Purchasing a house, whether for residential or investment purpose, is an important decision to be taken jointly by husband and wife. Many a time, the property is taken in joint names to secure the future of the family. An important question that arises here is that if a property is bought in the joint names by spouses using funds from one’s account, whether gains arising from the sale of such a property will be assessed to be taxed in the hands of the spouse or both of the joint owners.
The Income Tax Act, 1961 (IT Act) contains provisions relating to the taxability of capital gains, long-term (LTCG) as well as short-term (STCG), arising on the sale of capital assets. The basic computation of capital gains is the reduction of cost of acquisition and improvement (whether indexed or not) from the sale proceeds of a capital asset.
In one of recent case that came up before the tribunal, a taxpayer (wife) was joint owner of a property purchased by her husband out of his own funds and the said flat was shown in his balance sheet. On sale thereof, the entire STCG arising therefrom was disclosed in the husband’s return of income and not in the return of the taxpayer.
The tax officer treated the entire arrangement aimed to avoid legitimate tax payable (since the husband has set off short-term capital loss, or STCL, on sale of shares in his return of income against STCG from sale of the property in question. Hence, 50% of STCG was assessed in the hands of the taxpayer, i.e. wife.
The tribunal upheld the order of the commissioner (appeals) that even though the taxpayer is shown as co-owner, the source of funds for investment in the said property was provided by a person other than the taxpayer (evident from the bank statements furnished before the lower authorities) and hence, it was held that the STCG was rightly assessed in the hands of taxpayer’s husband.
Further, the set-off of STCG against STCL in the husband’s return in the instant case was a mere coincidence, which could not have been pre-planned at the time of acquisition of the said property, and hence the said transaction and its tax treatment could not be inferred to defraud revenue. The above view is in line with the decision of the High Court that the benefit of exemption u/s 54 of IT Act should not be restricted to one’s share in the house property purchased in a joint name.
Joint ownership in property is certainly not regarded as an ownership for the purpose of tax laws, and capital gains arising therefrom should not come in the ambit of taxation merely because the property is purchased in joint names. However, the facts of the case and claim made by the assessee need to be demonstrated by robust documentation such as bank statements, etc.
The writer is partner, Tax & Regulatory Services, Baker Tilly DHC