The Hindu : Business : Tax obligations as between husband and wife

Online edition of India's National Newspaper
Monday, May 17, 2004

Business

Business

Tax obligations as between husband and wife

Q:My wife and myself were both employed at Delhi and now both are retired. We purchased a plot at Chennai in the name of my wife and constructed a house from the joint savings and joint loan from LIC, and now we are settled in this house. For house-tax, and electrical connections my wife is being shown as the owner. I had a flat in my name in Delhi which I sold recently. Now I want to utilise the amount for constructing additions in this house in Chennai. Can I claim exemption from the capital gains tax, if I do so even though my wife is shown as the owner in legal documents?

A: The question raised by the reader is most frequently asked and answered periodically in view of the widespread indifference to the need to dichotomise the respective legal rights as between husband and wife of all the properties owned by them. If they own it jointly, each will have proportionate right in the property to the extent of contribution made for acquiring it. If the extent of such contributions cannot be easily ascertained, they will be presumed to have equal rights over the property. If the consideration for investment in the name of the wife has emanated from the husband or vice versa, the income from the property attributable to such finance made available by one's spouse will be taxed in the hands of the that spouse, notwithstanding the legal ownership of the other.

In matters, where the property stands in the name of the wife, while it is financed by the husband, the intention of the husband who makes investment in the name of wife, could be that it is benami with his ownership extant in his favour or that it is meant to be a gift by him to his wife. In either case, the income would continue to be assessed in his hands in the former case as owner and in the latter, because of the clubbing provisions under Sec. 64 of the Income-tax Act. When the wife has her own resources for the investment in her name, the question of clubbing her income in her husband's hands cannot arise. The Benami Transactions (Prohibition) Act, 1988 declares a benami transaction to be illegal except in the case of purchase of assets in the name of wife or unmarried daughter. But even in such a case, the law would presume gift, unless the contrary is proved. But even the presumption of gift cannot avoid tax because of the clubbing provision under section 64 of the Income-tax Act. Where a property is financed both by the husband and wife from their independent resources, as stated by the reader, the question as to who owns the property or whether it is jointly owned will be a matter of decision between them. It is odd that such questions are posed for the opinion of a third party. Such a nebulous situation can only mean that the assessing officer will have a free hand to draw his own inference, if the parties to the transactions are not clear as to the respective titles. It has been stated by the reader that his wife is shown as owner in legal documents. Income-tax law is concerned with beneficial ownership. She could well be benamidar or the source of her funds might have come from moneys received from her husband.

In the query, it has been said that it has come from joint savings so that part has come from the other spouse. The relevant facts and the understanding, while making the contribution for acquisition of the asset in the name of spouse or taking joint loan investment as between husband and wife would be relevant. Legal title may not be merely followed for tax purposes, because income-tax law is concerned with beneficial ownership and because of the clubbing provisions. This is a matter which has, therefore, to be sorted out between husband and wife with reference to all the relevant facts. Where it has not been so done, this may be done after sorting the matter out between husband and wife, by way of independent or joint affidavit as to the ownership, which should ordinarily be acceptable subject to proof in the context of source and the source and the clubbing provisions. If the property is joint with reader having an interest in the property, an addition in such property constituting an independent residential unit with the reader having an exclusive right over the new unit to the exclusion of his wife on clear understanding and assent on the part of his wife, there is no reason why the benefit of reinvestment benefit under Sec. 54 should not be available, if other conditions are also satisfied.

S. Rajaratnam

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