16. A promised to marry& girl B and gifted to her 10,00 shares, having face value of Rs 100 each share on 10™ April 2008. He then married B. in August 2008. During the year 2008-09 the shares so gifted yielded 2 gross dividends of RS 100000 Explain in whose hands the amount is taxable ?

1. Facts of the Case

Mr. A promised to marry Ms. B, and before the marriage, on 10th April 2008, he gifted her 10,000 shares, each of Rs. 100 face value.
The marriage between A and B was solemnized in August 2008.
During the financial year 2008–09, the gifted shares generated a gross dividend income of Rs. 1,00,000.
The question arises as to whose hands the dividend income is taxable under the Income Tax Act, 1961.

Is the dividend income arising from the gifted shares taxable in the hands of the donor (A) or the donee (B)?
Whether the clubbing provisions under Section 64 of the Income Tax Act, 1961 are applicable?
Is the timing of the gift (before marriage) relevant for the applicability of clubbing provisions?

This section provides that any income arising directly or indirectly to the spouse of an individual from assets transferred without adequate consideration is clubbable in the hands of the transferor.
Condition: The relationship of husband and wife must exist at the time of transfer of the asset.
If the gift or transfer was made before the marriage, the clubbing provisions do not apply, even if marriage happens later.

In the present case, the gift of shares was made on 10th April 2008, and the marriage occurred later in August 2008.
At the time of the transfer, B was not the spouse of A.
Hence, Section 64(1)(iv) does not apply, as the condition of being a “spouse at the time of transfer” is not satisfied.

Dividend income is taxable in the hands of the person who is the legal owner of the shares on the record date.
Since the shares were validly gifted and transferred to B before the record date, and she is the registered owner, the dividend income is assessable in her hands.

In this case:

The gift of shares was made before the marriage, and therefore Section 64(1)(iv) is not applicable.
Ms. B became the rightful owner of the shares upon transfer and was entitled to the dividend income.
Since she is the registered holder of the shares during the relevant period, the dividend of Rs. 1,00,000 is taxable in the hands of B as her own income.
Mr. A cannot be taxed on this income, as the clubbing provisions do not apply when the asset was transferred before the marital relationship commenced.