13“The assessee during the financial year, has invested FD a sum of R5.5,00,000/- in the name of his wife who is a house wife having no income of her own and not an assessee. The assessee doesn’t want to show the interest accrued on the FD and seeks your clarification and advise, As a Tax Consultant advise your client.

1. Facts of the Case

The assessee (your client), during the relevant financial year, has invested a sum of ₹5,50,000 in a Fixed Deposit (FD) in the name of his wife, who:

• Is a housewife
• Has no independent income
• Is not an assessee under the Income Tax Act

The interest accrued on this FD has not been offered to tax, and the assessee seeks clarification and legal advice on whether this interest needs to be disclosed in his own return or whether it can be treated as the wife’s income.

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2. Issues in the Case

1. Whether the interest income accruing on the FD held in the wife’s name is taxable in the hands of the wife or the assessee (husband)?
2. Can the assessee legally avoid showing the interest income in his return by investing in the spouse’s name?
3. Whether clubbing provisions under the Income Tax Act apply in such cases?

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3. Legal Principles and Supporting Judgements

A. Clubbing of Income – Section 64(1)(iv) of the Income Tax Act, 1961

Section 64(1)(iv) of the Income Tax Act states 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 by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.”

Implication:
If the assessee transfers funds (as in this case, ₹5.5 lakh) without adequate consideration to his wife, and income (interest) arises from such transferred asset, it will be clubbed with the income of the assessee.

B. Judicial Precedents

1. Seventilal Maneklal Sheth v. CIT (1968) 68 ITR 503 (SC):
   The Supreme Court held that indirect transfers also attract clubbing provisions, even if the income accrues in the name of the spouse.
2. CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC):
   If a transfer is made without adequate consideration, any income from such asset must be clubbed in the hands of the transferor.
3. ITAT and CBDT Clarifications:
   The name on the FD or bank account is not the deciding factor. What matters is source of the funds and beneficial ownership.

C. Exception to Clubbing:

Clubbing under Section 64(1)(iv) does not apply if:

• The asset was transferred for adequate consideration (e.g., gift in exchange for services or rights), or
• There is a formal agreement to live apart (separation agreement) between the spouses.

In this case, the transfer was a gift with no consideration, and there is no separation.

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4. Possible Judgement / Advice

Based on the facts and legal principles:

• The interest income earned on the FD in the wife’s name is not her independent income, but income arising from an asset transferred by the assessee without consideration.
• Under Section 64(1)(iv), the interest income must be clubbed with the assessee’s total income.
• Failure to disclose such interest income may attract penalties under Section 270A (for under-reporting/misreporting of income), and interest under Section 234A/B/C, along with potential scrutiny under Section 143(2).

Final Advice to the Client (Assessee):

As your tax consultant, I strongly advise you to:

1. Disclose the interest income arising from the FD (in your wife’s name) in your own Income Tax Return.
2. Maintain proper documentation to prove the source of the funds and computation of interest.
3. Avoid structuring financial investments in a way that attempts to evade tax using spouse’s identity, as it falls under clubbing provisions and may result in legal complications.