Taxpublishers.in - Monday Corner Answer to the Quiz for the week (13 Jan 2025)

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Quiz for the week (13 Jan 2025): Jayant is engaged in proprietary business since 2010. He has brought forward business loss eligible for set off amounting to Rs.35 lakhs. He thought that he has not been lucky and based on belief in astrology wanted to commence business in the name of his wife Kanta. He gifted Rs.30 lakhs to his wife as seed capital and conduct the same business making Kanta as owner. Assume her income in the first year is Rs.12 lakhs which was totally withdrawn by Jayant for his personal use. How would you tax the income of Kanta? Best Answer : The query required reference to the clubbing provisions contained in section 64(1). As per sub-clause (iv) of section 64(1) where an individual transfers an asset to his / her spouse and the transfer is whether direct or indirect otherwise than for adequate consideration or in connection with an agreement to live apart, the income as arises directly or indirectly from such asset shall be chargeable to tax in the hands of the transferor spouse. The relationship of husband wife must exist between the transferor and transferee at the time of transfer as well as at the time of accrual of income during the year. Thus, transfer made prior to marriage would not be covered by the said provision. The seed capital of Jayant became the capital of wife Kanta. During the year, she earned income of Rs.12 lakhs. The transferee's (i.e. Kanta's) spouse Jayant has brought forward business loss of Rs.35 lakhs. The income of spouse arising from the capital given by the husband is liable for clubbing. Further when the income is liable to be clubbed, it shall be clubbed in the same head in which it was earned by the transferee i.e. Kanta in this case. The income of transferee Kanta is taxable under the head 'Profits and gains of business or profession'. When it is included in the total income of the transferor Jayant under the head "Profits and gains of business or profession", he can set off the brought forward business loss of Rs.35 lakhs against such income. Thus, the income when clubbed in the hands of Jayant, the total income of Kanta would be 'nil'. The total income of Jayant would also be 'nil' since the entire business income would be reduced to 'nil' due to set off of brought forward business loss. In the query, it is stated that Jayant had withdrawn the entire profit of Rs.12 lakhs for his personal use. Since the profit would be increasing the capital and the withdrawal was made by Jayant, the composition of capital on the first day of April of the subsequent year would consist of Rs.12 lakhs being the profit of Kanta and Rs.18 lakhs being the capital of Jayant in the business (Rs.30 lakhs minus Rs.12 lakhs). Accordingly, the profit of the subsequent year would be apportioned in 2:3 ratio. This of course does not form part of the query posed. Nikita Lalwani Tamil Nadu

Quiz for the week (13 Jan 2025):

Jayant is engaged in proprietary business since 2010. He has brought forward business loss eligible for set off amounting to Rs.35 lakhs. He thought that he has not been lucky and based on belief in astrology wanted to commence business in the name of his wife Kanta. He gifted Rs.30 lakhs to his wife as seed capital and conduct the same business making Kanta as owner. Assume her income in the first year is Rs.12 lakhs which was totally withdrawn by Jayant for his personal use. How would you tax the income of Kanta?

Best Answer :

The query required reference to the clubbing provisions contained in section 64(1). As per sub-clause (iv) of section 64(1) where an individual transfers an asset to his / her spouse and the transfer is whether direct or indirect otherwise than for adequate consideration or in connection with an agreement to live apart, the income as arises directly or indirectly from such asset shall be chargeable to tax in the hands of the transferor spouse.

The relationship of husband wife must exist between the transferor and transferee at the time of transfer as well as at the time of accrual of income during the year. Thus, transfer made prior to marriage would not be covered by the said provision.

The seed capital of Jayant became the capital of wife Kanta. During the year, she earned income of Rs.12 lakhs. The transferee's (i.e. Kanta's) spouse Jayant has brought forward business loss of Rs.35 lakhs. The income of spouse arising from the capital given by the husband is liable for clubbing.

Further when the income is liable to be clubbed, it shall be clubbed in the same head in which it was earned by the transferee i.e. Kanta in this case. The income of transferee Kanta is taxable under the head 'Profits and gains of business or profession'.

When it is included in the total income of the transferor Jayant under the head "Profits and gains of business or profession", he can set off the brought forward business loss of Rs.35 lakhs against such income.

Thus, the income when clubbed in the hands of Jayant, the total income of Kanta would be 'nil'. The total income of Jayant would also be 'nil' since the entire business income would be reduced to 'nil' due to set off of brought forward business loss.

In the query, it is stated that Jayant had withdrawn the entire profit of Rs.12 lakhs for his personal use. Since the profit would be increasing the capital and the withdrawal was made by Jayant, the composition of capital on the first day of April of the subsequent year would consist of Rs.12 lakhs being the profit of Kanta and Rs.18 lakhs being the capital of Jayant in the business (Rs.30 lakhs minus Rs.12 lakhs). Accordingly, the profit of the subsequent year would be apportioned in 2:3 ratio. This of course does not form part of the query posed.

Nikita Lalwani
Tamil Nadu