Case Law Details
Vipin Yadav Vs ITO (ITAT Lucknow)
The appeal before the Income Tax Appellate Tribunal (ITAT), Lucknow Bench, arose from the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), dated 7 August 2024, affirming the assessment order passed under Section 143(3) of the Income Tax Act for Assessment Year 2018-19. The dispute concerned whether losses arising from derivative and equity trading undertaken in the name of the assessee’s spouse could be clubbed with the assessee’s income under Section 64(1)(iv) of the Income Tax Act.
The assessee had been engaged in trading in securities, derivatives and equities over several years and had been reporting such earnings under the head “Profits and Gains from Business or Profession” and under short-term and long-term capital gains, as applicable. During the relevant financial year, the assessee transferred ₹1,15,47,000 to his spouse from his earnings and past savings without consideration. The spouse maintained a demat account and a joint bank account with the assessee, through which derivative and equity transactions were undertaken.
The assessee claimed that a proportionate loss of ₹1,14,80,285 attributable to the gifted funds should be clubbed with his income under Section 64(1)(iv) and treated as business loss arising from futures and options transactions. According to the assessee, even the speculative profit of ₹30,239 earned in the spouse’s name had been included in his own return of income.
The Assessing Officer rejected the claim. He held that the income or loss generated in the spouse’s account was not merely a consequence of transfer of funds but resulted from the spouse’s own risk-taking process involved in trading activities. He also noted that the spouse had shown speculative business profit independently, indicating that she had carried out trading activities herself. Examination of KYC documents did not reveal that the assessee alone was operating the trading account. Consequently, the Assessing Officer concluded that the losses belonged to the spouse and could neither be set off nor carried forward in the hands of the assessee.
The assessee challenged the disallowance before the CIT(A). The appellate authority observed that the assessee and his spouse maintained a joint ICICI Bank account through which transfers were described as “loan to Ruchi”, “investment”, “gift” and “budget”. The transferred amounts had been capitalised in the books of the assessee, while the spouse had treated the funds as capital for undertaking speculative and derivative transactions.
The CIT(A) further observed that the spouse was an independent assessee and held that the clubbing provisions were inapplicable. Drawing an analogy from Section 27(i) of the Act, the CIT(A) reasoned that once the spouse had capitalised the amounts received and independently conducted speculative and derivative business, Section 64(1)(iv) would not apply. Accordingly, the appeal was dismissed.
Before the Tribunal, the assessee contended that he had transferred ₹1,15,47,000 to his spouse without consideration and that his spouse possessed no technical or professional expertise relating to securities trading. It was argued that all trading activities were undertaken by the assessee through the spouse’s demat account.
The assessee submitted that the spouse’s total capital stood at ₹1,95,81,193, of which ₹1,15,47,000 represented gifted funds. The spouse incurred an aggregate loss of ₹1,95,44,302 from derivative and equity transactions. According to the assessee, derivative losses amounting to ₹1,15,25,245 were attributable to transactions financed by the gifted funds, while losses attributable to the spouse’s own capital amounted to ₹80,19,057. After adjustment of short-term capital gains, the net loss claimed for set-off was ₹1,14,80,287.
The assessee relied on several judicial precedents, including decisions in Smt. Mohini Thapar v. CIT, Potti Veerayya Sresty v. CIT, Damodar K. Shah v. CIT, Uday Gopal Bhaskarawar v. ACIT, Col. H.H. Sir Harinder Singh v. CIT, Tulsidas Kilachand v. CIT and CIT v. J.H. Gotla.
The Department defended the orders of the Assessing Officer and CIT(A), reiterating that the spouse had independently carried on trading activities and had earned speculative profits. It was argued that, being an independent assessee who had capitalised the transferred amounts and conducted business in her own right, the spouse’s losses could not be clubbed with the assessee’s income.
After considering the rival submissions, the Tribunal examined Section 64(1)(iv), which provides that income arising directly or indirectly to a spouse from assets transferred without adequate consideration shall be included in the transferor’s total income, subject to specified exceptions.
The Tribunal noted that the assessee had produced gift deeds evidencing transfer of ₹1,15,47,000 to the spouse without consideration. Affidavits had also been filed affirming that the transfers were not connected with any agreement to live apart. The Department had not produced any evidence suggesting otherwise.
The Tribunal referred to the Supreme Court decision in Smt. Mohini Thapar v. CIT, wherein it was held that income arising indirectly from assets transferred, including dividend and interest earned from investments made out of gifted cash, falls within the ambit of clubbing provisions. The Tribunal also relied on the Gujarat High Court’s decision in Damodar K. Shah v. CIT, where interest earned from amounts received under life insurance policies funded by the husband was held to be income arising indirectly from transferred assets. Reference was also made to the Supreme Court decision in CIT v. Keshavji Morarji, recognising the principle that income attributable to transferred assets may be assessed in the hands of the transferor.
Particular reliance was placed on the Pune Bench decision in Uday Gopal Bhaskarawar v. ACIT, which dealt with losses arising from futures and options business commenced by the spouse using gifted funds. The Tribunal noted that such losses were held to be liable for clubbing under Section 64(1)(iv) read with Explanation 3.
Based on these judicial precedents, the Tribunal held that losses incurred by the assessee’s spouse from derivative transactions undertaken using money gifted by the assessee were eligible for set-off against the assessee’s income under Section 64(1)(iv) read with Explanation 3(i). Consequently, the decisions of the Assessing Officer and CIT(A) denying the benefit of such set-off were found to be inconsistent with law.
However, the Tribunal observed that the assessee had not furnished a detailed statement or working establishing the exact amount of losses attributable to the gifted funds. Since the lower authorities had focused primarily on the principle of allowability rather than quantification, the issue regarding the actual amount eligible for adjustment had not been adequately examined.
Accordingly, the Tribunal restored the matter to the Assessing Officer for the limited purpose of verifying the extent of losses incurred by the spouse from transactions undertaken using the gifted money and to allow such losses in accordance with Explanation 3(i) to Section 64(1)(iv).
Grounds relating to the applicability of Section 64(1)(iv) were allowed, while the principal ground concerning the exact quantum of loss was allowed for statistical purposes. The ground reserving the right to raise additional issues was dismissed as not pressed.
In the result, the appeal of the assessee was partly allowed.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
This is an appeal filed against the orders of the ld. CIT(A), NFAC under section 250 of the Income Tax Act dated 7.08.2024, wherein the ld. CIT(A) has dismissed the appeals of the assessee against the order of the Assessing Officer passed under section 143(3) for the assessment year 2018-19 on 7.01.2021. The grounds of appeal preferred by the assessee are as under:-
“2.1 The Learned Commissioner of Income Tax (Appeals) erred in law and on facts by disallowing the loss of ₹1,14,80,285/- arising from trading in derivatives and equities in the name of the spouse and denying the applicability of Section 64(1)(iv) of the Income Tax Act, 1961.
2.2 The Learned Commissioner of Income Tax (Appeals) failed to appreciate that the loss incurred by the spouse was the result of funds transferred without adequate consideration, thus satisfying the conditions for clubbing of income under Section 64(1)(iv) of the Income Tax Act, 1961.
2.3 The Learned Commissioner of Income Tax (Appeals) did not properly consider the ratio laid down in the case of Damodar K. Shah vs. Commissioner of Income Tax (2001) 966 CTR 429 (Guj.) and CIT vs. Keshavji Morarji (1967) 66 ITR 142 (SC), where it was held that income arising from assets transferred to the spouse is to be included in the total income of the transferor.
2.4 The Learned Commissioner of Income Tax (Appeals) erred in concluding that the income/loss arising from the risk-taking process by the spouse should be treated as independent, despite the fact that the funds utilized for such trading were directly transferred by the appellant, thereby attracting the provisions of Section 64(1)(iv) of the Act
2.5 The Learned Commissioner of Income Tax (Appeals) did not consider the principle of beneficial ownership and control, which establishes that the loss should be attributed to the person who exercises real control over the funds and transactions, as held in the case of Uday Gopal Bhaskarawar vs. ACIT (ITA No. 502/PUN/2019).
2.6 The appellant reserves the right to add, alter, or amend any grounds of appeal before or at the time of hearing.”
2. The facts of the case are that the case of the assessee was selected for limited scrutiny and the E-assessment Scheme, 2019 on account of;
i. Deductions from income from other sources and
ii. Securities (derivatives) transaction.
The assessee was doing business transactions in equity and derivatives from the past couple of years and was showing these earnings under the head, ‘profit & gains’ from business or profession and under short term / long term capital gains. During the F.Y. 2017-18, the assessee had shown the loss of the other person (spouse) as clubbed with his income as per the provisions of section 64(1)(iv) of the Income Tax Act, 1961. It was submitted that he had transferred a sum of Rs. 1,15,47,000/- to his spouse’s bank account out of his earnings and past savings and had been doing trading in derivatives and equities in the names and PAN of his spouse. It was submitted that a loss had been earned and the proportionate amount of loss (Rs. 1,14,80,285/-) w.r.t. the amount transferred by him as per section 64(1)(iv) had been claimed as business loss from F&O transactions. The ld. AO declined to consider his claim on account of his belief that the income / loss generated in his wife’s case was not merely the result of asset transfer (money) but was a result of risk-taking process by her. He pointed out that as per the proviso to section 64(1)(iv), the same was not to apply in relation to income arising to spouse where the spouse possess technical or professional qualifications and the income was solely attributable to the application of his or her technical or professional knowledge and experience and the assessee had submitted that his wife Smt. Ruchi Yadav, had earned an independent income of Rs. 30,239/- as speculative business profit, as evident from the statement of income submitted. From the above, he concluded that on the one hand, the assessee was treating speculative business profit as an independent income of his spouse whereas a large portion of the loss Rs. 1,14,80,287/- of the spouse was being set off against his own income. Thus, the reply of the assessee was not acceptable on merits. He also noted from the examination of KYC documents that it was not mentioned anywhere the wife would not be doing trading and the assessee would be handling all the transactions. He held that since the income / loss generated in the wife’s case was not only on account of such transfer (money) but was a result of risk-taking process of the trading done by the wife. Hence, the loss was to be treated as her own loss and he declined to allow the same to be carried forward in the hands of the assessee. He issued a draft assessment order to the assessee, in response to which the assessee submitted that even speculative profit of Rs. 30,239/- of Smt. Ruchi Yadav had been considered in his ITR and that his claim was as per the provisions of section 64(1)(iv). It was further submitted that the KYC documents did not offer an opportunity to explain that the wife would not be doing the trading and the assessee would be handling all the transactions etc,. However, the ld. AO was not convinced and accordingly he disallowed the claim of loss on account of clubbing.
3. Aggrieved with the said order, the assessee went in appeal before the CIT(A). The ld. CIT(A) observed that from the perusal of the bank statement of the assessee, it was noticed that a joint account was maintained with ICICI Bank and the amounts were transferred into this account, ‘loan to Ruchi’, ‘investment’ ‘gift’, ‘budget’. The entire amount transferred by the assessee into this joint account had been capitalized in the books of the assessee and the funds received in this manner had been claimed to be utilized for speculative business and derivative transactions by the assessee’s spouse. He observed from the notes on accounts and accounting policies in Schedule 1 that Smt. Ruchi Yadav was an independent assessee and the clubbing provisions were not at all applicable. He held that the provisions of section 64(1)(iv) were subject to the provisions of section 27(i) of the Act, which held that an individual who transfers otherwise than for adequate consideration any house property to whose or her spouse, not being a transfer in connection with agreement to live a part or to a minor child not being a married daughter shall be deemed to be the owner of the house property so transferred and using that analogy, held that since Smt. Ruch Yadav had capitalized the amounts received in the capital account maintained by her and carried the business of speculative and derivative transactions on this account, section 64(1)(iv) of the Act was not applicable to the facts and circumstances of the case. He, therefore, upheld the order of the ld. AO and dismissed the appeal of the assessee.
4. The assessee is aggrieved at this order of the ld. CIT(A) and has accordingly come in appeal before us. Sh. Dharmendra Kumar, C.A. (hereinafter referred to as the ld. AR) appearing on behalf of the assessee submitted that the assessee is an individual earning income by trading in securities, futures and options and intra-day trading in derivative and equities and has been doing this for a long time. He had also opened a de-mat account in the name of his wife, Smt. Ruchi Yadav and opened a joint bank account with his spouse. He used to contribute funds to this joint bank account for trading in F&O, derivatives and equities. The assessee’s spouse did not possess any technical or professional expertise in respect of the securities market and it was the assessee who used to do all the trading from her de-mat account. During the course of the assessment year, the assessee had transferred a sum of Rs. 1,15,47,000/- to his spouse without consideration. As a result of this, Smt. Ruchi Yadav had total capital of Rs. 1,95,81,193/-. From the aforesaid capital, the assessee had undertaken trading in derivatives and equities on her behalf and as a result of this she incurred a loss of Rs. 1,95,44,302/-. Bifurcating this loss from derivative trading in the de-mat account of Smt. Ruchi Yadav, the ld. AR pointed out that while derivative loss of Rs. 80,19,057/- were attributable to the own capital of Smt. Ruchi Yadav, the loss of Rs. 1,15,25,245/- were attributable to derivative transactions from the gift received from the assessee. Thus, he argued that as per the provisions of sections 64(1)(iv), any loss derived from such transactions was allowable to be set off against the profits of the assessee. For this proposition, he placed reliance on various case laws which were furnished by him as part of the second paper book filed by him on 14.11.2025. The case laws relied upon by him were
i. Smt. Mohini Thapar vs. CIT (1972) 83 ITR 208 (SC)
ii. Potti Veerayya Sresty v. Commissioner of Income-Tax, A.P. (1972) 85 ITR 194 (AP)
iii. Damodar K. Shah vs. CIT (2001) 119 taxman 882 (Guj)
iv. Uday Gopal Bhaskarawar vs. ACIT (2020) 113 com 378 (Pune-Trib)
v. Col H.H. Sir Harinder Singh vs. CIT (1972) 83 ITR 416 (SC)
vi. Tulsidar Kilachand vs. CIT (1961) 42 ITR 1 (SC)
vii. CIT vs. J.H. Gotla (1985) 23 taxman 14 J (SC)
In view of the above, the ld. AR prayed that the assessee be allowed to set off the loss incurred by his spouse from derivative transactions to the extent of Rs. 1,14,80,287/-.
5. Responding to the arguments, Sh. R.R.N. Shukla, Addl CIT DR that the AO and the ld. CIT(A) pointed out that when a person had earned the income out of her own expertise, then the proviso to clause 64(2) held that the income from such operations may not be clubbed and since the spouse of the assessee was herself dealing in derivatives from which she had also made profit of Rs. 30,239/-, the losses were not liable to be set off against the income of the assessee. Furthermore, the ld. CIT(A) had quite clearly pointed out that since Smt. Ruchi Yadav had capitalized the amount received in the capital account maintained by her and carried out the business of speculative and derivative transactions, her income was not entitled to be considered under section 64(1)(iv) of the Act, because she was an independent assessee in her own right. Accordingly, he placed reliance on the orders passed by the ld. AO and the ld. CIT(A) and prayed that they may be confirmed.
6. We have duly considered the facts of the case and the arguments presented by both parties. The provisions of section 64(1)(iv) are quite clear that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly, subject to the provisions of clause i of section 27, 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 be a part. The assessee has filed evidences of gift deeds whereby he has transferred a sum of Rs. 1,15,47,000/- without any consideration to his spouse’s bank account out of his earnings and past savings. It has also been sworn by way of affidavit that the amount has been transferred without any consideration and without agreement to live part. The Department has not brought any evidence on record to suggest that the money that has been transferred by way of gift has been transferred for any consideration or in respect of any agreement to live a part. Ongoing through the case laws furnished by the assessee, it is observed that that in the case of Smt. Mohini Thapar (supra), the Hon’ble Supreme Court was dealing with a case where the assets transferred were the gift of cash amounts to his wife. Those assets were subsequently invested in shares or deposits. The Hon’ble Supreme Court held that the incomes realized either as dividend from shares or as interest from deposits, were income indirectly received in respect of transfer of cash directly made. Therefore, it held that the net cast by section 16(3)(a)(iii) of the 1922 Act, included not merely the income that arose directly from the assets transferred but also that income that arose indirectly from the assets transferred. They held that the income that can be brought to tax under section 16(3)(a)(iii) must have a nexus with the assets transferred directly or indirectly and because in that particular case, the income had a nexus with the assets transferred, the Hon’ble Court held that the income derived by the wife was rightly included in the assessee’s total income under section 16(3)(a)(iii). Similarly, in the case of Damodar K. Shah vs. CIT (supra), the Hon’ble Gujarat High Court held that in a case where the assessee took out a policy on his life for the benefit of his wife and on which he paid premium that the amounts received by the wife under the polices and the interest earned upon that, was income from the assets transferred indirectly by the husband to the wife within the meaning of section 64(1)(iv) and therefore, liable to be clubbed in the hands of the husband. While doing so, the Hon’ble Gujarat High Court also referred to the decision of the Hon’ble Supreme Court in the case of CIT vs. Kehsavji Morarji (1967) 66 ITR 142 wherein the Hon’ble Supreme Court held that the income attributable to the assets transferred to his minor daughters was liable to be assessed in the hands of the assessee. We have also observed that in the case of Uday Gopal Bhaskarawar vs. ACIT (supra), the ITAT Pune Bench was dealing with a case where the assessee gifted a sum of Rs. 94.5 Lacs to his wife, who started the business of future and options from such gifted amounted and incurred a loss of Rs. 31,56,429/-, which was clubbed in his hands. The Assessing Officer accepted the primary claim of the assessee of his wife having incurred a loss of Rs. 31.56 Lacs in the F&O business and that such loss was eligible for set off against the income of the assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. However, he did not accept that contention that the entire loss could be set off against the assessee’s income. He held that only that part of the loss which bore proportion to the amount of investment out of gift on the first day of the previous year to the total investment in the business as on the first day of the previous year, could be deducted. In consideration of the appeal, the ITAT held that the amount of loss resulting from the business of F&O started by the assessee’s wife with the gifts received from the assessee, was liable to be clubbed in the hands of the assessee on account of Explanation 3 read in conjunction with section 64(1)(iv). What emerges from these case laws is that any loss incurred by the assessee’s spouse in derivative transactions entered into out of the money gifted by the assessee to his wife, has to be allowed to be deducted against the income earned by the assessee in view of the provisions of section 64(1)(iv) read with Explanation 3(i). Thus, the decision of the Assessing Officer and the ld. CIT(A) to deny the assessee the benefit of this set off, is not in accordance with the law and the judgments cited aforesaid. In view of the same, it is held that the assessee is entitled to set off that portion of the loss arising on trading in derivatives by his wife that result from transactions made with the money gifted by him to his spouse. Accordingly, ground nos. 2.2, 2.3, 2.4 and 2.5 are held to be allowed. However, we observed that the assessee, in his paper book has not submitted any statement or working before us from which it could be ascertained that Smt. Ruchi Yadav actually incurred a loss of Rs. 1,95,44,302/- from speculative and non-speculative business, of which Rs. 1,15,25,245/- were allowable to be set off against the income of the assessee after adjustment of short-term capital gains. After accounting of set off of STCG this would result in net loss of Rs. 1,14,80,287/-. In view of the fact that the debate in the assessment order and the order of the ld. CIT(A) has mainly focused on the principle of allowability, the matter of the actual amount of losses that are required to be adjusted against the income of the assessee, has not been enquired into. In view of the fact that, no such statement has been submitted before us either showing how these losses arose, we restore this matter to the file of the Assessing Officer for the limited purpose of verifying the extent of losses incurred by Smt. Ruchi Yadav from transactions undertaken with the gifted money from the assessee and to allow the same in accordance with the provisions of Explanation 3(i) to section 64(1)(iv). Ground no. 2.1 is accordingly allowed for statistical purposes. Ground no. 2.6 has not been pressed and is accordingly dismissed as infructuous.
7. In the result, the appeal of the assessee is partly allowed.
Orders pronounced on 19.05.2026 in the open Court.
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