The document discusses various situations in which an individual can be taxed on another person's income under Section 64 of the Income Tax Act of 1961. It explains that income from a spouse or minor child can be clubbed or added to the individual's income if certain criteria are met, such as if both spouses derive income from a business in which one has a substantial interest. It also discusses how income from assets transferred to a spouse or minor child may be clubbed. The document provides details on the various sub-sections under Section 64 that outline the specific clubbing rules and exceptions for spouse income, minor child income, and income from transferred assets. It examines clubbing situations for Hindu Undivided Families

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When can other person‘s income be
assessed in an assessee‘s hand?
T. N. Pandey
Normally, a person is expected to pay tax on his incomes
only. But, the I.T. Act, 1961 (Act) conceives of situations
when an assessee can be made to lawfully pay tax on
incomes belonging to others. In later paragraphs, such
situations are discussed in two parts, i.e. A & B, as
under:
Part-A
2. Assessment of incomes of spouses & minor children
in an assessee‘s hand
The most reliable persons that a person considers amongst his family
members are spouses and children, specially minor children, because after
children become major, they can exercise their own discretion and assert
themselves to claim that assets/ properties legally standing in their names
belong to them and, consequently, the incomes arising therefrom belong to
them.
2.1 Earlier, the predecessor of the present Act, mainly the I.T. Act, 1922,
provided for only clubbing of the income of wives in the hands of the
husbands but not the vice-versa [i.e. there was no clarity whether the
incomes of husbands could also be clubbed with the incomes of the wives,
when the tax avoidance practice is practised in a reverse manner. The SC in
the case of Badri Das Daga held that the term ‗wife‘ can mean only the
female of the species and not vice-versa. Hence, husband‘s income could not
be clubbed with that of the wife. Hence, by an amendment, the word
‗spouse‘ was substituted for the word ‗wife‘ in the relevant provision of the
I.T. Act.
2.2 Earlier, the provisions relating to clubbing of incomes of spouses &
minor children were almost identically worded. However, after the insertion
of sub-section (1A) w.e.f. 1.4.1993 by the Finance Act, 1992 in section 64,
subsections (i), (iii) & (v) of the Act, dealing with clubbing of incomes of
minors with those of the parents and income arising from transfer of assets
to the minors were omitted and replaced by sub-section (1A).
3. Section 64

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Under the existing law, clubbing can be done in the following circumstances
u/s 64 of the Act:
[a] Section 64(1)(ii)
This section provides that where there is a transfer of an income by a
person to another person, without the transfer of the asset, from which the
income arises, such income shall be included in the total income of the
transferor, whether such transfer is revocable or not and whether this
transfer is effected before or after the commencement of the I.T. Act, 1961.
Hence, any remuneration derived by a spouse from a concern in which the
other spouse has a substantial interest, shall be clubbed in the hands of the
spouse, who has a substantial interest in that concern. Any other income,
not specified above, is outside the scope of this section and will not be
clubbed even if it accrues to the spouse from a concern in which the
individual has a substantial interest.
[a-i] Exception to the general rule
The section, however, provides that clubbing cannot be resorted to if the
spouse is a partner in the firm because of her own ability and competence.
The aforesaid provision is not to apply to income arising to the spouse –
[a] on account of technical or professional qualifications possessed by the
spouse; and
[b] the income is solely attributable to the application of his/her technical or
professional knowledge or experience.
[a-ii] Where both husband and wife have substantial interest in the firm
In such cases, the clubbing will be done for the first time in the previous
year in which the following three conditions are satisfied:
[a] Both the husband and wife have a substantial interest in the concern.
[b] Both the husband and wife get remuneration from such a concern.
[c] The relationship of husband and wife subsists at the time of accrual of
such income.
[a-iii] Where such income is once included in the hands of either spouse,
any such income arising in any succeeding year shall not be included in the
total income of other spouse unless the AO is satisfied after giving that
spouse an opportunity of being heard that it is necessary so to do.
[a-iv] Meaning of substantial interest

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An individual shall be deemed to have a substantial interest in the concern:
[i] If the concern is a company: He alone or along with his relatives at any
time during the previous year owns beneficially, shares (not being shares
entitled to a fixed rate of dividend whether with or without a further right to
participate in profits) carrying not less than 20% of the voting power. Thus,
shares here would mean equity shares. Relative means the husband, wife,
brother or sister or any lineal ascendant or descendant of the individual.
[ii] In any other case: If he alone or along with his relatives is entitled to at
least 20% of the profits of such concern at any time during the previous
year.
4. Clubbing of incomes when income arises consequent to the transfer of
assets – Section 64(1)(iv)
Section 64(1)(iv) provides that the income from the transferred assets shall
not be clubbed in the following cases:
[i] if the transfer is for adequate consideration;
[ii] the transfer is under an agreement to live apart;
[iii] if the relationship of husband and wife does not exist, either at the time
of transfer of such asset or at the time of accrual of the income, e.g. A
makes a gift to his fiancée (would-be wife) then the income arising on the
amount so gifted shall not be taxable in the hands of A even after their
marriage as the relationship of husband and wife does not exist the time of
making the gift. Similarly, if A makes a gift to his wife and later on A
divorces his wife, income arising after such event will not be clubbed.
5. Clubbing when property is transferred in the name of son‘s wife – section
64(1)(vi)
This section provides that any income, which arises from assets transferred
directly or indirectly by an individual to his son‘s wife after 1.6.93, otherwise
than for adequate consideration, shall be included in the income of the
transferor.
5.1 Explanation 3 to section 64 provides how and to what extent clubbing
can be resorted when the assets transferred directly or indirectly by an
individual to his other spouse or son‘s wife are invested by them in some
other business or concern.
5.2 The provisions of section 64(1)(vii) & (viii) provide for situations as to
how the income from assets transferred to any other person for the benefit

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of the spouse of the transferor and for the benefit of son‘s wife are to be
dealt with.
5.3 From the foregoing discussion, it could be seen that elaborate provisions
have to be included in the I.T. Act to check inter transfer of assets amongst
the spouses to escape income tax law. Apart from making such provisions in
income tax law long and complicated, it has also led to considerable
litigation.
6. Use of minor children to avoid or escape income tax
Minor children too have been used to escape/ avoid tax. The following
provision has been included in the Act in the form of sub-section (1A) in the
Act to nullify such attempts:
[a] Clubbing of income of minor children – section 64(1A)
Section 64(1A) provides that in computing the total income of an individual,
there shall be included all such income as arises or accrues to his minor
child. The income shall be clubbed in the hands of that parent whose total
income (excluding the income of the minor) is greater. If the marriage of his
parents does not subsist, the income shall be clubbed in the hands of that
parent who maintains the minor child in the previous year.
[a-i] Where any income is once included in the total income of either parent,
any such income arising in any succeeding year shall not be included in the
total income of the other parent, unless the AO is satisfied after giving that
parent an opportunity of being heard, that it is necessary so to do. Where
the income of a minor child has been included in the total income of a
parent, such parent shall be entitled to an exemption to the extent of such
income or Rs 1,500 whichever is less in respect of each minor child, whose
income is so included.
[a-ii] It may be mentioned that relief of Rs 1,500 was fixed when sub-section
(1A) was inserted in section 64 by the Finance Act, 1992 w.e.f. 1.4.93. It was
already low at that time and has become ridiculous after passage of nearly
23 years. It has become meaningless by now and needs to be upgraded to
substantial amount, to be fair to the taxpayers.
[b] Income which cannot be clubbed and will be assessed in the hands of
the minor only
The following income of a minor shall not be clubbed and will be taxable in
the hands of the minor himself:

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[i] Any income of a minor child suffering from any disability of the nature
specified in section 80U like physically disabled, totally blind, etc.
[ii] Such income, which accrues or arises to the minor child on account of
any manual work done by him.
[iii] Such income, which accrues or arises to the minor child on account of
any activity involving application of his skills, talent or specialised
knowledge and experience.
7. Clubbing when self-acquired property is converted into HUF property
Hindu Undivided Families (HUFs) are integral part of income taxation in
India and have been stated to be one of the taxable entities in the Act, as a
person. HUF is taxed as a unit and the income taxed in the hands of the
HUF cannot once again be taxed in the hands of the members comprising
HUF. However, individuals can be separated from HUF along with share in
HUF properties on partition and, in that situation, they would be assessed
separately. An individual can also throw his self-acquired property into the
common hotchpot of the HUF and, in that event, his income from such
property will not be separately assessable in his hands. However, this
practice began to be used as a tax avoidance device and, hence, the
legislature has to step in to check such avoidance practice.
7.1 Sub-section 64(2) of the Act provides for assessment in cases of incomes
arising from conversion of self-acquired property into HUF property where
an individual, who is a member of the HUF, –
[a] converts his separate property as the property of the HUF, or
[b] throws the property into the common stock of the family, or
[c] otherwise transfers his individual property to the family.
7.2 Where the converted property has been the subject matter of partition
(whether partial or total) amongst the members of the family, the income
derived from such converted property as is received by the spouse on
partition shall be deemed to arise to the spouse from assets transferred
indirectly by the individual to the spouse and the income from the portion
received by the spouse shall be clubbed in the hands of the transferor.
7.3 Other aspects of the clubbing provisions
[a] Under what head, the income, which has been clubbed, is to be taxed?

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As per the provisions discussed above, income of another person is to be
included in the total income of the individual. However, such an income will
first be computed in the hands of the recipient as if it was his income and
such recipient will compute this income under the relevant head after
claiming exemptions/ allowances/ deductions permissible under the
relevant head in which it falls. Such income, computed under the relevant
head, will be included in the total income of the individual under the same
head of income.
[b] Collection of tax in respect of clubbed income (section 65)
Although the income from any asset transferred to certain specified persons,
mentioned in the above sections of clubbing of income, is includible in the
total income of the transferor, section 65 provides that the notice of demand
in respect of tax on such income may also be served upon the person to
whom such asset has been transferred. On service of such notice, the
transferee shall be liable to pay that portion of the tax levied on the
transferor, which is attributed to the income so included.
Part-B
8. In this part, some situations where others‘ income can be taxed in
assessee‘s hands are discussed. These are contained in sections 60 to 63 of
the Act, discussed in later paragraphs.
9. Section 60
This section provides for taxation of income in the transferor‘s hands when
there is no transfer of assets and only right to income is transferred. Thus,
where there is a transfer of an income by a person to another person,
without the transfer of the asset from which the income arises, such income
shall be included in the total income of the transferor, whether such
transfer is revocable or not and whether this transfer is effected before or
after the commencement of the I.T. Act, 1961.
9.1 Section 61
This relates to taxation of income in the transferor‘s hands arising from the
transfer of assets, where transfer made is revocable at the instance of the
transferor.
9.2 Section 62
This section deals with a situation, where the transfer made is irrevocable
only for a limited period and is in continuation of the preceding section 61.
It stipulates that the provisions of revocable transfer, discussed in section
61, shall not apply in certain circumstances. Such circumstances are –

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[a] in the case of transfer by way of trust, the transfer is not revocable
during the lifetime of the beneficiary;
[b] in the case of any other transfer, the transfer is not revocable during the
lifetime of the transferee;
[c] in case the transfer is made before 1.4.1961, the transfer is not revocable
for a period exceeding 6 years.
The above exceptions are applicable provided the transferor derives no
direct or indirect benefit from such income. Thus, this provision is in the
form of an exception to the general rule laid down by section 61.
9.3 Section 63
This section too deals with revocable transfers and provides that a transfer
for the purpose of sections 60, 61 & 62 shall be deemed to be revocable if –
[a] it contains any provision for the retransfer, directly or indirectly, of the
whole or any part of the income or assets to the transferor during the
lifetime of the beneficiary or the transferee as the case may, or
[b] it gives the transferor a right to reassume power directly or indirectly
over the whole or part of the income or assets during the lifetime of the
beneficiary or the transferee as the case may.
10. Concluding comments
The normal tendency of people the world over is to avoid payment of taxes
legally or even illegally by resorting to evasion/ concealment. There are
practically no taxpayers like Justice Holmes of the U.S. S.C., who once
observed that he likes to pay taxes because from these he buys civilisation.
The ways of tax evasion/ avoidance are multifold. There is always a tug of
war between the tax administrators and the taxpayers. The legislature tries
to deal with these by bringing changes in law as far as possible. But, still
such ways are numerous and the chasing has to go on.
10.1 From the foregoing discussion, it could be seen that an attempt has
been made by the Govt. to curb some situations where taxpayers have tried
to be one-up to avoid legitimate payment of tax by transfer of incomes and
assets to near and dear ones and also to create situations where incomes
could be transferred without parting with the assets which earn income. The
legislative attempt to check avoidance practices discussed earlier could not
be said to be the last word. Such situations will keep on coming and the
legislature will continue checking these. The journey has to go on.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes.)