Case Law Details
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.
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