Income Tax: Capital Gains from Spouse Gifted Property Taxable Only in Transferor’s Hands

The assessee filed her return of income for A.Y. 2016–17 declaring income of Rs. 5,86,740 and claiming TDS credit of Rs. 20,00,000 deducted under Section 194-IA on sale of immovable property. The property comprised six plots measuring about 37,236 sq. ft. situated at Okkiyam Thoraipakkam Village, Chennai.  The husband executed a settlement deed dated 09.06.2015 transferring the property to the assessee without consideration, after which the assessee sold the property on 29.06.2015 for Rs. 20 crore. Out of the total consideration, Rs. 19.40 crore was directly paid by the purchaser to State Bank of India towards discharge of mortgage liabilities created by the husband and other family members.

In the return of income, the Long-Term Capital Gain arising from the transaction was offered to tax in the hands of the husband under the clubbing provisions of Section 64(1)(iv), since the property had been transferred to the spouse without consideration. However, the Assessing Officer reopened the assessment under Section 148 and computed LTCG of Rs. 19,86,16,459 in the hands of the assessee, while also denying deduction of mortgage repayment under Section 48. The addition was confirmed by the Commissioner (Appeals), after which the assessee preferred an appeal before the Income Tax Appellate Tribunal.

Central Issue: Whether capital gains arising from property transferred to a spouse without consideration can be taxed in the transferee spouse’s hands despite applicability of Section 64(1)(iv) clubbing provisions.

Tribunal’s Rulling: The Tribunal held that Section 64(1)(iv) clearly mandates that income arising from assets transferred by an individual to his or her spouse without adequate consideration must be included in the income of the transferor spouse. In the present case, the property had been transferred by the husband to the assessee through a settlement deed without consideration. Therefore, any capital gains arising from the later sale of the property were liable to be assessed only in the hands of the husband, even though the sale transaction had been executed by the assessee. Since the husband had already offered the capital gains to tax in his return, taxing the same income again would result in impermissible double taxation.

The Tribunal also observed that reopening of the assessment was not sustainable because there was no escapement of income when the capital gain had already been assessed in the hands of the husband in accordance with the statutory clubbing provisions. Further, relying on the ruling of R.M. Arunachalam v. CIT (1997), the Tribunal reiterated that amounts paid for clearing a pre-existing mortgage constitute part of the cost of acquisition for the purpose of computing capital gains. Thus, the Tribunal set aside the order of the CIT(A) and directed deletion of the addition of Rs. 19,86,16,459.

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