Reassessment Quashed as Capital Gains Taxable in Transferor Spouse’s Hands Under Clubbing Rules

Summary:The case Sivasundar Selvakumari Vs ITO (ITAT Chennai) concerns reassessment proceedings initiated against an individual who sold immovable property for ₹20 crore after receiving it through a settlement from her husband. The buyer directly paid ₹19.40 crore to the State Bank of India to discharge mortgage liabilities attached to the property. The assessee claimed TDS credit in her return, while the long-term capital gains were declared in her husband’s return under the clubbing provisions of Section 64(1)(iv) of the Income-tax Act because the asset had been transferred to her without consideration. The Assessing Officer reopened the assessment and taxed the entire capital gain in the assessee’s hands, disallowing deduction for mortgage repayment. The Tribunal held the reassessment invalid due to failure to provide reasons for reopening and absence of escapement of income. It ruled that the capital gain must be taxed in the husband’s hands under the mandatory clubbing provisions and that repayment of a pre-existing mortgage constitutes allowable expenditure while computing capital gains.

The brief facts of the case are that the assessee, an individual, filed her return of income on 09.03.2018 u/s.139(4) of the Act, declaring total income of Rs.5,86,740/- and claimed credit for TDS of Rs.20,00,000/- deducted u/s.194IA of the Act in respect of sale of immovable property. A vacant land at No.148, Okkiyam Thoraipakkam Village, Sozhinganallur Taluk, Kancheepuram District, measuring 37,236 sq.ft originally belonged to Mrs.Danabakkiam Ammal. Subsequent to her demise, her legal heirs plotted the land into six plots and sold it to six persons vide six sale deeds all dtd. 13.11.1981.

The said six persons in turn sold the plots vide six sale deeds, all dtd.05.10.1998, to the family members of S.Sivasundar, assessee’s husband. One of the owners, Mr.S.Ganesh had created an equitable mortgage of his plot with Axis bank through mortgage deed dtd.09.07.2008, registered as doc.No.2898 of 2008 on the file of SRO Neelankarai. The family members had mortgaged the property with SBI to avail credit facilities for running their company, M/s.Rathna Stores Pvt.Ltd (the company). Thereafter, all the 6 persons, namely Mr.S.Ganesh, Mr.S.Sivasankar, Mr.S.Krishnakumar, Mr.P.S.Siva Perumal, Mr.S.Sivasundar & Mr.S.Ravishankar, created equitable mortgage by way of deposit of title deeds against their respective plots with the State Bank of India, through mortgage deeds registered with the SRO, Neelankarai, the details of the same are as below:

Plot Nos. and Mortgage deed Created by

1. Dated 20.11.2009 in Doct. No.4074 of 2009 Mr.S.Ganesh

2. Dated 12.01.2010 in Doct. No.472 of 2010 Mr.S.Sivasankar

3. Dated 12.01.2010 in Doct. No.473 of 2010 Mr.S.Krishnakumar

4. Dated 29.12.2009 in Doct. No.466 of 2010 Mr.P.S.Siva Perumal

5. Dated 20.11.2009 in Doct. No.4073 of 2009 Mr.S.Sivasundar

6. Dated 29.12.2009 in Doct. No.38 of 2010 Mr.S.Ravishankar

Later on, the persons in SI.Nos.1 to 4 & 6, settled their plots along with share of common pathway and the encumbrance on the same (mortgage) in
favour of Mr.S.Sivasundar, by way of 5 separate settlement deeds, registered with the SRO, Neelankarai:

Plot Nos. Settlement deed Executed by

1. Dated 14.11.2011 in Doct. No.7797 of 2011 Mr.S.Ganesh

2. Dated 14.07.2014 in Doct. No.4954 of 2014 Mr.S.Sivasankar

3. Dated 14.11.2011 in Doct. No.7798 of 2011 Mr.S.Krishnakumar

4. Dated 14.11.2011 in Doct. No.7794 of 2011 Mr.P.S.Siva Perumal

6. Dated 14.11.2011 in Doct. No.7799 of 2011 Mr.S.Ravishankar

Mr.S.Ganesh had discharged the mortgage through discharge receipt dtd.26.05.2015 registered as Doc.No.4014 of 2015 with the SRO, Neelankarai.

Consequent to the above settlements, the assessee’s husband Mr.S.Sivasundar, became the absolute owner of the 6 plots. Vide a Settlement deed dtd.09.06.2015, registered as Doc No.4376. Mr.S.Sivasundar had settled all the six plots to and in favour of the assessee.

Subsequent to the settlement, the entire property was sold by the assessee to one Dr.S.Rajasabapathy, vide Doc No.5028 of 2015 dtd. 29.06.2015 for the total consideration of Rs.20,00,00,000/- out of which Rs.19,40,13,703/- was paid directly by the buyer to SBI, SAM Branch, Chennai towards mortgage loan taken by the assessee’s husband Mr.S.Sivasundar and other 5 family members for the business of Ratna Stores Pvt. Ltd.

The Long Term Capital Gain arising from sale of the said property was computed after indexation and discharge of mortgage and the same was offered to tax in the return of income of the assessee’s husband for A.Y.2016-17 in terms of section 64(1)(iv) of the Act, since the asset had been transferred to spouse without consideration. The notice u/s.148 of the Act was issued on 30.03.2021, the assessee duly filed her ROI on 30.04.2021. In spite of having filed her ROI within 30 days of issuing the notice, the AO did not furnish the reasons for reopening to the assessee. Almost 7 months later, the Jurisdictional Assessing Officer (JAO) issued a notice u/s.143(2) of the Act dated 13.11.2021, wherein he stated that the reasons on which clarification was required was as per the Annexure, but the annexure was left blank. Thus, the reasons were not communicated to the assessee. The assessment was then transferred to the National Faceless Assessment Centre (NaFAC) and the Faceless Assessing Officer (FAO) assumed jurisdiction, who then issued notice u/s.142(1) of the Act dated 15.12.2021. The assessee filed her response on 28.12.2021, uploading her financials and mentioned that the income from the sale of the property was clubbed with her husband’s income and the LTCG was offered in his Retrun of income. The AO then issued another notice u/s.142(1) of the Act dated 17.01.2022 wherein he sought for details regarding sale / purchase of property during the year, expenses in connection with the transfer and reason for taking credit of TDS and not offering capital gain income in return of income. The assessee filed her response on 24.01.2022 wherein she again clarified that the income from sale of property was offered in her husband’s return of income after clubbing the income and since the TDS was deducted against her PAN as a vendor, she claimed credit for the same in her ROI. In response to a show cause notice (SCN) dated 16.02.2022 issued by the Assessing Officer, the assessee filed her detailed response on 21.02.2022, wherein she explained the history of the property and substantiated as to how the income from the sale of the property was rightly offered in her husband’s hands along with the documentary evidence. The very next day, the AO issued another notice u/s.142(1) of the Act calling for the documentary evidence for purchase and
sale of immovable property. The assessee responded on 25.02.2022 by filing the parent documents from 1988 onwards to show the flow of title in the property and how both the assessee and her husband had acquired the property with pre-existing charge on the same. The AO then issued a SCN dated 08.03.2022, wherein without recording the detailed submissions made by the assessee, the AO proposed to add a sum of Rs.19,86,16,459/- as the LTCG of the assessee after reducing indexed cost of acquisition of Rs.13,48,041/- and sale expenses of Rs.35,500/- from the sale consideration of Rs.20,00,00,000/- for the reason that the expenses claimed by the assessee were not allowable under the Act.

The assessee e-filed her objections on 11.03.2022, wherein she again explained as to how the property was acquired by both herself and her husband with pre-existing charge and how the clearance of said encumbrance is an allowable expenditure. In spite of the assessee’s detailed submissions, the AO proceeded to pass the impugned order of assessment u/s.147 r.w.s. 144B of the Act. The assessment was completed determining total income at
Rs.19,92,03,200/- by computing Long Term Capital Gain at Rs.19,86,16,459/- in the hands of the assessee and denying deduction towards discharge of mortgage liability. The AO held that u/s.45 r.w.s 48 of the Act, only cost of acquisition and transfer expenses are allowable deductions while computing capital gains. He observed that repayment of the mortgage/loan to the bank is neither cost of acquisition nor expenditure incurred wholly and exclusively in connection with the transfer. Accordingly, he rejected the assessee’s claim and taxed the entire capital gain in her hands.

Aggrieved, the assessee preferred her appeal before the ld.CIT(A). The ld.CIT(A) upheld the validity of reopening and confirmed the addition on the ground that the mortgage created with State Bank of India was not an existing encumbrance at the time of acquisition by the assessee. Therefore, he treated it as a self-created mortgage, and held that the amount paid for its discharge cannot be treated as cost of acquisition. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

Before us, the ld.AR for the assessee submitted that the reassessment itself is invalid as there was no escapement of income. The capital gain had already been offered to tax in the hands of the assessee’s husband as mandated by section 64(1)(iv) of the Act. It was submitted that once income is statutorily includible in the hands of the transferor spouse, the same cannot be assessed in the hands of the transferee spouse. it is not known if the AO did indeed record reasons and obtain approval u/s.151 of the Act prior to reopening the assessment. The assessee had duly filed her Return of Income within 30 days of issuance of notice u/s.148 of the Act. The AO purporting to provide reasons in the annexure to notice u/s.143(2) of the Act dated 13.11.2021, left the annexure blank. Even in the impugned order, the AO has not furnished the reasons. In fact, the assessee filed a letter dated 04.08.2023 with the JAO on 07.08.2023 requesting him to furnish the reasons along with approval, if any.

The assessee has still not received the same. It was further submitted that reasons recorded for reopening were not furnished despite request, which vitiates the reassessment proceedings in view of the judgment of the Hon’ble Supreme Court in Comunidado of Chicalim Vs. ITO (247 ITR 271).

On merits, it was contended that section 64(1)(iv) of the Act clearly provides that income arising from assets transferred without consideration to spouse shall be included in the hands of the transferor. The property having been settled without consideration, the capital gain is required to be assessed only in the hands of the assessee’s husband. It was further submitted that taxing the same income again in the hands of the assessee would amount to double taxation which is impermissible in law.

(Key Legal Grounds Explained in Simple Terms)

The Tribunal set aside the reassessment proceedings based on multiple statutory, legal, and procedural deficiencies. The key reasons are explained below:

1. Mandatory Application of Clubbing Provisions (Section 64(1)(iv))

• Under Section 64(1)(iv) of the Income-tax Act, income arising from an asset transferred to a spouse without adequate consideration must be taxed in the hands of the transferor (husband).
• In this case:
  • The husband transferred property to his wife without consideration.
  • Therefore, Long-Term Capital Gain (LTCG) arising on sale must be taxed in the husband’s hands.
• The Tribunal clarified:
  • This provision is mandatory and asset-based, not dependent on legal ownership at the time of sale.
  • Even though the wife sold the property, taxation must follow the statutory clubbing rule.

2. Prevention of Double Taxation

• The husband had already declared and paid tax on the capital gains in his return of income.
• Taxing the same income again in the wife’s hands would result in:
  • Double taxation, which is not permitted under law.
• The Tribunal emphasized:
  • There is no provision in the Income-tax Act that allows the same income to be taxed twice in two different hands.

3. Jurisdictional and Procedural Defects in Reassessment

The reassessment proceedings were held to be invalid (vitiated) due to serious procedural lapses:

a) Failure to Provide Reasons for Reopening

• The Assessing Officer (AO) did not furnish the recorded reasons for reopening despite repeated requests.
• As per judicial precedents:
  • Non-supply of reasons makes reassessment void and illegal.

b) No “Reason to Believe” (Incorrect Assumption of Facts)

• Reopening under Section 147 requires a valid “reason to believe” that income has escaped assessment.
• In this case:
  • Income was already taxed in the husband’s hands.
  • Hence, no income had escaped assessment.
• Therefore:
  • The very foundation of reopening was factually incorrect.

c) Change of Opinion Not Permissible

• The Tribunal observed:
  • The final addition was based on a different issue (mortgage deduction under Section 48) than the original reason for reopening.
• Law does not permit:
  • Reassessment based on a mere change of opinion.
• Hence, reassessment was invalid on this ground also.

4. Allowability of Deduction for Mortgage Discharge (Section 48)

• The Assessing Officer disallowed deduction for repayment of mortgage while computing capital gains.
• The Tribunal held:
  • The mortgage was a pre-existing encumbrance on the property.
  • Payment made to clear such mortgage is necessary to obtain clear title.
• Based on judicial principles:
  • Such payment forms part of the cost of acquisition/improvement.
  • Hence, it is allowable as deduction under Section 48.

5. Final Conclusion of the Tribunal

• The reassessment proceedings were held to be:
  • Legally invalid
  • Procedurally defective
  • Contrary to statutory provisions
• Accordingly:
  • The addition of ₹19.86 crore was deleted in full.

Key Takeaways for Tax Professionals

• Clubbing provisions under Section 64 are mandatory and override ownership.
• Double taxation is strictly prohibited unless expressly provided by law.
• Reassessment must strictly comply with:
  • Valid reason to believe
  • Proper procedural requirements
• Non-furnishing of reasons = invalid reassessment
• Payments for clearing pre-existing encumbrances are deductible under Section 48.