While granting relief from taxation of non-agricultural land in the hands of the spouse (wife), gifted by her husband, the Bangalore ITAT recently ruled that the liability to pay capital gains tax on the sale of such land falls on the husband and not his wife. Since in this case, there was a gift from husband to wife without any adequate consideration, and rather, there is an assumption of natural love & affection, then the capital gain resulting from the sale of the gifted property is chargeable to tax only in the hands of the husband.
The Division Bench comprising Prashant Maharishi (Vice President) and Soundararajan K. (Judicial Member) referred to the provisions of Section 64(1)(iv) of the Income Tax Act to observe that if any income arises to the spouse of an individual from a property transferred directly or indirectly, such income may be earned by that spouse but shall be chargeable to tax in the hands of the person who transferred the asset to the spouse. The Bench therefore granted relief to the appellant and concluded that income from the transfer of the assets, which is received by the appellant as a gift from her husband, shall be taxed in the hands of the husband of the appellant only.
The Bench highlighted that the object of Section 64(1)(iv) is to circumvent a tendency on the part of the taxpayers, who attempt to avoid tax by transferring the property to the spouse and showing income thereof in the hands of the spouse, though it substantially belongs to the transferor. The Bench, however, clarified that the applicability of Section 64(1)(iv) is only restricted by the provisions of Section 27(i)(1) of the Income Tax Act where the property is transferred to the spouse for adequate consideration.
Briefly, in this case, the appellant (wife) has received agricultural land, by way of gift from her husband, which property was received by her husband by way of family partition. When the appellant sought to sell the land to one G. Lakshmi Aruna, then, due to restrictions in purchasing agricultural land under the Karnataka Land Reforms Act, the purchaser requested conversion of said agricultural land to non-agricultural purposes, which was acceded to, and a sale deed was executed for a total consideration of Rs. 17.26 crores. Later, while filing her return, the appellant disclosed her share of Rs. 8.36 crores in the sale consideration and declared Nil Capital Gains after claiming cost of acquisition at Rs. 1.50 crores, being the fair market value of the agricultural land on the date of conversion. The AO, however, treated the total sale consideration of Rs. 8.83 crores as income in the hands of the appellant. This addition was confirmed by the CIT(A) after applying the provisions of Section 50C of the Income Tax Act.
Cases Relied On:
Nagappa C R Vs. CIT – TS-5034-SC-1968-O
Muthaiah Chettiar Vs. CIT – TS-5009-SC-1969-O
Appearances:
Advocate V. Chandrashekar, for the Appellant/ Taxpayer
Muthu Shankar, for the Respondent/ Revenue
