Jigar M. Patel
International Tax Attorney
Building Capital for Spouse and Son’s Wife
Keeping in view the joint family system prevailing in India where the financial affairs of the family are generally managed and controlled by the male head of the family, it is common to come across situations where the family head plans holding of assets and deriving income in the hands of his wife or son’s wife, thus trying to avail advantage of tax planning under the Income-tax Act.
However, the clubbing of income provisions under Section 64 of the Income-tax Act seek to guard against generation of income and escapement of tax through the route of gifts to such close family entities.
Clubbing of Income in respect of Assets Gifted to Spouse or Son’s Wife
Section 64(1) of the Income-tax Act provides that in computing the total income of an individual, the income arising to the spouse or son’s wife (daughter-in-law) from assets gifted to them by the individual would be clubbed with the total income of the individual.
Are there any practical and lawful ways to overcome the clubbing provisions? This is a common question that would naturally arise in the context of the provisions of Section 64 referred to above.
Gift to would-be Spouse or Son’s would-be Wife
In order that the relevant clubbing provisions under Section 64 are attracted, it is essential that the relationship of spouse must exist between the individual and the concerned person on the date when the assets are transferred. If such a relationship does not exist on that date, the question of clubbing would not arise. Several judicial pronouncements including that of the Apex Court in the case of ‘Philip John Plasket Thomas vs. CIT’ 49 ITR 97 (SC), has made it clear that in order to attract the clubbing provisions, the relationship of spouse must exist both at the time when the transfer is made and at the time when the income is earned by the transferee.
In view of this principle, the transfer by an individual, to his would-be spouse (fiancé) or his son’s would-be wife (i.e. would-be daughter-in-law), prior to the date of marriage, would not make him liable to tax in respect of the income arising to the transferee even after the date of marriage. This idea can be usefully relied upon from the tax-planning point of view in appropriate cases, by planning pre-marital gifts which would be outside the scope of the clubbing provisions.
Ensure that such gifts are made on the occasion of marriage
In case of the above proposition, keeping in mind the provisions of Section 56(2)(x) treating the value of gifts exceeding Rs. 50,000 received from a non-relative as income in the hands of the recipient, due care must be taken to ensure that such gifts are made to the would-be spouse or son’s would-be wife only ‘on the occasion of marriage.’ Since gifts received by an individual even from a non-relative, but on the occasion of marriage are covered as exempt under Section 56(2)(x), no liability to income-tax would arise in respect of the receipt of such gifts, irrespective of their value.
Obviously, in such cases, the taxpayer can contend that the respective gifts were made on the occasion of, but before the completion of the marriage rituals, pursuant to which the relationship as contemplated under Section 64 would come into being.
