Query No. 1 (Clubbing of income)

If husband invests his own funds in house property but the property was purchased in his wife’s name and the same is sold, in whose hands the capital gains will be chargeable to tax?


Section 64(1) of the Income-tax Act, 1961 specifically provides that:

“In computing the total income of individual, there shall be included all such income as arises directly or indirectly –

iv) Subject to the provisions of clause (i) of section 27, 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”.

Thus, from the fact, it is clear that husband has invested his own funds in house property but the property was purchased in his wife’s name. So he has transferred the property to his wife. On sale of the said property the capital gains would be chargeable in the hands of husband.

The Supreme Court in Sevantilal Maneklal Sheth v. CIT [68 ITR 503] held that when the spouse transfers the property to a third person and receives the sale price giving rise to capital gains such capital gains are includible in the name of the transferor spouse as being arising from assets transferred. This follows from the definition of income in the statute.

Query No. 2 (Reference to Valuation Officer)

Assessing Officer ascertaining the defect in the books, as to accounting for Cost of Construction refer it to “Valuation Officer” u/s. 142A.

Can Assessing Officer refer it, without finding any defect in books as to the Cost of Construction?


Yes, in CIT v. Bhavani Shankar Vyas [311 ITR 8] the Uttarakhand High Court held that, section 142A was inserted in the Income-tax Act, 1961 by the Finance Act of 2004, with retrospective effect from November 15, 1972. Under section 142A of the Act, full power has been given to the Assessing Officer to call for a report from Valuation Officer. A perusal of section 144 read with sections 145, 142A and 131(1)(d) make it clear that it is not mandatory for the Assessing Officer to reject the books of account first before making reference under section 131(1)(d) of the Act or calling for a report of the valuer under section 142A.

However, the Supreme Court in Sargam Cinema v. CIT [328 ITR 513] has held that before making a reference to the Valuation Officer it is mandatory for the Assessing Officer to reject the books of account..

The aforesaid judgment of the Supreme Court has been considered by the Andhra Pradesh High Court in Bharathi Cement Corporation P. Ltd. v. CIT [356 ITR 74]., wherein the Court observed that the said judgment is very short judgment and nothing is placed before us to infer that the matter pertains to a year after the amendment of section 142A by the Finance (No. 2) Act, 2004. The relevant facts are not discernible from the judgment and in our opinion this decision cannot, therefore come to the rescue of the petitioner.

Query No. 3 (Formation of HUF)

The HUF ‘s pool is empty. It consists of husband & wife only. Can it be formed with gift from relatives etc.


Yes, in C. Krishna Prasad v. CIT [97 ITR 493], the Supreme Court clarified that family signifies a group plurality of persons is an essential attribute of a family.

So, husband and wife being family nucleus . The Supreme Court in CIT v. Satyendra Kumar [232 ITR 360] affirmed the decision in Satyendra Kumar v. CIT [140 ITR 840 (Mad.)] and held that where female donor had gifted funds with clear intention of benefitting the family as a whole, the gifted property was part of the joint family property and the assessee was liable to be taxed in the status of HUF. This was a case where donor lady who provided the funds made it perfectly clear that those funds were to be utilised only for the benefit of the family. Therefore, the intention of the donor must necessary be spelt out in the gift deed or letter conveying gift.

Query No. 4 (Indexation u/s. 48 from which date?)

Purchase of flat under self finance scheme: An assessee booked a flat with RHB under self financing scheme & paid regular instalments. The flat was booked in 2006 and the amount was paid till 2011. The flat was allotted in 2010 & possession was given in 2011. What will be the date of acquisition & position of indexation of instalment.


Explanation to section 48 of the Act, defines “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981 whichever is later.

Since the expression “held by the assessee” is not defined under section 48 of the Act, that expression has to be understood as defined under section 2 of the Act [see CIT v. Manjula J. Shah – 355 ITR 474 (Bom.)].

Now, from the fact, it is clear that though a flat was allotted in 2010 but the possession was given only in 2011. Therefore acquisition of flat would be in 2010 but indexation would be from 2011.

Query No. 5 [Penalty u/s. 271(1)(c)]

The assessee purchased material for construction of his factory building and partly for use of his manufacturing process. The A.O. held the purchase as bogus and added amount to total income. The A.O. levied penalty u/s. 271(1)(c) on entire sum added in spite of fact that major part was not claimed under any head (capital expenses debited to building account). Is there any way for exclusion of the said amount? Can any sum not chargeable under the law be considered for penalty u/s. 271(1)(c )?


Section 271(1)(c ) of the Act provides for levy of penalty for concealing the particulars of income or furnishing inaccurate particulars of such income.

From the fact, it is clear that the assessee had purchased the material for construction of factory building and use of his manufacturing process. Majority part of the material was capitalised as used for factory building. But the same was held by AO as bogus purchases. Hence the assessee should file an appeal before the CIT(A) to prove that the purchases are genuine by adducing cogent material/evidence

Further, there is no concealment of the particulars of income, as only some of the purchases have been considered as bogus.

In CIT v. Reliance Petroproducts Pvt. Ltd. [322 ITR 158] the Supreme Court held that making an incorrect claim does not amount to furnishing inaccurate particulars. In the said judgment, the Supreme Court has observed :

“A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars, of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word “particulars” used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.

Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

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