Using intra-spouse transition as gifts to save tax. Is it legal?

Here I will let you know sometimes how loopholes in tax and misusing section 56(2)(x) which deals with exemption in the case of gift from relative can backfire if other provisions are not taken into consideration. Happy Reading

Introduction

Here I will be discussing an amazing and analytical judgement of the Bangalore bench of the income tax appellate tribunal, which made a ruling on 18th August 2025.

ITAT came across an interesting case that was related to the taxation of capital gains (in whose hands) at the time of sale of land that was gifted by the husband to his wife i.e. we can say inter spouse transaction which is actually exempt as per section 56(2)(x).

Dispute all about

The dispute revolved around whether the capital gains from above sale of the gifted property that was made by a wife should be taxed in her own hands or in the hands of the husband who actually transferred the asset.

Main section dealing with above is Section 64(1)(iv)of the Income Tax Act, 1961, that deals with “clubbing of income” between the relatives as per Income tax which includes spouses, along with application of these transfers as per provisions of capital gains.

It is clearly stated in this case that “form” or a registered gift deed cannot prevail over “substance” or the absence of adequate consideration as per the Income tax act.

Facts of the case

In this case, the husband acquired land through family partition in year 1995, whereas in May 2009, he executed a registered gift deed and transferred that land to his wife.

In June 2011, his wife along with her husband’s involvement got that land converted for non-agricultural use. And sold it on 29 June 2011, for a consideration of Rs. 17.26 crore, in which the wife’s share was about Rs. 8.36 crore.

After the sale, wife got filed her income tax return filed, showing very less income and also claimed zero income from capital gains by adopting fair market value at conversion (from agriculture land) as cost of acquisition.

So, the Assessing Officer at the time of scrutiny disagreed this treatment by invoking Section 50C which deals with the sale of property, stating that when a property is sold, this section ensures that the sale is taxed as per the property stamp duty value or the actual sale price, whichever is higher. This section was introduced to prevent the undervaluation of properties by the assesses for avoiding tax, similarly done in this case, using this AO taxed Rs. 8.36 crore in the hands of wife.

ITAT ruling

The ITAT overruled the AO, holding that Section 64(1)(iv) mandates clubbing of income in the husband’s hands.

Note: Section 64(1)(iv) deals with the income arising directly or indirectly to the spouse from assets transferred otherwise than for adequate consideration shall be included in the income of the transferor.

Core legal issue

The main issue was whether capital gains arising from sale of land that was gifted by a husband to his wife can be assessed in the wife’s hands as the legal owner or must be clubbed with the income of the husband as per the Section 64(1)(iv).

Analysis of the sections of Income tax

“Income” includes “capital gains” which means that, if capital gains arise from an asset which is transferred without any consideration and that transfer is made to spouse, then it must be taxed in the hands of transferor.

ITAT reasoning

If any gift is given as per section 56(2)(x)without any adequate consideration, then in that case gift deed must be duly registered. However, “love and affection” cannot amount to adequate consideration as per the legal sense. Therefore, Section 64(1)(iv)squarely applied.

Scope of the clubbing provisions

The ITAT reiterated that capital gains are part of income for the purposes of Section 64. It covered one of the judgements of Supreme Court that emphasised (Sevantilal Maneklal Sheth v. CIT) and CBDT Circular (20 November 1963).

Sevantilal Maneklal Sheth v. CIT

In Sevantilal Maneklal Sheth Versus Commissioner of Income-Tax (Central), Bombay - 1967 (11) TMI 5 - Supreme Court, the Supreme court held that the compulsory acquisition of property constitutes a “transfer” under Section 2(47)of the Income-tax Act, 1961, and hence, any compensation received on such acquisition is chargeable to capital gains tax, in this case the court rejected the assessee’s plea that since the shares were earlier received under a family arrangement, hence the compulsory acquisition can’t be treated as a taxable transfer, clarifying that the incidence of tax arises at the point of compulsory acquisition irrespective of the earlier mode of acquisition.

Taxability in hands of wife

In this case the income was actually “accrued” in the hands of wife, but the tax incidence must fall in the hands of husband. Hence, the AO wrongly assessed the wife, as Section 64 overrides ownership for the tax purposes.

Substance over Form

Even though the wife was the legal owner, tax cannot be avoided through intra-spousal transfers, clubbing provisions are the anti-avoidance measures, hence, the tax base cannot shift just by executing a gift deed.

Analysis and interpretation of ITAT Judgement

ITAT’s Interpretation seemed to be legally sound, as the literal reading of Section 64(1)(iv)supports taxation in the husband’s hands. The purposive interpretation aligns with anti-avoidance which was the intent of the law to prevent income splitting within the family.

The AO was technically incorrect, as here Section 64 applies, So, assessing wife was unsustainable, Instead, AO should have assessed and taxed the husband directly. This indicates a need for better departmental training on applying clubbing provisions.

Implications for tax planning

Many taxpayers believe executing a registered gift deed shifts tax liability to the giver, This ruling reinforces that gifts to spouse (or minor child) do not change the incidence of tax. Hence a proper structuring is required through timing of transfers, exemptions of Section 54/54F, or transfers to adult children/relatives becomes crucial in this case.

On one hand, taxing husband (who may not have sold the property himself) may appear inequitable, but on the other hand, it prevents abuse of lower slab rates or exemptions that are available to the spouse. Thus, making this provision equitable in taxation.

Lessons learned by me as a professional

Clubbing provisions are absolute which means we should always evaluate Section 64 implications before advising on intra-spousal gifts, also the gift deed is not the tax planning tool, that means  registration do not bypass tax incidence, also the assessees should avoid claiming zero tax positions on spousal transfers without analysing clubbing provisions, which may lead to possible scrutiny.

If sale proceeds are reinvested, exemptions like Section 54/54F, may still reduce liability, still it would be taxable in the hands of transferor.

Conclusion

The ITAT Bangalore ruling decisively holds that capital gains on sale of gifted property to spouse are taxable in the transferor’s hands, not the transferee’s, under Section 64(1)(iv). The judgment tell us about anti-avoidance provisions do override legal ownership and that taxpayers cannot escape the tax merely by gifting assets to spouses.

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