Spouse’s Trading Losses Funded by Gifted Money Must Be Clubbed and Allowed for Set-Off

ORDER

Nikhil Choudhary, Accountant Member. – This is an appeal filed against the orders of the ld. CIT(A), NFAC under section 250 of the Income Tax Act dated 7.08.2024, wherein the ld. CIT(A) has dismissed the appeals of the assessee against the order of the Assessing Officer passed under section 143(3) for the assessment year 2018-19 on 7.01.2021. The grounds of appeal preferred by the assessee are as under:-

“2.1 The Learned Commissioner of Income Tax (Appeals) erred in law and on facts by disallowing the loss of Rs. 1,14,80,285/- arising from trading in derivatives and equities in the name of the spouse and denying the applicability of Section 64(1)(iv) of the Income Tax Act, 1961.

2.2 The Learned Commissioner of Income Tax (Appeals) failed to appreciate that the loss incurred by the spouse was the result of funds transferred without adequate consideration, thus satisfying the conditions for clubbing of income under Section 64(1)(iv) of the Income Tax Act, 1961.

2.3 The Learned Commissioner of Income Tax (Appeals) did not properly consider the ratio laid down in the case of Damodar K. Shah v. Commissioner of Income Tax (Gujarat)/[2001] 252 ITR 235 (Gujarat)/(2001) 966 CTR 429 (Guj.) and CIT v. Keshavji Morarji [1967] 66 ITR 142 (SC), where it was held that income arising from assets transferred to the spouse is to be included in the total income of the transferor.

2.4 The Learned Commissioner of Income Tax (Appeals) erred in concluding that the income/loss arising from the risk-taking process by the spouse should be treated as independent, despite the fact that the funds utilized for such trading were directly transferred by the appellant, thereby attracting the provisions of Section 64(1)(iv) of the Act

2.5 The Learned Commissioner of Income Tax (Appeals) did not consider the principle of beneficial ownership and control, which establishes that the loss should be attributed to the person who exercises real control over the funds and transactions, as held in the case of Uday Gopal Bhaskarawar v. Asstt. CIT, Circle-13, Pune 182 ITD 216 (Pune – Trib.)/ (ITA No. 502/PUN/2019).

2.6 The appellant reserves the right to add, alter, or amend any grounds of appeal before or at the time of hearing.”

2. The facts of the case are that the case of the assessee was selected for limited scrutiny and the E-assessment Scheme, 2019 on account of;

The assessee was doing business transactions in equity and derivatives from the past couple of years and was showing these earnings under the head, ‘profit & gains’ from business or profession and under short term / long term capital gains. During the F.Y. 2017-18, the assessee had shown the loss of the other person (spouse) as clubbed with his income as per the provisions of section 64(1)(iv) of the Income Tax Act, 1961. It was submitted that he had transferred a sum of Rs. 1,15,47,000/- to his spouse’s bank account out of his earnings and past savings and had been doing trading in derivatives and equities in the names and PAN of his spouse. It was submitted that a loss had been earned and the proportionate amount of loss (Rs. 1,14,80,285/-) w.r.t. the amount transferred by him as per section 64(1)(iv) had been claimed as business loss from F&O transactions. The ld. AO declined to consider his claim on account of his belief that the income / loss generated in his wife’s case was not merely the result of asset transfer (money) but was a result of risk-taking process by her. He pointed out that as per the proviso to section 64(1)(iv), the same was not to apply in relation to income arising to spouse where the spouse possess technical or professional qualifications and the income was solely attributable to the application of his or her technical or professional knowledge and experience and the assessee had submitted that his wife Smt. Ruchi Yadav, had earned an independent income of Rs. 30,239/- as speculative business profit, as evident from the statement of income submitted. From the above, he concluded that on the one hand, the assessee was treating speculative business profit as an independent income of his spouse whereas a large portion of the loss Rs. 1,14,80,287/- of the spouse was being set off against his own income. Thus, the reply of the assessee was not acceptable on merits. He also noted from the examination of KYC documents that it was not mentioned anywhere the wife would not be doing trading and the assessee would be handling all the transactions. He held that since the income / loss generated in the wife’s case was not only on account of such transfer (money) but was a result of risk-taking process of the trading done by the wife. Hence, the loss was to be treated as her own loss and he declined to allow the same to be carried forward in the hands of the assessee. He issued a draft assessment order to the assessee, in response to which the assessee submitted that even speculative profit of Rs. 30,239/- of Smt. Ruchi Yadav had been considered in his ITR and that his claim was as per the provisions of section 64(1)(iv). It was further submitted that the KYC documents did not offer an opportunity to explain that the wife would not be doing the trading and the assessee would be handling all the transactions etc,. However, the ld. AO was not convinced and accordingly he disallowed the claim of loss on account of clubbing.

3. Aggrieved with the said order, the assessee went in appeal before the ld. CIT(A). The ld. CIT(A) observed that from the perusal of the bank statement of the assessee, it was noticed that a joint account was maintained with ICICI Bank and the amounts were transferred into this account, ‘loan to Ruchi’, ‘investment’ ‘gift’, ‘budget’. The entire amount transferred by the assessee into this joint account had been capitalized in the books of the assessee and the funds received in this manner had been claimed to be utilized for speculative business and derivative transactions by the assessee’s spouse. He observed from the notes on accounts and accounting policies in Schedule 1 that Smt. Ruchi Yadav was an independent assessee and the clubbing provisions were not at all applicable. He held that the provisions of section 64(1)(iv) were subject to the provisions of section 27(i) of the Act, which held that an individual who transfers otherwise than for adequate consideration any house property to whose or her spouse, not being a transfer in connection with agreement to live a part or to a minor child not being a married daughter shall be deemed to be the owner of the house property so transferred and using that analogy, held that since Smt. Ruch Yadav had capitalized the amounts received in the capital account maintained by her and carried the business of speculative and derivative transactions on this account, section 64(1)(iv) of the Act was not applicable to the facts and circumstances of the case. He, therefore, upheld the order of the ld. AO and dismissed the appeal of the assessee.

4. The assessee is aggrieved at this order of the ld. CIT(A) and has accordingly come in appeal before us. Sh. Dharmendra Kumar, C.A. (hereinafter referred to as the ld. AR) appearing on behalf of the assessee submitted that the assessee is an individual earning income by trading in securities, futures and options and intra-day trading in derivative and equities and has been doing this for a long time. He had also opened a de-mat account in the name of his wife, Smt. Ruchi Yadav and opened a joint bank account with his spouse. He used to contribute funds to this joint bank account for trading in F&O, derivatives and equities. The assessee’s spouse did not possess any technical or professional expertise in respect of the securities market and it was the assessee who used to do all the trading from her de-mat account. During the course of the assessment year, the assessee had transferred a sum of Rs. 1,15,47,000/- to his spouse without consideration. As a result of this, Smt. Ruchi Yadav had total capital of Rs. 1,95,81,193/-. From the aforesaid capital, the assessee had undertaken trading in derivatives and equities on her behalf and as a result of this she incurred a loss of Rs. 1,95,44,302/-. Bifurcating this loss from derivative trading in the de-mat account of Smt. Ruchi Yadav, the ld. AR pointed out that while derivative loss of Rs. 80,19,057/- were attributable to the own capital of Smt. Ruchi Yadav, the loss of Rs. 1,15,25,245/- were attributable to derivative transactions from the gift received from the assessee. Thus, he argued that as per the provisions of sections 64(1)(iv), any loss derived from such transactions was allowable to be set off against the profits of the assessee. For this proposition, he placed reliance on various case laws which were furnished by him as part of the second paper book filed by him on 14.11.2025. The case laws relied upon by him were

In view of the above, the ld. AR prayed that the assessee be allowed to set off the loss incurred by his spouse from derivative transactions to the extent of Rs. 1,14,80,287/-.

5. Responding to the arguments, Sh. R.R.N. Shukla, Addl CIT DR that the ld. AO and the ld. CIT(A) pointed out that when a person had earned the income out of her own expertise, then the proviso to clause 64(2) held that the income from such operations may not be clubbed and since the spouse of the assessee was herself dealing in derivatives from which she had also made profit of Rs. 30,239/-, the losses were not liable to be set off against the income of the assessee. Furthermore, the ld. CIT(A) had quite clearly pointed out that since Smt. Ruchi Yadav had capitalized the amount received in the capital account maintained by her and carried out the business of speculative and derivative transactions, her income was not entitled to be considered under section 64(1)(iv) of the Act, because she was an independent assessee in her own right. Accordingly, he placed reliance on the orders passed by the ld. AO and the ld. CIT(A) and prayed that they may be confirmed.

6. We have duly considered the facts of the case and the arguments presented by both parties. The provisions of section 64(1)(iv) are quite clear that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly, subject to the provisions of clause i of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to be a part. The assessee has filed evidences of gift deeds whereby he has transferred a sum of Rs. 1,15,47,000/- without any consideration to his spouse’s bank account out of his earnings and past savings. It has also been sworn by way of affidavit that the amount has been transferred without any consideration and without agreement to live part. The Department has not brought any evidence on record to suggest that the money that has been transferred by way of gift has been transferred for any consideration or in respect of any agreement to live a part. Ongoing through the case laws furnished by the assessee, it is observed that that in the case of Smt. Mohini Thapar (supra), the Hon’ble Supreme Court was dealing with a case where the assets transferred were the gift of cash amounts to his wife. Those assets were subsequently invested in shares or deposits. The Hon’ble Supreme Court held that the incomes realized either as dividend from shares or as interest from deposits, were income indirectly received in respect of transfer of cash directly made. Therefore, it held that the net cast by section 16(3)(a)(iii) of the 1922 Act, included not merely the income that arose directly from the assets transferred but also that income that arose indirectly from the assets transferred. They held that the income that can be brought to tax under section 16(3)(a)(iii) must have a nexus with the assets transferred directly or indirectly and because in that particular case, the income had a nexus with the assets transferred, the Hon’ble Court held that the income derived by the wife was rightly included in the assessee’s total income under section 16(3)(a)(iii). Similarly, in the case of Damodar K. Shah(supra), the Hon’ble Gujarat High Court held that in a case where the assessee took out a policy on his life for the benefit of his wife and on which he paid premium that the amounts received by the wife under the polices and the interest earned upon that, was income from the assets transferred indirectly by the husband to the wife within the meaning of section 64(1)(iv) and therefore, liable to be clubbed in the hands of the husband. While doing so, the Hon’ble Gujarat High Court also referred to the decision of the Hon’ble Supreme Court in the case of CIT v. Kehsavji Morarji [1967] 66 ITR 142 (SC) wherein the Hon’ble Supreme Court held that the income attributable to the assets transferred to his minor daughters was liable to be assessed in the hands of the assessee. We have also observed that in the case of Uday Gopal Bhaskarawar (supra), the ITAT Pune Bench was dealing with a case where the assessee gifted a sum of Rs. 94.5 Lacs to his wife, who started the business of future and options from such gifted amounted and incurred a loss of Rs. 31,56,429/-, which was clubbed in his hands. The Assessing Officer accepted the primary claim of the assessee of his wife having incurred a loss of Rs. 31.56 Lacs in the F&O business and that such loss was eligible for set off against the income of the assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. However, he did not accept that contention that the entire loss could be set off against the assessee’s income. He held that only that part of the loss which bore proportion to the amount of investment out of 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, could be deducted. In consideration of the appeal, the ITAT held that the amount of loss resulting from the business of F&O started by the assessee’s wife with the gifts received from the assessee, was liable to be clubbed in the hands of the assessee on account of Explanation 3 read in conjunction with section 64(1)(iv). What emerges from these case laws is that any loss incurred by the assessee’s spouse in derivative transactions entered into out of the money gifted by the assessee to his wife, has to be allowed to be deducted against the income earned by the assessee in view of the provisions of section 64(1)(iv) read with Explanation 3(i). Thus, the decision of the Assessing Officer and the ld. CIT(A) to deny the assessee the benefit of this set off, is not in accordance with the law and the judgments cited aforesaid. In view of the same, it is held that the assessee is entitled to set off that portion of the loss arising on trading in derivatives by his wife that result from transactions made with the money gifted by him to his spouse. Accordingly, ground nos. 2.2, 2.3, 2.4 and 2.5 are held to be allowed. However, we observed that the assessee, in his paper book has not submitted any statement or working before us from which it could be ascertained that Smt. Ruchi Yadav actually incurred a loss of Rs. 1,95,44,302/- from speculative and non-speculative business, of which Rs. 1,15,25,245/- were allowable to be set off against the income of the assessee after adjustment of short-term capital gains. After accounting of set off of STCG this would result in net loss of Rs. 1,14,80,287/-. In view of the fact that the debate in the assessment order and the order of the ld. CIT(A) has mainly focused on the principle of allowability, the matter of the actual amount of losses that are required to be adjusted against the income of the assessee, has not been enquired into. In view of the fact that, no such statement has been submitted before us either showing how these losses arose, we restore this matter to the file of the Assessing Officer for the limited purpose of verifying the extent of losses incurred by Smt. Ruchi Yadav from transactions undertaken with the gifted money from the assessee and to allow the same in accordance with the provisions of Explanation 3(i) to section 64(1)(iv). Ground no. 2.1 is accordingly allowed for statistical purposes. Ground no. 2.6 has not been pressed and is accordingly dismissed as infructuous.

7. In the result, the appeal of the assessee is partly allowed.