ITAT Bangalore Ruling: Gifted Land Sale Exempt from Tax

Clarifying how capital gains on gifted property are taxed under Indian law

A recent judgment by the Income Tax Appellate Tribunal (ITAT), Bangalore bench, dated August 18, 2025, delivers valuable clarity for taxpayers navigating spousal asset transfers. The case involved a woman who sold non-agricultural land worth ₹17.26 crore, which was originally gifted to her by her husband. The tribunal held that she is not liable to pay income tax on the capital gains—instead, the tax obligation lies with the husband, under the clubbing provisions of the Income Tax Act.

Key Details of the Ruling

• Section Invoked: The tribunal applied Section 64(1)(iv), which mandates that income arising from assets transferred without adequate consideration between spouses must be taxed in the hands of the transferor—here, the husband.
• Mandatory Application: The bench emphasized the mandatory nature of this rule, stating that neither taxpayers nor the tax department can opt to tax the gains in the recipient spouse’s hands.
• Legal Rationale: The law aims to prevent tax avoidance through such transfers—ensuring that high-value assets cannot be shifted to spouses to exploit lower tax brackets.
• Transaction Validity: The ITAT rejected the tax department’s argument that the claim was belated and upheld that proper application of the statute takes precedence over procedural technicalities.

Why This Matters for Taxpayers

1. Tax Liability Clarity: When a spouse sells a gifted asset, the tax authority will look to the transferor for capital gains—not the recipient.
2. Critical Documentation: Timely and legally executed gift deeds, sale agreements, and capital gains computation are essential.
3. No Loopholes: The mandatory clubbing rule leaves no leeway—tax planning must account for Section 64(1)(iv).
4. Strategic Considerations: Even if the donee spouse has no income, the tax liability still remains with the donor spouse.

FAQs on the ITAT Bangalore Ruling

Question	Answer
Who pays tax on capital gain from gifted property?	The spouse who gifted the asset (transferor) pays tax under Section 64(1)(iv).
Is the recipient spouse exempt from tax?	Yes—as long as the asset was a genuine gift, the donee spouse is not taxed on the gain.
Is this provision optional?	No—clubbing is mandatory; neither assessee nor Revenue can override it.
Does this apply if the asset was jointly owned before gifting?	Yes—ownership timing matters. Gains are taxed based on how and when ownership shifted.
What if the gift deed is missing?	Improper documentation may lead to disputes. Always use a registered gift deed.
Can the recipient claim exemptions?	No—only the transferor can claim exemptions since capital gains are taxed in their hands.

Final Thoughts

This ITAT ruling highlights that clubbing provisions strongly shape tax outcomes in spousal transactions. Tax liability follows the donor spouse, regardless of whose name appears on the sale deed. Hence, gifting property is legally valid but must be approached with awareness of its capital gains implications. For taxpayers, the key takeaway is simple: be compliant, keep documentation ready, and plan taxes strategically.