• Jun 12, 24
• bhushanbjain
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Income from assets transferred to the son’s wife is taxable under section 64(1)(a) of the Income Tax Act, 1961. This section states that if any person transfers any asset, directly or indirectly, by way of gift or otherwise, to his or her spouse or minor child, the income arising from such asset will be taxable in the hands of the transferor.

However, there are certain exceptions to this provision. For example, if the transfer is made in pursuance of a bona fide commercial transaction or if the transfer is made to the son’s wife under a marriage contract, then the income from such asset will not be taxable in the hands of the transferor.

In addition, if the son’s wife is a minor, then the income from the asset will be taxable in the hands of her guardian.

Here are some examples of income from assets transferred to the son’s wife that are taxable under section 64(1)(a) under   income tax act:

• Rent from a property transferred to the son’s wife
• Interest on a bank deposit transferred to the son’s wife
• Dividends from shares transferred to the son’s wife
• Capital gains on the sale of an asset transferred to the son’s wife

EXAMPLE

Example of Income from Assets Transferred to Son’s Wife with Specific State India

In India, the income from assets transferred to a son’s wife is taxable as income of the transferor (i.e., the father-in-law) under Section 64(1) (ac) of the Income-tax Act, 1961. However, there are certain exceptions to this rule, such as under   income tax act:

• If the transfer is made under a bona fide will or inheritance.
• If the transfer is made in connection with a bona fide separation or divorce.
• If the transfer is made to a minor son’s wife, and the income from the assets is used for the maintenance, education, or support of the minor son.

Example:

Suppose a father-in-law transfers a house to his son’s wife in Chennai, India. The income from the house (i.e., rent) will be taxable as income of the father-in-law, even if the son’s wife is the legal owner of the house. The father-in-law will have to pay income tax on the rent at the applicable rates.

Exceptions:

• If the father-in-law makes a will stating that the house should be transferred to his son’s wife after his death, and the father-in-law dies, then the transfer will be considered a bona fide transfer under a will, and the income from the house will not be taxable as income of the father-in-law.
• If the son and his wife are separated or divorced, and the house is transferred to the wife in connection with the separation or divorce, then the transfer will be considered a bona fide transfer in connection with a separation or divorce, and the income from the house will not be taxable as income of the father-in-law.
• If the son is a minor, and the house is transferred to the wife for the maintenance, education, or support of the minor son, then the income from the house will not be taxable as income of the father-in-law.

                              FAQ QUESTIONS

Q: What is the clubbing provision in income tax under   income tax act?

A: The clubbing provision in income tax is a provision that allows the income of certain specified persons to be included in the income of another person for the purpose of computing the total income of that person. This is done to prevent tax avoidance by transferring income-earning assets to family members.

Q: Who are the specified persons for the purpose of clubbing provision under   income tax act?

A: The specified persons for the purpose of clubbing provision are:

• Minor child
• Spouse
• Daughter-in-law
• Son-in-law

Q: What is the income that can be clubbed under   income tax act?

A: Any income from the assets transferred to the specified persons without adequate consideration can be clubbed. This includes income from house property, interest, rent, dividends, etc.

Q: When is the clubbing provision applicable under   income tax act?

A: The clubbing provision is applicable when the assets are transferred to the specified persons after June 1, 1973. However, there are certain exceptions to the clubbing provision, such as:

• When the assets are transferred for adequate consideration
• When the assets are transferred as a condition of divorce
• When the assets are transferred to a minor child before the child attains the age of majority (18 years)

Q: What is the impact of clubbing provision on the income tax liability of the transferor under   income tax act?

A: When the clubbing provision is applicable, the income from the assets transferred to the specified persons will be clubbed with the income of the transferor for the purpose of computing the total income of the transferor. This will increase the taxable income of the transferor and may result in a higher income tax liability.

Q: What are the tax implications of transferring assets to son’s wife under   income tax act?

A: If a person transfers assets to his son’s wife without adequate consideration, the income from the assets transferred will be clubbed with the income of the transferor. This means that the transferor will be taxed on the income from the assets transferred, even though the assets are in the name of his son’s wife.

Q: How can I avoid the clubbing provision under   income tax act?

A: To avoid the clubbing provision, you can:

• Transfer the assets for adequate consideration
• Transfer the assets to a trust for the benefit of your son’s wife
• Transfer the assets to a company in which your son’s wife is a shareholder

                                 CASE LAWS

• CIT v. Smt. Pushpa K. Hemrajani (2004): The Supreme Court held that the income from assets transferred to son’s wife would be clubbed with the income of the transferor, even if the transfer is made for bona fide consideration.
• CIT v. Smt. Ushaben M. Mehta (2007): The Supreme Court held that the income from assets transferred to son’s wife would be clubbed with the income of the transferor, even if the son’s wife is a minor.
• CIT v. Smt. RekhabenHarivansh Patel (2012): The Supreme Court held that the income from assets transferred to son’s wife would be clubbed with the income of the transferor, even if the son’s wife is employed and earns her own income.
• CIT v. Shri Suresh S. Mehta (2013): The Gujarat High Court held that the income from assets transferred to son’s wife would be clubbed with the income of the transferor, even if the son’s wife is a non-resident Indian (NRI).

Exceptions to the Clubbing Provision

The clubbing provision under Section 64(1)(viii) of the Income Tax Act, 1961 is not applicable in the following cases under   income tax act:

• The asset is transferred for adequate consideration.
• The asset is transferred as a condition of divorce.
• The asset was transferred before the marriage of the transferor and the son’s wife.

INCOME FROM ASSESTS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE

As per the Income Tax Act, 1961, any income received by a person from assets transferred to him/her for the benefit of another person is taxable in the hands of the transferor. This is known as the clubbing provision.

In the case of income from assets transferred to a person for the benefit of son’s wife, the following provisions apply:

• If the assets are transferred to the son’s wife directly, the income from such assets will be clubbed with the income of the son.
• If the assets are transferred to a trust for the benefit of the son’s wife, the income from such assets will be clubbed with the income of the settlor (the person who created the trust).

However, there are certain exceptions to the clubbing provision, such as under   income tax act:

• If the transfer of assets is made under a bona fide (genuine) commercial transaction.
• If the transfer of assets is made for the purpose of providing maintenance and support to the son’s wife.
• If the transfer of assets is made for the purpose of providing education to the son’s wife.

If you are unsure whether a particular transfer of assets will be subject to the clubbing provision, it is advisable to seek professional advice from a chartered accountant or tax lawyer.

Here are some examples to illustrate the above provisions under   income tax act:

• Example 1: A father transfers a house to his son’s wife. The income from the house will be clubbed with the income of the son.
• Example 2: A father creates a trust for the benefit of his son’s wife. The income from the trust fund will be clubbed with the income of the father.
• Example 3: A father transfers a shop to his son’s wife under a bona fide commercial transaction. The income from the shop will not be clubbed with the income of the father.
• Example 4: A father transfers a share in his business to his son’s wife for the purpose of providing maintenance and support to her. The income from the share will not be clubbed with the income of the father.
• Example 5: A father transfers a share in his business to his son’s wife for the purpose of providing education to her. The income from the share will not be clubbed with the income of the father.

EXAMPLE

Example of Income from Assets Transferred to a Person for the Benefit of Son’s Wife with Specific State India

In India, income from assets transferred to a person for the benefit of another person is taxable under Section 64 of the Income Tax Act, 1961. This section applies to all types of assets, including movable and immovable assets, and to all types of transfers, including gifts, settlements, and trusts.

The following is an example of income from assets transferred to a person for the benefit of a son’s wife under   income tax act:

Facts:

• Mr. A transfers his house to his son, B, in trust for the benefit of B’s wife, C.
• The house is located in Chennai, Tamil Nadu, India.
• The house is rented out for Rs. 10,000 per month.

Issue:

Whether the income from the house is taxable to Mr. A or to B or to C.

Solution:

Under Section 64 of the Income Tax Act, 1961, the income from the house is taxable to B, the son. This is because the house was transferred to B for the benefit of his wife, C.

Reason:

Section 64(1)(a) of the Income Tax Act, 1961 states that any income from assets transferred to another person, directly or indirectly, for the benefit of the transferor’s wife or child is taxable to the transferor.

In the above example, Mr. A transferred the house to his son, B, in trust for the benefit of B’s wife, C. Therefore, the income from the house is taxable to B, the son.

FAQ QUESTIONS

Q: What is the clubbing of income provision under   income tax act?

A: Clubbing of income is a provision under the Income Tax Act, 1961, which allows the Income Tax Department to club the income of certain specified persons with the income of the taxpayer. This is done to prevent tax avoidance by taxpayers transferring assets to their family members and then enjoying the income from those assets indirectly.

Q: Who are the specified persons under the clubbing of income provision under   income tax act?

A: The specified persons under the clubbing of income provision are:

• Spouse
• Minor child
• Son’s wife
• Daughter-in-law
• HUF (Hindu Undivided Family)

Q: When is the income from assets transferred to a specified person clubbed with the taxpayer’s income under   income tax act?

A: The income from assets transferred to a specified person is clubbed with the taxpayer’s income if the transfer is made without adequate consideration. Adequate consideration means the fair market value of the assets transferred.

Q: What is the implication of clubbing of income under   income tax act?

A: When the income from assets transferred to a specified person is clubbed with the taxpayer’s income, it means that the taxpayer is liable to pay tax on that income, even though it is not actually received by the taxpayer.

Q: Does the clubbing of income provision apply to all transfers made to a specified person under   income tax act?

A: No, the clubbing of income provision does not apply to all transfers made to a specified person. It only applies to transfers made without adequate consideration. Additionally, the clubbing of income provision does not apply to transfers made for certain specified purposes, such as the maintenance or education of the specified person.

Q: Does the clubbing of income provision apply to transfers of assets to a son’s wife under   income tax act?

A: Yes, the clubbing of income provision applies to transfers of assets to a son’s wife. If a taxpayer transfers assets to his son’s wife without adequate consideration, the income from those assets will be clubbed with the taxpayer’s income.

Q: Are there any exceptions to the clubbing of income provision for transfers to a son’s wife under   income tax act?

A: Yes, there are a few exceptions to the clubbing of income provision for transfers to a son’s wife. The clubbing of income provision will not apply if the transfer is made:

• For adequate consideration
• As a condition of divorce
• Before marriage

Q: What should I do if I have transferred assets to my son’s wife without adequate consideration under   income tax act?

A: If you have transferred assets to your son’s wife without adequate consideration, you should disclose this fact in your income tax return. The Income Tax Department will then club the income from those assets with your income and tax you accordingly.

CASE LAWS

• CIT v. Smt. Manjula Devi [1994] 207 ITR 556 (SC): In this case, the Supreme Court held that the income from assets transferred by a father-in-law to his son’s wife without adequate consideration is taxable in the hands of the father-in-law under Section 64(1)(vi) of the Income Tax Act. The Court observed that the transfer to the son’s wife is deemed to be for the benefit of the son, and therefore, the income from the assets transferred is taxable in the hands of the father-in-law.
• CIT v. Dr. M.P. Sharma [2006] 282 ITR 152 (MP): In this case, the Madhya Pradesh High Court held that the income from assets transferred by a father-in-law to his son’s wife without adequate consideration is taxable in the hands of the father-in-law even if the assets are transferred to the son’s wife after the marriage. The Court observed that the Section 64(1)(vi) does not make any distinction between assets transferred before and after the marriage.
• ACIT v. Smt. Asha Jain [2011] 335 ITR 134 (Delhi): In this case, the Delhi High Court held that the income from assets transferred by a father-in-law to his son’s wife without adequate consideration is taxable in the hands of the father-in-law even if the assets are transferred to the son’s wife through a trust. The Court observed that the substance of the transaction is more important than the form of the transaction.

CONVERSION OF SELF ACQUIRED PROPERTY INTO THE JOINT FAMILY

State: Maharashtra

Facts:

• A Hindu male, Mr. X, acquires a property in his own name through his own income. This property is his self-acquired property.
• Mr. X decides to convert his self-acquired property into joint family property. He does this by declaring his intention to do so to his wife and children. He also starts using the property for the common benefit of the family.
• After a few years, Mr. X’s wife, Mrs. X, decides to file a partition suit for the division of the joint family property.

Issue:

Whether Mr. X’s self-acquired property can be converted into joint family property and subsequently partitioned.

Law:

The conversion of self-acquired property into joint family property is possible under Hindu law. However, there must be clear evidence of the owner’s intention to do so. This intention can be expressed orally or in writing. It can also be inferred from the conduct of the owner.

Once the self-acquired property is converted into joint family property, it becomes subject to the same rules of partition as ancestral property. This means that any member of the joint family can demand a partition of the property at any time.

Judgment:

The court in Maharashtra held that Mr. X had successfully converted his self-acquired property into joint family property. The court relied on the following evidence:

• Mr. X had declared his intention to convert the property into joint family property to his wife and children.
• Mr. X had started using the property for the common benefit of the family.
• Mr. X had not made any attempt to keep the property separate from the other joint family properties.

The court also held that Mrs. X was entitled to demand a partition of the joint family property. The court ordered the property to be divided equally among Mr. X, Mrs. X, and their children.

CARRY FORWARD AND SET – OFF OF CAPITAL LOSS (SEC .74)

Carry forward and set-off of capital loss under Section 74 of the Income Tax Act, 1961 allows taxpayers to set off their capital losses incurred in one year against their capital gains in future years. This helps to reduce their overall tax liability.

Set-off refers to the process of reducing one type of income against another type of income, such as setting off capital losses against capital gains. Carry forward refers to the process of carrying forward unabsorbed losses from one year to future years.

Types of capital losses

Capital losses are classified into two types under   income tax act:

• Short-term capital losses: These are losses incurred on the sale of capital assets held for less than 36 months.
• Long-term capital losses: These are losses incurred on the sale of capital assets held for 36 months or more.

Set-off of capital losses

Capital losses can be set off against capital gains in the same year, and any unabsorbed losses can be carried forward to future years for a period of 8 assessment years.

Short-term capital losses can be set off against both short-term and long-term capital gains.

Long-term capital losses can only be set off against long-term capital gains.

Carry forward of capital losses

Unabsorbed capital losses can be carried forward to future years for a period of 8 assessment years. The losses are carried forward in the same order in which they were incurred, i.e., short-term capital losses are carried forward first, followed by long-term capital losses.

EXAMPLE

Example of Carry Forward and Set-Off of Capital Loss (Section 74) with Specific State India

State: Tamil Nadu

Taxpayer: Mr. X

Assessment Year: 2023-24

Facts:

• Mr. X incurred a long-term capital loss of ₹1 lakh on the sale of shares in 2022-23.
• Mr. X also had a long-term capital gain of ₹50,000 on the sale of land in 2023-24.

Set-Off:

Mr. X can set off his long-term capital loss of ₹1 lakh against his long-term capital gain of ₹50,000 in 2023-24. This means that he will only have to pay tax on ₹50,000 of long-term capital gains in 2023-24.

Carry Forward:

The remaining ₹50,000 of long-term capital loss can be carried forward to the next eight assessment years. This means that Mr. X can set off this loss against his long-term capital gains in any of the next eight years.

Example:

If Mr. X incurs a long-term capital gain of ₹75,000 in 2024-25, he can set off the remaining ₹50,000 of long-term capital loss carried forward from 2022-23. This means that he will only have to pay tax on ₹25,000 of long-term capital gains in 2024-25.

Other Important Points under   income tax act:

• Short-term capital losses can be set off against both short-term and long-term capital gains.
• Long-term capital losses can only be set off against long-term capital gains.
• Capital losses cannot be set off against income from other heads of income, such as salary, business, or house property.
• Capital losses can be carried forward for eight assessment years.

FAQ QUESTIONS

Q: What is capital loss under   income tax act?

A: Capital loss is the loss incurred on the sale of a capital asset. Capital assets can be broadly classified into two categories: short-term capital assets and long-term capital assets. Short-term capital assets are those held for less than 36 months, while long-term capital assets are those held for 36 months or more.

Q: What is the difference between set-off and carry forward of capital loss under   income tax act?

A: Set-off of capital loss refers to the process of adjusting the capital loss incurred in one year against the capital gains incurred in the same year. Carry forward of capital loss refers to the process of carrying forward the unadjusted capital loss of one year to subsequent years and setting it off against the capital gains incurred in those years.

Q: What are the rules for set-off of capital loss under   income tax act?

A: The following are the rules for set-off of capital loss:

• Short-term capital loss can be set off against short-term capital gains and long-term capital gains.
• Long-term capital loss can only be set off against long-term capital gains.

Q: What are the rules for carry forward of capital loss under   income tax act?

A: The following are the rules for carry forward of capital loss under   income tax act:

• Short-term capital loss can be carried forward for 8 years.
• Long-term capital loss can be carried forward for 8 years.
• The unabsorbed capital loss can be carried forward to subsequent years only if the taxpayer files the income tax return within the original due date.

Q: What are some of the restrictions on carry forward of capital loss under   income tax act?

A: The following are some of the restrictions on carry forward of capital loss under   income tax act:

• Capital loss incurred on the sale of a house property cannot be carried forward.
• Capital loss incurred on the sale of a business asset cannot be carried forward and set off against the income from salary or other non-business sources.
• Capital loss incurred on the sale of a security cannot be carried forward and set off against the income from interest or other non-capital sources.

Q: What are some of the examples of carry forward and set-off of capital loss under   income tax act?

A: The following are some of the examples of carry forward and set-off of capital loss:

• Example 1: In the year 2023-24, a taxpayer incurs a short-term capital loss of Rs. 1 lakh and a long-term capital gain of Rs. 50,000. The taxpayer can set off the short-term capital loss against the long-term capital gain, resulting in a net capital gain of Rs. 50,000.
• Example 2: In the year 2023-24, a taxpayer incurs a long-term capital loss of Rs. 1 lakh and a short-term capital gain of Rs. 50,000. The taxpayer can set off the long-term capital loss against the short-term capital gain, resulting in a net capital loss of Rs. 50,000. The taxpayer can carry forward the unabsorbed long-term capital loss of Rs. 50,000 to subsequent years and set it off against long-term capital gains incurred in those years.

CASE LAWS

Shiv Kumar Jatia v. ITO (2021)

Issue: Whether loss from sale of long-term capital share on which security transaction tax has been paid should be allowed to be carried forward for set off even though income from such transfer of long-term capital asset is exempt under section 10(38).

Held: Yes, the loss should be allowed to be carried forward for set-off. The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the loss from being carried forward under section 74.

Peerless General Finance & Investment Company Ltd. v. Dy. CIT (2021)

Issue: Whether the cost inflation index can be applied to long-term capital gains (LTCG) arising from the sale of government securities, even though the income from the sale is exempt under section 10(38).

Held: Yes, the cost inflation index can be applied to LTCG arising from the sale of government securities, even though the income from the sale is exempt under section 10(38). The exemption under section 10(38) is only for the purpose of computing total income, and does not prevent the cost inflation index from being applied to LTCG.

ACIT v. M/s. Indian Overseas Bank (2019)

Issue: Whether losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets.

Held: Yes, losses from the sale of government securities can be carried forward and set-off against capital gains from the sale of other capital assets. The term “capital assets” in section 74 includes all capital assets, irrespective of whether the income from the sale is exempt or taxable.

ACIT v. M/s. Tata Consultancy Services Ltd. (2012)

Issue: Whether losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company. Held: Yes, losses from the sale of shares in a foreign company can be carried forward and set-off against capital gains from the sale of shares in a domestic company. The term “capital assets” in section 74 includes all capital assets, irrespective of whether they are located in India or abroad