Clubbing of Income provisions (Section 64(1)(iv) of the Income-tax Act, 1961)

[MAHTAB KHAN]

As per section 64(1)(iv), if an individual transfers (directly or indirectly) his/her asset (other than house property) to his or her spouse otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor). 

Situation:

• Husband gifts money (asset) ? wife invests in mutual fund units.

• Wife earns capital gains (short-term or long-term) on redemption/sale of units.

• Will such capital gains be clubbed with the husband’s income under Section 64(1)(iv) of the Income-tax Act, or will it be taxable in the wife’s hands?

[Ryan Vaz]

Applicable Law / Judicial Position

• Section 64(1)(iv), Income-tax Act, 1961 – Clubbing of income arising directly or indirectly from assets transferred to spouse without adequate consideration.

• Explanation 1 to Section 64(1) – Income includes loss; clubbing applies to income arising from the transferred asset.

• Judicial precedents (settled law):

  • CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC) - 1970 (4) TMI 8 - Supreme Court

  • CIT v. Smt. Nirmala Devi - 1986 (7) TMI 32 - MADHYA PRADESH High Court (various HC rulings on accretion/conversion of asset)

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Short Practical Answer

Yes, the capital gains will be clubbed with the husband’s income.
Where a husband gifts money to his wife (without adequate consideration) and the wife invests that money in mutual fund units, capital gains arising on redemption/sale of those units are regarded as income arising indirectly from the transferred asset (money) and are taxable in the hands of the husband under section 64(1)(iv).

AI Summary

Gifts of money to a spouse invested in mutual funds - capital gains are taxed to the transferor under clubbing rules. Section 64(1)(iv) treats income arising directly or indirectly from an asset transferred to a spouse without adequate consideration as income of the transferor; Explanation 1 includes losses and accretions. Where gifted money is invested by the spouse in mutual fund units, capital gains on sale/redemption are regarded as income arising indirectly from the transferred asset and are taxable in the transferor's hands under the clubbing rule.