ITAT Bangalore: Capital Gains Tax on Spousal Gift | Section 64(1)(iv) Clarified
13 Sept 2025
ITAT Bangalore: Capital Gains Tax on Spousal Gift | Section 64(1)(iv) Clarified
Citation: ITA No. 49/Bang/2023, Order dated 18 August 2025
Coram: Shri Prashant Maharishi (Vice President) and Shri Soundararajan K (Judicial Member)Case Name: Sushama Rajesh Rao v. Deputy Commissioner of Income Tax
Court/Tribunal: Income Tax Appellate Tribunal, Bangalore
FLOW OF THE PROCEEDINGS
1. Assessing Officer (AO)- Scrutiny Assessment Order: 20 March 2015
2. First Appellate Authority (CIT(A)) Order: 7 December 2022
3. Income Tax Appellate Tribunal (ITAT), Bangalore Order: 18 August 2025
ABSTRACT OF THE CASE
The Bangalore ITAT ruled that capital gains arising from the sale of land gifted by a husband to his wife are to be taxed in the husband’s hands under Section 64(1)(iv) of the Income-tax Act, 1961. It was held that since the transfer was without “adequate consideration,” the income from the property—though realized by the wife—must be clubbed with the transferor spouse’s income. Thus, the wife was not liable to pay income tax on the Rs 8.36 crore received from the Rs 17.26 crore land transaction.
FACTS
• 1995: Husband received agricultural land in Navarathna Agrahara, North Bengaluru, through a family partition.
• May 2009: Husband gifted the land to his wife via a registered gift deed.
• June 2011: Land converted into non-agricultural property on buyer’s request.
• June 2011: Wife sold the land; sale consideration Rs 17.26 crore, wife’s share was Rs 8.36 crore (48.43%).
• 2012–2013: Wife filed and later revised ITR but declared lower income, claiming capital gains as NIL by adopting FMV (fair market value) at conversion.
• March 2015: AO completed assessment u/s 143(3) and taxed Rs 8.36 crore in wife’s hands, invoking Section 50C.• August 2015: ITAT ruled in wife’s favour, applying Section 64(1)(iv).
ISSUES
1. Whether the capital gains arising from sale of land gifted by the husband to his wife should be taxed in her hands or in the hands of her husband under clubbing provisions (Section 64(1)(iv))?
2. Whether the Assessing Officer was justified in computing taxable capital gains in the wife’s assessment despite the fact that transfer was a spousal gift?
2. Whether the Assessing Officer was justified in computing taxable capital gains in the wife’s assessment despite the fact that transfer was a spousal gift?
ARGUMENTS
Appellant- (Sushama Rao- Assessee)
• Land was gifted by husband without consideration.
• As per Section 64(1)(iv), income arising from gifted assets is taxable in the hands of the donor spouse, not the recipient.
• She claimed that the capital gains computation, which resulted in NIL tax, was proper.
• The Tax Officer wrongly added Rs 8.36 crore in her assessment.
Respondent (Assessing Officer)
• Wife sold the property and received Rs 8.36 crore; hence capital gains taxable in her hands.
• Section 50C applied as there was understatement of consideration.
• The wife herself had disclosed the transaction in her ITR; hence, tax liability, according to the AO lay with her.
• Wife sold the property and received Rs 8.36 crore; hence capital gains taxable in her hands.
• Section 50C applied as there was understatement of consideration.
• The wife herself had disclosed the transaction in her ITR; hence, tax liability, according to the AO lay with her.
LEGAL PROVISIONS INVOLVED
• Section 45 – Capital gains chargeable to tax.• Section 50C – Stamp duty valuation deemed consideration.
• Section 56(2)(x)- Exempt from taxation.
• Section 64(1)(iv) – Clubbing of income arising from assets transferred to spouse without adequate consideration.
• Section 27(i)(1) – Exception to clubbing provisions.
TRIBUNAL’S JUDGMENT
• Section 64(1)(iv) clearly mandates that income from an asset transferred to a spouse without adequate consideration must be taxed in the hands of the transferor spouse.
• “Adequate consideration” is distinct from “good consideration”, such as love and affection. Thus, a gift between spouses is without adequate consideration.
• Capital gains are included in “income” (Sevantilal Maneklal Sheth v. CIT, SC 1967).
• Circular No. 12/2/62 dated 20.11.1963 supports this interpretation.
• Therefore, capital gains on sale of land gifted by husband to wife are taxable in husband’s hands, not wife’s.
• “Adequate consideration” is distinct from “good consideration”, such as love and affection. Thus, a gift between spouses is without adequate consideration.
• Capital gains are included in “income” (Sevantilal Maneklal Sheth v. CIT, SC 1967).
• Circular No. 12/2/62 dated 20.11.1963 supports this interpretation.
• Therefore, capital gains on sale of land gifted by husband to wife are taxable in husband’s hands, not wife’s.
“In view of the above facts, we hold that income from transfer of the assets which is received by the Assessee as a gift from her husband is chargeable to tax in the hands of the husband of the Assessee and not the Assessee. The appeal of the Assessee succeeds.”
SUPREME COURT PRECEDENTS RELIED UPON
1. Tulsidas Kilachand v. CIT (1961) 42 ITR 1 (SC): Adequate consideration vs. good consideration.2. Sonia Bhatia v. State of U.P. (1981) 2 SCC 585: Nature of consideration in spousal transfers.
3. Major V.P. Singh v. State of U.P. (1991 Supp 2 SCC 346): Principles on transfer and clubbing.
ANALYSIS
• This ruling reaffirms the mandatory nature of Section 64(1)(iv) – neither the Assessee nor Revenue can waive or avoid its operation.
• The case demonstrates how an anti-avoidance provision, meant to prevent income shifting, ended up working in favour of the taxpayer’s wife.
• Taxpayers should note that:
• The case demonstrates how an anti-avoidance provision, meant to prevent income shifting, ended up working in favour of the taxpayer’s wife.
• Taxpayers should note that:
o Gifts between spouses are tax-neutral at transfer.
o But future income/capital gains from such assets will be taxed in donor’s hands.
• ITAT also clarified that raising the clubbing claim at the appellate stage is valid, as the provision is mandatory.
• Key lesson: Proper tax planning and professional advice at the ITR filing stage are crucial to avoid prolonged litigation.
KEY TAKEAWAYS
o But future income/capital gains from such assets will be taxed in donor’s hands.
• ITAT also clarified that raising the clubbing claim at the appellate stage is valid, as the provision is mandatory.
• Key lesson: Proper tax planning and professional advice at the ITR filing stage are crucial to avoid prolonged litigation.
KEY TAKEAWAYS
The ITAT Bangalore reaffirmed that under Section 64(1)(iv), capital gains from assets gifted between spouses without adequate consideration are mandatorily taxable in the transferor spouse’s hands. Spousal gifts, though valid, do not qualify as “adequate consideration” and future income or gains from such assets must be clubbed with the donor. The ruling underscores that clubbing provisions are automatic, apply even at the appellate stage and serve both as a safeguard and a reminder for taxpayers to plan carefully in cases of intra-spousal transfers.
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The information contained in this document is prepared by R.J. Soni & Associates and TaxOSmart LLP (hereinafter referred to as RJSA) for information purpose only. It does not constitute any legal advice or tax advice. In no way, this document should be treated as a marketing material or efforts to solicit a client. While we have made every attempt to ensure that the information contained in this document is true, RJSA, its partners and/or any of its employees make no claims / guarantee about its accuracy, completeness, or up-to-date character, or warranty, express or implied, including the warranty of opinions expressed for a particular purpose, or assume any liability or responsibility for the accuracy, completeness, or usefulness of any information available from this document.