ITAT Allows Set-Off of Spouse’s Derivative Loss from Gifted Funds Under Section 64

Vipin Yadav vs. Income-tax officer [2026] 186 taxmann.com 972 (Lucknow - Trib.)

Judiciary and Counsel Details

• Kul Bharat, Vice President & Nikhil Choudhary, Accountant Member
• Dharmendra Kumar, C.A. for the Appellant.
• R.R.N. Shukla, Addl CIT DR for the Respondent.

Facts of the Case

The assessee, an individual engaged in trading in equities and derivatives, gifted Rs. 1.15 crore to his spouse out of his earnings and past savings. Using these funds, derivative and equity transactions were undertaken in the spouse’s name, resulting in substantial losses. The assessee claimed that the proportionate loss attributable to the gifted funds should be clubbed under section 64(1)(iv) and allowed to be set off against his income.

However, the Assessing Officer rejected the claim, holding that the losses arose from the spouse’s independent trading decisions and risk-taking activities. The CIT(A) affirmed the disallowance, observing that the spouse was an independent assessee and had carried on the trading activity using funds capitalised in her own account. The matter reached the Tribunal.

The Tribunal observed that the assessee had furnished gift deeds and affidavits evidencing transfer of funds to his spouse without consideration, and there was no material on record to show that such transfer was made for consideration or in connection with an agreement to live apart. Referring to various judicial precedents, the Tribunal held that section 64(1)(iv) encompasses not only income arising directly from the transferred assets but also income or loss arising indirectly therefrom.

ITAT Held

The Tribunal held that losses arising from derivative transactions undertaken with money gifted by the assessee to his spouse are equally covered by section 64(1)(iv) read with Explanation 3(i). Accordingly, the proportionate loss attributable to the gifted funds was eligible to be set off against the assessee’s income, and the contrary view taken by the Assessing Officer and the CIT(A) was unsustainable.
However, since the record did not contain any statement or working to ascertain the exact amount of loss attributable to transactions undertaken with the gifted funds, the matter was restored to the AO for the limited purpose of verifying the extent of such losses and allowing the set-off in accordance with law.

List of Cases Referred to

• CIT v. J.H. Gotla [1985] 23 Taxman 14J (SC) (para 4)
• Tulsidas Kilachand v. CIT [1961] 42 ITR 1 (SC) (para 4)
• Col. H.H. Sir Harinder Singh v. CIT [1972] 83 ITR 416 (SC) (para 4)
• Damodar K. Shah v. CIT [2001] 119 Taxman 882 (Gujarat)/[2001] 252 ITR 235 (Gujarat) (para 4)
• Potti Veerayya Sresty v. CIT [1972] 85 ITR 194 (Andhra Pradesh) (para 4)
• Smt. Mohini Thapar v. CIT [1972] 83 ITR 208 (SC) (para 4)
• Uday Gopal Bhaskarwar v. Asstt. CIT, Circle-13 Pune [2020] 113 taxmann.com 378/182 ITD 216 (Pune – Trib.) (para 4)
• CIT v. Keshavji Morarji [1967] 66 ITR 142 (SC) (para 6)