By JAGDISH T. PUNJABI | PRACHI PAREKH
Chartered Accountants
DEVENDRA JAIN | Advocate
8. [2020] 113 taxmann.com 378 (Pune)(Trib.)
Uday Gopal Bhaskarwar vs. ACIT
ITA No. 502/Pune/2019
A.Y.: 2014-15
Date of order: 20th January, 2020
Section 64 – Entire loss arising to wife of assessee in the
business of Futures and Options (F&O) which business was started by her
during the previous year with contribution from assessee in shape of gifts, was
liable to be clubbed in hands of assessee in terms of Explanation 3 read in
conjunction with section 64(1)(iv) – Assessee was entitled to club full loss
from business of F&O in his personal income
FACTS
The assessee, in the return of
income filed by him, clubbed the loss from the business of his spouse amounting
to Rs. 31,56,429 in view of the provisions of section 64. In the course of
assessment proceedings, on being called upon to justify such a claim, the
assessee submitted that during the year under consideration he gifted a sum of
Rs. 94.50 lakhs to Mrs. Priti Bhaskarwar, his wife, who started a business of
Futures and Options (F&O) on 18th September, 2013. The assessee
claimed that she incurred a loss of Rs. 31,56,429 in the business which was
clubbed in his hands.
The A.O. accepted the primary claim
of the assessee of his wife having incurred a loss of Rs. 31.56 lakhs in the
business of F&O, which was set up on 18th September, 2013, and further that
the loss from such business was eligible for set-off against the income of the
assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. He,
however, did not accept the assessee’s contention that the entire loss of Rs.
31.56 lakhs be set off against his (the assessee’s) income. Considering the
mandate of Explanation 3 to section 64(1), the A.O. held that only that part of
the business loss incurred by the assessee’s wife could be set off against the
assessee’s income which bears the proportion of amount of investment out of the
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.
He, therefore, computed the amount
of loss eligible for set-off against the assessee’s income at Rs. 9,72,563 by
multiplying Rs. 31,56,429 (loss incurred by wife in the business) with Rs.
25.00 lakhs (gifts made by the assessee to his wife up to 18th
September, 2013) as divided by Rs. 81,13,648 (opening capital as on 1st April,
2013 as increased by the gift of Rs. 25.00 lakhs given by the assessee up to 18th
September, 2013).
Aggrieved, the assessee preferred an
appeal to the CIT(A) who confirmed the action of the AO.
Still aggrieved, the assessee
preferred an appeal to the Tribunal.
HELD
The Tribunal noted that the core of
controversy is the computation of eligible amount of loss incurred by the
assessee’s wife which is eligible for set-off against the assessee’s income.
On going through the mandate of
section 64(1)(vi) of the Act in juxtaposition with Explanation 3 to the
sub-section, it transpires that there can be two possible situations of
utilisation of the assets transferred by husband to wife triggering the
clubbing provision. The first situation can be where the amount of assets
received by the wife is exclusively invested in an asset and further there is
no investment by the wife in such a new asset. The full income resulting from
such an exclusive investment is liable to be clubbed with the total income of
the husband. An example of such a situation can be a wife making a fixed
deposit with a bank, etc. out of the gift of money received from her husband.
The full amount of interest income arising on such FDR is liable to be clubbed
with the income of the husband.
The second situation can be where
the amount of assets received by the wife as a gift from her husband is not the
exclusive investment in the business carried on by her. Rather, she has also
made separate investment in the said business. In such a situation of a common
pool of unidentifiable investments in the business, there arises difficulty in
precisely attributing the income of such a business to the investments made out
of the gift received from the husband attracting clubbing and to investments
made out of funds other than the gift received from the husband not attracting
the clubbing provision. It is in such a scenario that the prescription of
Explanation 3 comes into play by providing that the amount of income from the
combined business as relatable to the assets transferred by the husband should
be computed by taking the income from such business earned during the year as
multiplied with the amount of assets received by the wife from her husband as
invested in the business and divided by her total investment in the business,
including the amount of assets received from the husband.
In a nutshell, there are three
components in this formula. The first component is the income of the business,
which is to be considered for the year. The second is the amount of assets
received by the wife from her husband as invested in the business, and the
third is the total investment in the business including the amount of assets
received from the husband. The latter two figures are required to be taken as
on the first day of the previous year. Section 3 defines ‘Previous year’ to
mean ‘the financial year immediately preceding the assessment year.’ The proviso
to section 3 states that, in the case of a business newly set up in a financial
year, the previous year shall be the period beginning with the date of the
setting up of the business and ending with the said financial year. Since the
wife of the assessee started the new business of F&O on 18th
September, 2013, the extant case is, ergo, covered by the proviso
to section 3.
Having examined the factual position
in detail, the Tribunal held that the entire amount of loss resulting from the
business of F&O started by Mrs. Priti Bhaskarwar with the gifts received
from the assessee is liable to be clubbed in the hands of the assessee.
This ground of appeal filed by the assessee was
decided in favour of the assessee.
