clubbing provision

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Chintan Vasa (Querist)
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26 February 2009 x has gold of Rs.500000. he transfers it to his wife & she sells it for Rs.600000.
the capital gain arising from it would definitely be clubbed with X's income. Now his wife deposited the amount in bank FD & earned interest from it.
My question is would this interest earned be clubbed with X's income?

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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26 February 2009 The interest income will not be included in the hands of Mr.X.

Chintan Vasa

Chintan Vasa (Querist)
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26 February 2009 can u tell how?
is their any case 4 it?

Chintan Vasa

Chintan Vasa (Querist)
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26 February 2009 can u tell how?
is their any case 4 it?

K V Subba Rao

K V Subba Rao (Expert)
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26 February 2009 Study provisions of Sec 64(1)(iv)

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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26 February 2009 Answer is given by Rao sir. However you may refer the following also.

1) Page 57(last sentence) in V.G.Mehta's Income Tax Ready Reckoner(Asst.year 2008-09).

2) CIT Vs M S S Rajan (2001)252 ITR 126(Mad).

Chintan Vasa

Chintan Vasa (Querist)
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27 February 2009 thanks a lot 4 mentioning the case. i went through the case. in the case there was a line written "If in this case the flat that had been gifted to the wife had been sold and the money had been deposited in the bank, the interest realised from the deposit would have been taxable in the hands of the assessee transferor"
my query is similar to it. the difference is that here it is gold.
if this above lines are read its clear that in my query the income will be clubbed.

please guide me as the case is saying something different.

K V Subba Rao

K V Subba Rao (Expert)
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28 February 2009 I appreciate your (Mr Chintan Vasa) inquisitive attitude. Based on Sri Warrier's reply, I have checked https://law.incometaxindia.gov.in/Directtaxlaws/act2005/casesec64.htm and noted the following:

"Income earned out of income from transferred asset cannot be included - What is made taxable under section 64(1)(iv) in the hands of the transferor-assessee is the income from the assets transferred to the spouse. The manner in which the income realised from the asset is applied - Whether it is spent or saved - is a matter which falls outside the purview of section 64. This special provision cannot be stretched to include the second generation of income, namely, income from the invested income from the asset that has been transferred. Thus, where the assessee transferred a flat to his spouse, and the spouse invested the rental income in fixed deposits, the rental income alone is assessable in the hands of the assessee, while the interest income from the fixed deposit is assessable in the hands of the spouse only - CIT v. M.S.S. Rajan [2001] 252 ITR 126 (Mad.)". Now my understanding of the subject is as follows:

(1)With regard to specifics of Query, transaction between Mr X and his spouse is transfer of "asset" for nil consideration. So Rs 6 lacs amount received by Mrs X (by selling Rs 5 lacs worth of Gold)is to be treated as "Gift" from Mr X

(2) Mrs X invests Rs 6 lacs in FD and earns Interest. This interest has to be undoubtedly clubbled with Mr X's Income.

(3) Let us assume Mrs X receives Rs 60000 in one year as Interest on FD. Suppose she invest this amount of Rs 60000 in IPOs and earns a profit of Rs 10000 (These days, it is not happening, that is a different matter). Now tax treatment is as follows:

(a) Interest Rs 60000 received by Mrs X - This has to be clubbed with Mr X's Income

(b) Profit Rs 10000 received ON INVESTMENT OF RS 60000 in IPOs - There is no need to club this amount with Mr X's income. This is because "... special provision cannot be stretched to include the second generation of income" quoted by me from the above link

Don't mix two different issues of "capital gains" and "second generation of income". In our case. capital gains cannot be treated as first generation income enabling us to treat Interest on FD and thus avoid clubbing provisions.

A clear distinction has to be necessarily made because capital gains arises out extinguishing of asset itself whereas income generation arises out of utilising and yet retaining the asset proper (subject, of course, to increase or decrease to the extent of income generated or loss suffered)

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