In an interesting case of the gifting of shares by a man to his wife and their subsequent sale by the wife, the Authority for Advance Rulings (Income-Tax) has ruled that income under the head 'Capital Gains' made by the wife of the applicant will be clubbed with the income of the applicant.

Further, such income under the head Capital Gains, so included in the income of the applicant, shall be excluded from the total income of applicant's wife.

The applicant, a Non-Resident Indian, gifted 68 shares of shares of Indian companies to his wife Kamla G Jarani in December, 2002. Out of these shares, some were sold in the third quarter of 2003 by Kamla Jarani. This resulted in an income in the form of capital gains on the investment originally made by the applicant.

On these facts, the applicant sought ruling on the following questions:

• "Is (If) the income of Capital Gain made by the donee will be clubbed with the income of the donor NRI (applicant)?
• "If such income is to be included in the income of donor (applicant) then shall such income of Capital Gain be excluded from the total income of the donee?
• "Any other compliance donor is required to comply with?"

The applicant was of the view that in terms of section 64 (1)(vii) of the Income Tax Act, 1961, the income of Capital Gain made by the applicant's wife is to be included in the applicant's income and the income so arrived at will be liable to tax in the hands of the applicant.

It was also stated that the Capital Gain so included in the applicant's income shall be excluded from the total income of his wife Kamla Jarani.

The Commissioner of Income Tax-I, Indore, stated that in this case provisions of section 64(1) (iv) of the Act (and not section 64(1)(vii)) are attracted and the Capital Gain on sale of shares will have to be clubbed with the other income of the applicant because the shares were transferred by the applicant to his spouse without consideration.

Once such income is clubbed with the income of the applicant transferor, it will have to be excluded from the income of the transferee. It is also stated that this will be subject to the provisions of Double Tax Avoidance Agreement, if applicable.

Section 64(1)(iv) lays down that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual from assets transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live apart.

Similar provision exists under section 64(1)(vii) where assets are transferred to a third person for the benefit of the spouse of the transferor.

The authority observed that the provisions of Section 64(1)(iv) are attracted since shares were transferred by the applicant directly to the spouse.

The authority ruled as under:

• "Income under the head Capital Gains made by the wife of the applicant will be clubbed with the income of the applicant.
• "Such income under the head Capital Gains, so included in the income of the applicant, shall be excluded from the total income of applicant's wife.
• "The question is vague, we, therefore, decline to answer."

See full text of Judgement in 2004-TIOL-09-ARA-IT in Legal Corner.