ITAT explains Provisions of Clubbing of Income of Wife with Husband

Uday Gopal Bhaskarwar Vs ACIT (ITAT Pune)

ITAT explains Provisions of Clubbing of Income of Wife with Husband- Allows Losses of F&O Business of Wife to be clubbed with Income of Husband

Where the spouse (husband) of an individual (wife) transfers some assets otherwise than for adequate consideration or in connection with an agreement to live apart, then the income from such assets arising to the wife is liable to be included in the total income of the husband. Explanation 3 to section 64(1) deals with the clubbing provision in a particular situation in which the assets transferred by husband are invested by wife in any business, otherwise than as capital in a firm etc. In such a scenario, the income arising out of such business liable to be included in the total income of husband shall be that part of the total income of the business as bears the proportion of the value of assets transferred by husband to wife on the first day of the previous year as are invested in the business to the total investment in the business by the wife on the same day.

On going through the mandate of section 64(1)(vi) of the Act in juxtaposition to Explanation 3 to the sub-section, it transpires that there can be two possible situations of utilization of the assets transferred by husband to wife triggering clubbing provision. The first situation can be where the amount of assets received by wife is exclusively invested in an asset and further there is no investment by wife in such a new asset. Full income resulting from such an exclusive investment is liable to clubbed in the total income of husband. An example of such a situation can be a wife making a Fixed Deposit with a bank etc. out of gift of money received from husband. Full amount of interest income arising on such FDR is liable to be clubbed with the income of husband. The second situation can be where the amount of assets received by wife as gift from husband is not the exclusive investments in a business carried on by her. Rather, she has also made separate investment in the said business. In such a situation of a common pool of unidentifiable investments in the business, there arises difficulty in precisely attributing income of such a business to the investments made out of gift received from husband attracting clubbing and to investments made out of funds other than gift received from husband not attracting clubbing provision. It is in such a scenario that prescription of the Explanation 3 comes into play by providing that the amount of income from combined business as relatable to the assets transferred by husband should be computed by taking income from such business earned during the year as multiplied with the amount of assets received by wife from her husband as invested in the business and divided by her total investment in the business including the amount of assets received from husband. In a nutshell, there are three components in this formula. The first component is income of the business, which is to be considered for the year. The second is the amount of assets received by wife from her husband as invested in the business and the third is total investment in the business including the amount of assets received from husband. The latter two figures are required to be taken as on the first day of the previous year. Section 3 defines “Previous year” to mean: `the financial year immediately preceding the assessment year.’ Proviso to section 3 states that, in the case of a business newly set up in a financial year, the previous year shall be the period beginning with the date of setting up of the business and ending with the said financial year.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee arises out of the order passed by the CIT(A)-5, Pune on 18-01-2019 in relation to the assessment year 2014-15.

2. The only issue raised in this appeal is against non-allowing of set off of business loss in full amounting to Rs.31,56,429/-.

3. Succinctly, the factual matrix of the case is that the assessee filed return declaring total income of Rs.4,59,830/-comprising, inter alia, Business income. During the course of assessment proceedings, the Assessing Officer (AO) observed from the computation of total income that the assessee clubbed loss from the business of his spouse amounting to Rs.31,56,429/- in view of the provisions of section 64 of the Income-tax Act, 1961 (hereinafter called ‘the Act’). On being called upon to justify such a claim, the assessee submitted that during the year under consideration he gifted a sum of Rs.94.50 lakh to Mrs. Priti Bhaskarwar, his wife, who started business of Futures and Options (F&O) on 18-09-2013. The assessee claimed that she incurred loss of Rs.31,56,429/- in such business, which was clubbed in his hands. The AO accepted the primary claim of the assessee of his wife having incurred loss of Rs.31.56 lakh in the business of F&O, which was set up on 18-09-2013 and further that loss from such business was eligible for set off against the income of the assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. He, however, did not accept the assessee’s contention that the entire loss of Rs.31.56 lakh be set off against the assessee’s income. Considering the mandate of Explanation 3 to section 64(1), the AO held that only that part of the business loss incurred by the assessee’s wife could be set off against the assessee’s income which bears the proportion of amount of investment out of gift on the first day of previous year to the total investment in the business as on the first day of previous year. He, therefore, computed the amount of loss eligible for set off against the assessee’s income at Rs.9,72,563 by multiplying Rs.31,56,429 (loss incurred by wife from the business) with Rs.25.00 lakh (gifts made by the assessee to wife up to 18-09-2013) as divided by Rs.81,13,648/- (opening capital as on 01-04-2013 as increased by gift of Rs.25.00 lakh given by the assessee up to 18.9.2013). The assessee failed to convince the ld. CIT(A) on his line of reasoning, who echoed the assessment order on this count. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.

4. I have heard both the sides and perused the relevant material on record. Unassailed and the admitted position is that the assessee’s wife incurred loss of Rs.31,56,429/- in the business of F&O which was started on 18-09-2013; such business was set up by the wife having some contribution from the assessee in the shape of gifts as per the AO; provisions of section 64 are attracted; `income’ includes `loss’ as per Explanation 2 at the end of section 64; and the assessee is otherwise entitled to set off the eligible loss against his separate income. The core of controversy is the computation of eligible amount of loss incurred by the assessee’s wife which is eligible for set off against the assessee’s income. Relevant clubbing provision in this regard is contained in section 64(1), material part of which reads as under:-

64.(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

(iv) … 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 ;

Explanation 3.—For the purposes of clauses (iv) and (vi), where the assets transferred directly or indirectly by an individual to his spouse … (hereafter in this Explanation referred to as “the transferee”) are invested by the transferee,—

(i) in any business, …. that part of the income arising out of the business to the transferee in any previous year, which bears the same proportion to the income of the transferee from the business as the value of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the transferee as on the said day ;

(ii) …

shall be included in the total income of the individual in that previous year.]

5. A circumspection of the above provision delineates that where the spouse (husband) of an individual (wife) transfers some assets otherwise than for adequate consideration or in connection with an agreement to live apart, then the income from such assets arising to the wife is liable to be included in the total income of the husband. Explanation 3 to section 64(1) deals with the clubbing provision in a particular situation in which the assets transferred by husband are invested by wife in any business, otherwise than as capital in a firm etc. In such a scenario, the income arising out of such business liable to be included in the total income of husband shall be that part of the total income of the business as bears the proportion of the value of assets transferred by husband to wife on the first day of the previous year as are invested in the business to the total investment in the business by the wife on the same day.

6. On going through the mandate of section 64(1)(vi) of the Act in juxtaposition to Explanation 3 to the sub-section, it transpires that there can be two possible situations of utilization of the assets transferred by husband to wife triggering clubbing provision. The first situation can be where the amount of assets received by wife is exclusively invested in an asset and further there is no investment by wife in such a new asset. Full income resulting from such an exclusive investment is liable to clubbed in the total income of husband. An example of such a situation can be a wife making a Fixed Deposit with a bank etc. out of gift of money received from husband. Full amount of interest income arising on such FDR is liable to be clubbed with the income of husband. The second situation can be where the amount of assets received by wife as gift from husband is not the exclusive investments in a business carried on by her. Rather, she has also made separate investment in the said business. In such a situation of a common pool of unidentifiable investments in the business, there arises difficulty in precisely attributing income of such a business to the investments made out of gift received from husband attracting clubbing and to investments made out of funds other than gift received from husband not attracting clubbing provision. It is in such a scenario that prescription of the Explanation 3 comes into play by providing that the amount of income from combined business as relatable to the assets transferred by husband should be computed by taking income from such business earned during the year as multiplied with the amount of assets received by wife from her husband as invested in the business and divided by her total investment in the business including the amount of assets received from husband. In a nutshell, there are three components in this formula. The first component is income of the business, which is to be considered for the year. The second is the amount of assets received by wife from her husband as invested in the business and the third is total investment in the business including the amount of assets received from husband. The latter two figures are required to be taken as on the first day of the previous year. Section 3 defines “Previous year” to mean: `the financial year immediately preceding the assessment year.’ Proviso to section 3 states that, in the case of a business newly set up in a financial year, the previous year shall be the period beginning with the date of setting up of the business and ending with the said financial year.

7. At this juncture, it is relevant to note that admittedly wife of the assessee started new business of F&O on 18-09-2013. The extant case is, ergo, covered by the proviso to section 3, going by which figures of the two components in the aforesaid formula, namely, the amount of assets received by the wife from her husband as invested in the business and total investments in the business including the amount of assets received from husband, will have to be taken as on 18-09-2013.

8. Reverting to the factual panorama as obtaining in the instant case, it is found that the first component in the formula, being, loss incurred by Mrs. Priti Bhaskarwar from the business of F&O is not disputed at Rs.31,56,429/-. The controversy rests on the second and third components. Whereas the case of the AO is that the figure of the denominator in the formula, being, total investment in the business of F&O as on 18-09-2013 is Rs.81,13,684/-, the assessee has set up a case that the total investment as on 18-09-2013 is Rs.10,00,000/-. Similarly, qua the numerator, being, the amount of gift made by the assessee to his wife up to 18-09-2013, whereas the case of the AO is that the figure is Rs.25.00 lakh, the assessee contends that such a figure is also Rs.10.00 lakh.

9. The assessee’s wife admittedly started the business of F&O on 18.9.2013 through ICICI Securities Ltd., which is a member of National Stock Exchange of India Ltd. Such a business was facilitated through a bank account maintained with ICICI bank. First transaction of purchase of certain securities totaling 450 in number with the value of approximately Rs.27.00 lakh was carried out by the assessee’s wife on 18-09-2013 through a Derivative Contract Note, whose copy has been placed at page 19 of the paper book. Since these were transactions in F&O, the assessee’s wife had to deposit margin money with ICICI Securities amounting to Rs.2,21,589/-, which appears on page 31 of the paper book, in the Quarterly FNO Margin Ledger. Such an amount of Rs.2.21 lakh and odd was debited on 18-09-2013 itself to the bank account maintained by her with ICICI bank. There are two deposits of Rs.5.00 lakh each on 18-09-2013 and 22-08-2013 respectively in the said bank account, which was opened with the first such deposit. These two amounts of Rs.5.00 lakh each were undisputedly gifted by the assessee to Mrs. Priti Bhaskarwar, which got deposited in her ICICI bank for the purposes of F&O business with ICICI Securities Ltd. On the business transactions carried out on 18-09-2013, there was a loss of Rs.5,309/- at the end of the day due to decrease in the value of holding, which was debited in ICICI bank account maintained by Mrs. Priti Bhaskarwar. On the next day, namely, 19-09-2013, she again made certain transactions of purchase and sale through ICICI Securities Ltd. worth more than Rs.1.00 crore. A copy of Derivative Contract Note dated 19-09-2013 evidencing such transactions has been placed at pages 22 and 23 of the paper book. Margin money got accordingly increased by Rs.10,73,047/-, which was debited to her bank account maintained with ICICI bank on 19-09-2013 itself. Prior to such debit, there is a further deposit of Rs.5.00 lakh in the said bank account, which was again a gift from the assessee on 19-09-2013. Since account of a customer in the F&O is adjusted on daily basis by ICICI Securities Ltd. w.r.t. the increase/decrease in the value of holding vis-à-vis its value on the preceding day, her bank account was debited on 19-09-2013 with a loss of Rs.2,07,707/-. Again on 20-09­2013, she expanded her business and effected more transactions of purchase and sale, which are depicted on page 25 in the Derivative Contract Note dated 20-09-2013. This resulted in increase in margin money by a further sum of Rs.1,80,238/-, which was debited to her bank account maintained with ICICI bank. For the date of 20-09-2013, there was surplus in the value of her holdings in F&O by Rs.2.63 lakh, which was credited to the ICICI bank account. In this way, the position continued on day-to-day basis as can be seen from daily profit/loss statement of F&O in the account maintained by Mrs. Priti Bhaskarwar with ICICI Securities Ltd., a copy of which is available at pages 11 to 14 onwards. On some dates, there is increase in the value of holding resulting into profits and corresponding credit to her bank account, while on others there is decrease in the value of her holding resulting into loss with corresponding debit to her bank account. Total of such net loss from 18-09-2013 to 31-03-2014 comes to Rs.31.53 lakh, which got debited to her bank account maintained with ICICI Bank. It is such loss which has been clubbed by the assessee. From the above narration of facts, it is clear that as on 18-09-2013, being the first day of the preceding year when the business of F&O was set up by her, total investment through margin money was Rs.2,21,589/- plus loss of Rs.5,309/- incurred for that date. On that date itself, the assessee had gifted a sum of Rs.5.00 lakh which got deposited in her bank account maintained with ICICI bank for the purpose of doing business in F&O. Prior to that, another gift of Rs.5.00 lakh was also made by the assessee to Mrs. Priti Bhaskarwar on 22-08-2013, which also got deposited in the same bank account maintained with ICICI bank for carrying out the business of F&O. On going through the statement of ICICI bank account from 22.8.2013 to 31.3.2014, it can be seen that in all there are deposits of Rs.80.00 lakh in addition to income arising on certain days and there are withdrawals in the shape of payments towards margin money and also loss happening on certain days. The entire amount of Rs.80.00 lakh was gifted by the assessee to his wife through different gift transactions happening during the year in question. As I have to focus on the figure of total investment made Mrs. Priti Bhaskarwar in the business of F&O as on 18-09-2013 and the amount of gift available with her from the assessee on that day, it can be vividly seen that the investment made as on that date amounting to Rs.2.21 lakh as margin money plus loss of Rs.5,309/- was fully financed from the amount of gift made by the assessee. In other words, as on 18.9.2013 the amount of gifts given by the assessee, which got invested by Mrs. Priti Bhaskarwar in her F&O business (the numerator in the formula) and total investment in such business (the denominator in the formula), are equal.

10. It is further relevant to note that the above is the position on the basis of the gifts made by the assessee during the year itself. It is found that some more gifts were made by the assessee to his wife in earlier years. As per law, such an amount is also otherwise eligible for inclusion in the numerator of the formula as the second component, if invested in the business by her.

11. Here it is pertinent to note that the assessee also 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 Rs.7,21,547/- in addition to Venture capital income of Rs.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 have been discussed supra in para no. 6. 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 Rs.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 Rs.31,56,429/- from F&O business is an illustration of such income, which was rightly clubbed by the assessee but wrongly denied partly.

12. In the hue of the above discussion and 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. I, therefore, hold that the assessee is entitled to club full loss of Rs.31.53 lakh arising during the year from the business of F&O carried on by Mrs. Priti Bhaskarwar, in his personal income.

13. In the result, the appeal is allowed.