49. The assessee during the financial year, has invested FD a sum of Rs.5,00,000/- in the name of his wife who is a housewife having no income of her own and not an assessee. The assessee doesn’t want to show interest accrued with the FD and seeks your clarification and advice, as a Tax Consultant advises your client.

1. Facts of the Case

• The assessee, an individual taxpayer, has invested ₹5,00,000 in a Fixed Deposit (FD) during the financial year.
• The FD is in the name of his wife, who is a housewife, has no independent income, and is not an assessee.
• The interest earned on the FD will be credited to the wife’s account.
• The assessee wants to avoid reporting the interest income in his tax return, believing that since the FD is in his wife’s name, it need not be disclosed by him.

2. Issues in the Case [Questions]

1. Can the interest income from the FD in the name of the wife be excluded from the assessee’s income?
2. Is there a clubbing provision under the Income Tax Act that makes the assessee liable to include such income?
3. What is the correct legal and ethical approach the assessee should take in this matter?

3. Legal Principles Covered

A. Section 64(1)(iv) – Clubbing of Income

• As per Section 64(1)(iv) of the Income Tax Act, 1961: “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.”
• This means that any income earned by the spouse from assets gifted by the assessee (without consideration) will be taxable in the hands of the assessee, not the spouse.

B. Key Judicial Precedents

• CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC): Supreme Court held that income derived by the spouse from an asset transferred without adequate consideration is liable to be clubbed with the income of the transferor.
• Income Tax Circulars also clarify that interest income on FDs gifted to spouse is taxable in the hands of the person making the gift.

C. Tax Evasion Risks

• Not disclosing such income can be considered tax evasion, inviting penalties under Section 270A and possibly prosecution under Section 276C of the Act.

4. Possible Judgement / Consultant’s Advice

As your Tax Consultant, the following advice is given:

• The interest income from the FD in your wife’s name will be clubbed with your total income under Section 64(1)(iv) since:
  • The FD was made from your own funds,
  • Your wife has no independent source of income,
  • The transfer was made without adequate consideration.
• You must declare the interest income in your return of income to stay compliant with tax laws.
• If the FD earns, say, ₹30,000 annually, that amount should be included in your “Income from Other Sources”.
• To legally separate tax liability, your wife must invest her own income, from sources such as:
  • Gifts from relatives other than spouse (with care),
  • Inheritances or awards, or
  • Income earned through her own profession or work.

Final Opinion:

• The Assessing Officer would be right in including the interest income in your hands if it’s detected.
• Avoiding disclosure may lead to penalty and interest, or even legal consequences.
• Therefore, the interest income from FD in wife’s name should be reported by the assessee under the head “Income from Other Sources” in his ITR.