Taxpublishers.in - Monday Corner Answer to the Quiz for the week (24 Feb 2025)

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Quiz for the week (24 Feb 2025): Balaji is a resident in Chennai. He is engaged in business consultancy service and has total income which is always taxed at 30%. He has a commercial complex in Madurai fetching monthly rental income of Rs.2 lakhs. He approached his tax counsel to minimize his income tax liability by shifting the rental income to his wife, who has no income at all. Suggest a viable tax planning idea to Balaji to reduce his tax liability. Best Answer : From the query posed it is clear that Balaji who is a resident in Chennai has income exceeding Rs.15 lakhs from his business consultancy services and wants to shift the rental income to wife and thereby save income tax liability. The property income liable to tax in the hands of Balaji is Rs.16,80,000 (Rs.24 lakhs less deduction @ 30% being Rs.7,20,000) based on the information provided in the query. One apparent provision which prohibits or prevents transfer of income to spouse could be found in section 64(1)(iv). It says that subject to the provisions of clause (i) of section 27 transfer of asset directly or indirectly to the spouse of the individual otherwise than for adequate consideration is taxable in the hands of transferor. However, if the transfer is for adequate consideration or in connection with an agreement to live apart, the provisions of section 64(1)(iv) will not apply. Thus, either the property must be transferred for adequate consideration or in connection with an agreement to live apart. In these cases, the clubbing provision will not operate. In CIT v. Maharaj Kumar Kamal Singh (1973) 89 ITR 1 (SC) it was held that the provisions of section 64(1)(iv) will not apply in respect of income arising from a property transferred by holder of an impartible estate to his wife for her maintenance. Readers may note recently a celebrity separated from his wife and it was attributed as a strategy adopted for tax planning and it is not a divorce in the strict sense of the term. This method of transfer of property based on an agreement to live apart unless it is a genuine arrangement will not stand a test of scrutiny under law and on moral code. The other alternative available for the assessee is to execute a sale deed in favour of his wife with a condition that she would pay the sale consideration in instalments along with interest. In such case, the amount of interest so paid by wife to husband towards sale consideration is taxable under the head 'other sources' in his hands. However, the rental income in her hands would be reduced to the extent of such interest paid or payable to the husband towards sale consideration. Therefore, from the income of Rs.16.80 lakhs the wife can claim interest on sale consideration and only the resultant is chargeable to tax in her hands. Given the fact that the basic exemption limit for assessment year 2026-27 (financial year 2025-26) is Rs.12 lakhs, this sort of planning is possible. Support for claiming unpaid purchase price to be treated as borrowed capital could be found in CIT v. Sunil Kumar Sharma (2002) 122 Taxman 159 (P&H). It must be noted that the interest amount receivable from wife is liable to tax in the hands of husband as income under the head 'Other sources'. If he follows cash basis of accounting in respect of such interest income, only the actual interest received is to be offered to income tax. One key aspect to be noted in this case is that the sale consideration less indexed cost of acquisition (or without indexation) would be chargeable to tax as long-term capital gain in the hands of husband-Balaji. Since it is given in the query that he has been subjected to tax always @30% it is presumed that the asset was held for more than 24 months and hence is a long-term capital asset. The expenditure towards stamp duty for executing the sale deed and the capital gain liability are one-time outflows being the cost of such kind of tax planning.

Quiz for the week (24 Feb 2025):

Balaji is a resident in Chennai. He is engaged in business consultancy service and has total income which is always taxed at 30%. He has a commercial complex in Madurai fetching monthly rental income of Rs.2 lakhs. He approached his tax counsel to minimize his income tax liability by shifting the rental income to his wife, who has no income at all. Suggest a viable tax planning idea to Balaji to reduce his tax liability.

Best Answer :

From the query posed it is clear that Balaji who is a resident in Chennai has income exceeding Rs.15 lakhs from his business consultancy services and wants to shift the rental income to wife and thereby save income tax liability. The property income liable to tax in the hands of Balaji is Rs.16,80,000 (Rs.24 lakhs less deduction @ 30% being Rs.7,20,000) based on the information provided in the query.

One apparent provision which prohibits or prevents transfer of income to spouse could be found in section 64(1)(iv). It says that subject to the provisions of clause (i) of section 27 transfer of asset directly or indirectly to the spouse of the individual otherwise than for adequate consideration is taxable in the hands of transferor. However, if the transfer is for adequate consideration or in connection with an agreement to live apart, the provisions of section 64(1)(iv) will not apply.

Thus, either the property must be transferred for adequate consideration or in connection with an agreement to live apart. In these cases, the clubbing provision will not operate.

In CIT v. Maharaj Kumar Kamal Singh (1973) 89 ITR 1 (SC) it was held that the provisions of section 64(1)(iv) will not apply in respect of income arising from a property transferred by holder of an impartible estate to his wife for her maintenance. Readers may note recently a celebrity separated from his wife and it was attributed as a strategy adopted for tax planning and it is not a divorce in the strict sense of the term. This method of transfer of property based on an agreement to live apart unless it is a genuine arrangement will not stand a test of scrutiny under law and on moral code.

The other alternative available for the assessee is to execute a sale deed in favour of his wife with a condition that she would pay the sale consideration in instalments along with interest. In such case, the amount of interest so paid by wife to husband towards sale consideration is taxable under the head 'other sources' in his hands. However, the rental income in her hands would be reduced to the extent of such interest paid or payable to the husband towards sale consideration. Therefore, from the income of Rs.16.80 lakhs the wife can claim interest on sale consideration and only the resultant is chargeable to tax in her hands. Given the fact that the basic exemption limit for assessment year 2026-27 (financial year 2025-26) is Rs.12 lakhs, this sort of planning is possible. Support for claiming unpaid purchase price to be treated as borrowed capital could be found in CIT v. Sunil Kumar Sharma (2002) 122 Taxman 159 (P&H).

It must be noted that the interest amount receivable from wife is liable to tax in the hands of husband as income under the head 'Other sources'. If he follows cash basis of accounting in respect of such interest income, only the actual interest received is to be offered to income tax.

One key aspect to be noted in this case is that the sale consideration less indexed cost of acquisition (or without indexation) would be chargeable to tax as long-term capital gain in the hands of husband-Balaji. Since it is given in the query that he has been subjected to tax always @30% it is presumed that the asset was held for more than 24 months and hence is a long-term capital asset. The expenditure towards stamp duty for executing the sale deed and the capital gain liability are one-time outflows being the cost of such kind of tax planning.