Husband trades through wife’s demat account, incurs Rs 1.95 crore loss;
tax dept sends notice over clubbing of income,
ITAT Lucknow grants him relief
Jun 22, 2026
Synopsis
A husband's attempt to offset substantial stock market losses against his income was initially rejected by tax authorities. Despite trading using his wife's demat account and gifting her Rs 1.15 crore, the tax department argued the Rs 1.95 crore loss, including Rs 80 lakh from her own funds, was hers alone.
When Mr. Yadav from Kanpur filed his income tax return (ITR) for FY 2018-19, he combined his wife's stock market and F&O trading losses with his own income under clubbing provisions (Section 64(1)(iv)) and claimed a set-off, thereby reducing his total tax liability.
However, the tax department objected to the claim on two grounds.
First, her total stock market trading loss was about Rs 1.95 crore, of which only Rs 1.15 crore was attributable to funds gifted by Yadav to his wife; the remaining Rs 80 lakh came from her own resources.
Second, the Assessing Officer treated her as an independent taxpayer and held that the gains and losses arose from trading activities undertaken in her name and account, making the losses her own and not eligible for set-off in her husband's hands. Accordingly, the tax officer rejected the clubbing claim and denied the set-off of losses.
Unhappy with this decision, Mr Yadav filed an appeal before the commissioner of appeals (CIT (A) arguing that he maintains a joint bank account with ICICI Bank and routinely transfers money to this account citing reasons like 'investment', 'gift', 'budget'. He explained that just like these routine transfers, he transferred Rs 1.15 crore of his own money to their joint bank account and used it to trade in the stock market from her demat account.
To support his claims, he submitted the gift deed showing he had transferred Rs 1.15 crore to his wife without any consideration and fully out of his earnings and past savings. He also filed an affidavit declaring that the amount has been transferred without any consideration and without agreement to live part.
However, CIT (A) rejected his appeal, and so he took his case to ITAT Lucknow. The primary reason why both the CIT (A) and tax officer didn't believe him was because they thought that the income / loss generated in his wife's case was not merely the result of asset transfer (money) but rather the result of risk-taking by her.
The idea that she herself possessed enough skill to trade in the stock market was solidified by the fact that she had earned an independent income of Rs 30,239 shown as speculative business profit, as evident from the statement of income submitted.
CIT (A) and the tax officer concluded that on the one hand, Yadav was treating speculative business profit as an independent income of his wife, while on the other hand, a large portion of the Rs 1.14 crore-loss of his wife was being set off against his own income. Therefore, the reply of the assessee was not found to be acceptable on merits.
Thus both CIT (A) and the tax officer ruled that Section 64(1) (iv) is not applicable if the wife possesses technical or professional qualifications and the income or loss was solely attributable to the application of his or her technical or professional knowledge and experience.
Chartered Accountant Dharmendra Kumar appearing on Yadav's behalf in ITAT Lucknow told the tribunal that Yadav had opened that demat account in her name as well as the joint bank account in ICICI Bank. Kumar told the tribunal that she had no technical or professional expertise to trade in the stock market and so Yadav used to contribute funds to their joint bank account for trading in F&O, derivatives and equities using her demat account.
Kumar also told the tribunal that during the year, Yadav had transferred Rs 1.15 crore to her in their joint bank account where she also had Rs 80 lakh of her own funds. As a result of this, his wife had a total capital of Rs 1.95 crore. From this capital, Yadav had undertaken trading in derivatives and equities on her behalf, as a result of which she incurred a loss of Rs 1.95 crore.
Bifurcating this loss from the derivative trading in her demat account, Kumar said while derivative trading losses of Rs 80 lakh (coming from her own funds) were attributable to her, the loss of Rs 1.15 crore were attributable to derivative transactions from the gift received from Yadav.
Thus, Kumar argued that as per the provisions of Sections 64(1)(iv), any loss derived from such transactions was allowed to be set off against the profits made by Yadav. On May 19, 2026, Yadav won the case in ITAT Lucknow (ITA No.585/LKW/2024).
Chartered Accountant Ashish Karundia said to ET Wealth Online: "The Tribunal has rightly reaffirmed that the clubbing provision under Section 64(1)(iv) is not a one-way street."
According to Karundia, if income arising from assets transferred to a spouse is liable to be clubbed in the hands of the transferor, the same principle must equally apply to losses attributable to such transferred assets.
Karundia says: "The Tribunal correctly held that derivative trading losses arising from transactions funded through the taxpayer's gift to his spouse are eligible for set-off in the taxpayer's hands. The ruling reinforces the principle that tax law should operate symmetrically, preventing a selective application of clubbing provisions."
Chartered Accontant Naveen Wadhwa, Vice President, Research and Advisory Division, Taxmann, said to ET Wealth Online: "A common misconception is that the clubbing provisions of the Income-tax Act operate only when there is an income. Where a spouse's income is liable to be clubbed in an individual's hands, a loss from that very source is equally liable to be clubbed."
According to Wadhwa, this conclusion is based on the principle that the expression 'income' has always been read to include a loss. So if the conditions for clubbing are otherwise met, the spouse's loss is set off against the individual's income, and any unabsorbed portion is carried forward in his own hands. The principle remains the same under the new Income-tax Act, 2025.
ITAT Lucknow judgement and discussion
ITAT Lucknow cited several Supreme Court rulings and decisions from other ITAT benches, concluding that losses incurred by a spouse in derivative transactions from money gifted to them, must be allowed and deducted from the income of the gifting spouse. This is in accordance with Section 64(1)(iv) read with Explanation 3(i).
ITAT Lucknow said: "Thus, the decision of the Assessing Officer and the ld. CIT(A) to deny the assessee the benefit of this set off, is not in accordance with the law and the judgments cited aforesaid."
Therefore, ITAT Lucknow held that Yadav is entitled to set off that portion of the loss arising from trading in derivatives by his wife that resulted from transactions made with the money he had gifted her.
However, since Yadav did not submit any evidence or working or statement showing the bifurcation of this Rs 1.95 crore loss or how these losses arose, ITAT Lucknow restored the matter to the Assessing Officer for the limited purpose of verifying the extent of losses incurred by her from transactions undertaken with the money gifted by Yadav and to allow it in accordance with the provisions of Explanation 3(i) to Section 64(1)(iv).
In view of the fact that the debate over the assessment order and the order of the ld. CIT(A) is mainly focused on the principle of allowability, the matter of the actual amount of losses that need to be adjusted against the income of Yadav, has not been enquired into by ITAT Lucknow.
Order: In the result, the appeal of the assessee (Yadav) is partly allowed. Orders pronounced on 19.05.2026.
[The Economic Times]
