(1)(a)(i) shall be pressed into operation in respect of an item which is an asset on the valuation date although it might not be asset at the time of transfer to spouse. For example, shares are not asset as per Sec 2(ea) of Wealth Tax Act, Suppose if Mr X gifts some shares to his wife and the wife purchases a plot of land (Urban Land which is an asset) out of sale consideration received on sale of shares, then the value of land will be clubbed in the hands of husband. 

This is in the case of Wealth Tax. But, to my knowledge, the judiciary is silent regarding the same in case of Income Tax Act, after the introduction of Section 56(2)(vii) - Taxation of gift of sum of money, moveable and immovable properties. 

 

Originally posted by : deepak rathore
	ya u r ryt, i have seen juz now that k  the income from the transferred investment is to be clubbed with the earnings of the transferor, any income earned on the income is not. That is treated as the independent income of the transferee and the tax liability is also her  Rs 90000 will not clubbed in the hand of husband

@ sathish ji!! n this case sec 56 (2)(vii) has no implication.. As it is a gift by husband to his wife who are relatives as per sec 2(41) of Income Tax 1961.. Sec 56(2) (vii) will not apply in case where the transfer is made between relatives.. So In the above case sec 56 (2) (vii) will not apply and cap gain from sale of plot will be clubbed in the income of transferori.e in the income of husband

No Mr Varun, your case originally involved a cash gift of Rs 4,00,000 for which there is no application of Sec 56(2)(vii)(a). Subsequently this was used for the purchase of plot, clubbing will be applicable only if the husband directly transfers the plot to his spouse for inadequate consideration. Also, the wife can always establish that there is a consideration for a cash gift. I have written about this in one of my reply in another forum, I am writing it here as well. In Chandrakant H Shah Vs ITO 208 SOT 315 it was held by the Mumbai Tribunal that, in Sec 56(2)(vii)(a), the term ‘consideration’ is neither prefixed by the word ‘adequate’ nor it is suffixed by the word ‘money’ or ‘moneys’ worth. Hence, if in any transaction there exists consideration as per the provisions of the Indian Contract Act, 1872, such transaction would not come into the ambit of this section. The term consideration as defined in the Indian Contract Act, Inter alia includes doing something as well as abstaining from doing something. Therefore, the consideration need not be in monetary terms unlike clubbing provisions. In clubbing provisions there are several case laws which says that mutual love and affection, consent to marry a person etc, are good consideration but not adequate. Same is not the case of monetary gifts. Monetary gift given is not taxable on account of two reasons 1) Husband and wife are related, gifts between relatives are not taxable; 2) Even if there is no such provision, the assessee can establish in case of monetary gifts that gift was given out of mutual love and affection. In that case, the assessee can always take a stand that cash gifts were given for a consideration and that is not exclusively inter-connected with the purchase of plot. Hence, if cash gifts are not taxable, its subsequent application for purchase of plot is also not taxable as these are different transactions.

 

@ sathish ji !! Sir i would like to draw ur attention to the case of cit vs smt pelleti sridevamma (1995) 216 itr 826 (sc) where assessee gift cash to her minor son and which inturn use for purchasing house property . This property is sold after 8 years in which cap gain Rs 58000/- is attracted. The case was decided in favour of departmnt where it was held that such gain should be clubbed in the income of transferor. The link for the case is given below https://www.sitcinfo.com/content/directTaxes/decisions/displayNamDetails.asp?rCase=CIT+Vs.+Pelleti+Srideramma%2C+Smt.&GoToRec=1&Scroll=Move

This case was given in the context of sec 64 (1) of income tax act ,1961