Clubbing of Spouse's Derivative Trading Losses Arising from Gifted Funds Under Section 64(1)(iv): ITAT Lucknow's Landmark Ruling

Overview of the Dispute

The Income Tax Appellate Tribunal, Lucknow Bench, recently delivered a significant ruling in Vipin Yadav Vs ITO (ITAT Lucknow) concerning the applicability of clubbing provisions under Section 64(1)(iv) of the Income Tax Act, 1961, in relation to losses incurred by a spouse from derivative and equity trading operations financed entirely through gifts made by the assessee. The appeal was directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), dated 7 August 2024, which had upheld the assessment order passed under Section 143(3) of the Income Tax Act for Assessment Year 2018-19.

The central legal question before the Tribunal was whether losses generated from futures, options, and equity transactions carried out in the name of a spouse, using funds gifted by the assessee without any consideration, could legitimately be clubbed with the assessee's income under Section 64(1)(iv) and subsequently set off against the assessee's business income.

Background and Factual Matrix

The assessee, Mr. Vipin Yadav, was engaged in securities trading — including futures and options (F&O), derivatives, and equity transactions — over multiple years. He regularly disclosed such income under "Profits and Gains from Business or Profession" as well as under the heads of short-term and long-term capital gains, as applicable under the Income Tax Act, 1961.

During the relevant financial year 2017-18 (Assessment Year 2018-19), the assessee transferred a sum of ₹1,15,47,000 to his spouse, Smt. Ruchi Yadav, from his business earnings and accumulated savings, without receiving any consideration in return. A demat account was opened in the spouse's name, and a joint bank account was maintained with ICICI Bank through which trading in derivatives and equities was conducted.

The assessee maintained that:

  • His spouse possessed no technical or professional expertise in securities markets.
  • All trading decisions and transactions were executed by the assessee himself through the spouse's demat account.
  • The total capital available in the spouse's account stood at ₹1,95,81,193, of which ₹1,15,47,000 represented the gifted amount.
  • The spouse incurred an aggregate loss of ₹1,95,44,302 from speculative and non-speculative (derivative) transactions.
  • Of this total loss, ₹1,15,25,245 was attributable to transactions funded by the gifted amount, while the remaining ₹80,19,057 was referable to the spouse's own capital.
  • After adjusting short-term capital gains, the net loss claimed for clubbing and set-off was ₹1,14,80,285.
  • Even the speculative profit of ₹30,239 earned in the spouse's name had been duly included in the assessee's own return of income.

Gift deeds evidencing the transfer of funds without consideration were placed on record, along with affidavits confirming that the transfers were not linked to any agreement to live apart.

Grounds of Appeal

The assessee raised the following primary grounds before the Tribunal: