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CLUBBING OF INCOME
What is clubbing of income?
 Generally an assessee is taxed in respect of his own income. But sometimes in some exceptional
circumstances this basic principle is deviated and the assessee may be taxed in respect of income
which legally belongs to somebody else.
 Earlier the taxpayers made an attempt to reduce their tax liability by transferring their assets in favor
of their family members or by arranging their sources of income in such a way that tax incidence falls
on others, whereas benefits of income is derived by them .
 So to counteract such practices of tax avoidance, necessary provisions have been incorporated in
sections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax on his own income as well
as income belonging to others on fulfillment of certain conditions. Inclusion of other’s Incomes in the
income of the assessee is called Clubbing of Income and the income which is so included is called
Deemed Income.
Objectives of studying clubbing of income
 Circumstances when income of some other person is included in the income
of assessee.
 Provisions when these sections will be applicable.
 Under what head and in whose income it will be included.
Terms
 Transferor- The person who transfers any of his belongings, specifically
his assets/income to another person is known as Transferor.
 Transferee-The person to whom the transferor transfers his / her assets
is known as transferee.
 Revocable- he right to reacquire or take back anything legally which was
given earlier under an agreement or settlement.
 Minor- A person who is below the age at which he or she legally
becomes an adult. In India at present a person becomes adult at the age
of 18 years.
TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60)
 Section 60 is applicable if the following conditions are satisfied: -
• The taxpayer owns an asset
• The ownership of asset is not transferred by him.
• The income from the asset is transferred to any person under a settlement, trust, covenant,
agreement or arrangement.
• The above transfer maybe revocable or may not be revocable.
• The above transfer maybe affected at any time.
 If above conditions are satisfied ,INCOME FROM THE ASSEST IS TAXABLE IN THE HANDS OF
TRANSFEROR
Illustration
 Darshit Parmar owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual)
interest being Rs. 100,000. On April 1, 2005, he transfers interest income to
Mayur Tadvi, his friend without transferring the ownership of these
debentures. Although during 2005-06, interest of Rs. 100,000 is received by
Mayur Tadvi, it is taxable in the hands of Darshit Parmar as per Section 60.
REVOCABLE TRANSFER OF ASSETS (SEC 61)
 If an asset is transferred under a “revocable transfer” , income from such asset is
taxable in the hands of the transferor. The transfer for this purpose includes any
settlement, trust, covenant, agreement or arrangement.
 In any of the following cases, transfer is treated as “revocable transfer” –
1. If an asset is transferred under a trust and it is revocable during the lifetime of the
beneficiary.
2. If an asset is transferred to a person and it is revocable during the lifetime of
transferee.
Contd….
3. If an asset is transferred before April 1 , 1961 and it is revocable within six years.
4. If the transfer contains any provision to re-transfer the asset(or income
therefrom) to the transferor directly or indirectly, wholly or partly.
5. If the transferor has any right to reassume power over the asset (or income
therefrom) directly or indirectly, wholly or partly.
Consider the following cases:-
 X transfers a house property to a trust for the benefit of A&B. However, X has a right to
revoke the trust during the lifetime of A and/or B. Its is revocable transfer and income
arising from the house property is taxable in the hands of X.
 X transfer a house property to A. However , X has a right to revoke the transfer during the
lifetime of A. it is a revocable transfer and income arising from the house property is
taxable in the hands of X.
 X transfer an asset on March 31, 1961. It is revocable on or before June 6, 1963. It is a
revocable transfer. Income arising from the asset is taxable in the hands of X. conversely, if
X transfers an asset before April 1, 1961 and it is revocable after 6 years (say, on April 10,
1967), it is not taken as a revocable transfer.
Contd….
 X transfer as asset. Under the terms of transfer, on or after April 1, 1998, he has a
right to utilize the income of the asset for his benefit. However, he has not
exercised this right as yet. On or April 1, 1998, income of the asset would be taxable
in the hands of X, even if he has not exercised the aforesaid right.
 X transfers an asset. Under the terms of transfer, he has a right to use the asset for
the personal benefits of his family members whenever he wants. Till date, he has
not exercised the right. It is revocable transfer. The entire income from the asset
would be taxable in the hands of X.
Conclusions
 The following conclusions can be drawn-
• There is asset which is transferred under a “revocable transfer”.
• Income from the aforesaid asset is taxable in the hands of transferor.
• Such income is taxable as and when the power to revoke arises.
• The above rule is applicable even if the power to revoke has not
been exercised so far.
When an individual is Assessable in respect of
Remuneration of SPOUSE {SEC.64(1)(ii)}
 Section 64(1)(ii) is applicable if the following conditions are satisfied -
• The taxpayer is an individual.
• He/she has a substantial interest in a concern.
• Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-
mentioned concern.
• Spouse is employed in the concern without any technical or professional knowledge or
experience.
 If the above conditions are satisfied, then salary income of the spouse will be taxable in
the hands of the taxpayer.
Contd….
 Concern – Concern could be any form of business or professional concern. It could be a
sole proprietor, partnership, company, etc.
 Substantial interest - An individual is deemed to have substantial interest, if he/she
(individually or along with his relatives) beneficially holds equity shares carrying not less
than 20 per cent voting power in the case of a company or is entitled to not less than 20
percent of the profits in the case of a concern other than a company at any time during
the previous year.
 Relative – Relative in relation to an individual means the husband,wife,brother or sister .
 When both husband and wife have substantial interest in a concern and both are
employed by the concern without professional qualification , remuneration will included
in the total income of husband or wife whose total income, excluding such
remuneration , is greater.
Illustration
 X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any
technical or professional qualification to justify the remuneration. In this case, salary
income of Mrs. X shall be taxable in the hands of X .Where both the husband and wife
have a substantial interest in a concern and both are in receipt of the remuneration
from such concern both the remunerations will be included in the total income of
husband or wife whose total income, excluding such remuneration, is greater.
INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC.
64(1)(IV)]
 Income from assets transferred to spouse becomes taxable under provisions of section 64 (1) (iv) as
per following conditions:-
• The taxpayer is an individual
• He/she has transferred an asset (other than a house property)
• The asset is transferred to his/her spouse
• The transfer may be direct or indirect.
• The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an
agreement to live apart.
• The asset may be held by the transferee-spouse in the same form or in a different form.
 If the above conditions are satisfied, any income from such asset shall be deemed to be the income of
the taxpayer who has transferred the asset.
 ILLUSTRATION- X transfers 500 debentures of IFCI to his wife without adequate
consideration. Interest income on these debentures will be included in the income of
X.
Section 64 is not applicable in the following cases:
1) If assets are transferred before marriage.
2) If assets are transferred for adequate consideration.
3) If assets are transferred in connection with an agreement to live apart.
4) If on the date of accrual of income, transferee is not spouse of the transferor.
5) If property is acquired by the spouse out of pin money (i.e. an allowance given to the
wife by her husband for her dress and usual household expenses).
 In the aforesaid five cases, income arising from the transferred asset cannot be
clubbed in the hands of the transferor.
INCOME FROM ASSETS TRANSFERRED TO SON’S
WIFE [SEC. 64 (1) (VI)]
 Income from assets transferred to son’s wife attract the provisions of section 64(1) (vi) as
per conditions below:-
• The taxpayer is an individual.
• He/she has transferred an asset after May 31, 1973.
• The asset is transferred to son’s wife.
• Transfer may be direct or indirect.
• The asset is transferred otherwise than for adequate consideration.
• The asset may be held by the transferee in the same form or different form.
 If the above conditions are satisfied , then income from the asset is included in the income
of the taxpayer who has transferred the asset.
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR
THE BENEFIT OF SPOUSE [SEC. 64 (1)(VII)]
 Income from assets transferred to a person for the benefit of spouse attract the
provisions of section 64 (1) (vii) on clubbing of income. If:
• The taxpayer is an individual.
• He/she has transferred an asset to a person or an association of persons.
• Transfer may be direct or indirect.
• Asset is transferred for the immediate or deferred benefit of his/her spouse.
• The transfer of asset is without adequate consideration.
 If the above conditions are satisfied then income from such asset to the extent of
such benefit is taxable in the hands of the taxpayer who has transferred the asset.
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR
THE BENEFIT OF SON’S WIFE [SEC. 64 (1)(VIII)]
 Income from assets transferred to a person for the benefit of son’s wife attract the provisions of
section 64 (1) (viii) on clubbing of income. If:
• The taxpayer is an individual
• He or she has transferred an asset after May 31, 1973.
• The asset is transferred to any person or an association of persons.
• Transfer may be direct or indirect.
• The asset is transferred for the immediate or deferred benefit of his/her son’s wife.
• The asset is transferred otherwise than for adequate consideration.
 If the above conditions are satisfied, then income from the asset to the extent of such benefit is
included in the income of the taxpayer who has transferred the asset.
INCOME OF MINOR CHILD {SEC. 64 (1A)}
 All income which arises or accrues to the minor child shall be clubbed in the income of
his parent (Sec. 64(1A), whose total income (excluding Minor's income) is greater.
However, in case parents are separated, the income of minor will be included in the
income of that parent who maintains the minor child in the relevant previous year.
 When clubbing is not attracted- the following income will be taxable in the hands of
minor child:
1) Income of minor child( from all sources) suffering from any disability of the nature
specified under sec. 80U.
2) Income of minor child on account of any manual work.
3) Income of minor child on account of any activity involving application of his skill , talent
or specialized knowledge and experience.
Exemption under sec. 10(32)
 In case the income of an individual includes the income of his / her minor child in
terms of above provisions, such an individual shall be entitled to exemption of
Rs.1,500 in respect of each minor child. Where , however, the income of any minor
so includible is less than Rs.1500, the aforesaid exemption shall be restricted to the
income so included in the total income of the individual.
Tax implication of conversion of self-acquired property into
joint family property and subsequent partition [Sec. 64(2)]
 The following transactions are covered by section 64(2) –
• Case 1- Where an individual (being member of HUF) converts (after December 31, 1969) his
self-acquired property into property belonging to the family. It is done by impressing such
property with the character of joint family property or throwing such property into common
stock of the family.
• Case 2- When such individual transfers his self-acquired property, directly or indirectly, to
the other family otherwise than for adequate consideration.
Other points:
 Income from accretion of property transferred- In this case , income arising to the
transferee from the property transferred is taxable in the hands of transferor. Income
arising to the transferee from the accretion of such property or from accumulated
income of such property Is , however , not included in the total income of transferor.
 Example
X transfers a sum of 10 lac to his wife without any consideration. Mrs X deposits the
money in a bank. Interest received from the bank on such deposit is taxable in the hands
of X. If , however , Mrs.X purchases a house from the acc. Interest income , rental income
received by Mrs.X is taxable in her hands and will not be clubbed with the income of X.
Can negative income be clubbed?
 If clubbing provisions are applicable and income from such a source is negative it will
still be clubbed in the income of assessee.
Consider the following cases:
1. Mr. X gifts Mrs. X Rs 2 lakhs from which she starts a business. Now as per clubbing
provisions whatever is the profit from this business it will be taxable in the hands of
Mr. X. Since it is an income taxable under the head ‘Profits & gains of Business &
profession’ that is why it will be taxable under the same head and income will be
calculated as if it is the business of Mr. X.
2. Minor son of Y has a business. For the previous year 2014-15 , loss from business is
Rs.20,000 . The loss of 20,000 will be included in the income of Y or Mrs. Y whosoever
has higher income.
Tax clubbing of income tax

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Tax clubbing of income tax

  • 2. What is clubbing of income?  Generally an assessee is taxed in respect of his own income. But sometimes in some exceptional circumstances this basic principle is deviated and the assessee may be taxed in respect of income which legally belongs to somebody else.  Earlier the taxpayers made an attempt to reduce their tax liability by transferring their assets in favor of their family members or by arranging their sources of income in such a way that tax incidence falls on others, whereas benefits of income is derived by them .  So to counteract such practices of tax avoidance, necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax on his own income as well as income belonging to others on fulfillment of certain conditions. Inclusion of other’s Incomes in the income of the assessee is called Clubbing of Income and the income which is so included is called Deemed Income.
  • 3. Objectives of studying clubbing of income  Circumstances when income of some other person is included in the income of assessee.  Provisions when these sections will be applicable.  Under what head and in whose income it will be included.
  • 4. Terms  Transferor- The person who transfers any of his belongings, specifically his assets/income to another person is known as Transferor.  Transferee-The person to whom the transferor transfers his / her assets is known as transferee.  Revocable- he right to reacquire or take back anything legally which was given earlier under an agreement or settlement.  Minor- A person who is below the age at which he or she legally becomes an adult. In India at present a person becomes adult at the age of 18 years.
  • 5. TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60)  Section 60 is applicable if the following conditions are satisfied: - • The taxpayer owns an asset • The ownership of asset is not transferred by him. • The income from the asset is transferred to any person under a settlement, trust, covenant, agreement or arrangement. • The above transfer maybe revocable or may not be revocable. • The above transfer maybe affected at any time.  If above conditions are satisfied ,INCOME FROM THE ASSEST IS TAXABLE IN THE HANDS OF TRANSFEROR
  • 6. Illustration  Darshit Parmar owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual) interest being Rs. 100,000. On April 1, 2005, he transfers interest income to Mayur Tadvi, his friend without transferring the ownership of these debentures. Although during 2005-06, interest of Rs. 100,000 is received by Mayur Tadvi, it is taxable in the hands of Darshit Parmar as per Section 60.
  • 7. REVOCABLE TRANSFER OF ASSETS (SEC 61)  If an asset is transferred under a “revocable transfer” , income from such asset is taxable in the hands of the transferor. The transfer for this purpose includes any settlement, trust, covenant, agreement or arrangement.  In any of the following cases, transfer is treated as “revocable transfer” – 1. If an asset is transferred under a trust and it is revocable during the lifetime of the beneficiary. 2. If an asset is transferred to a person and it is revocable during the lifetime of transferee.
  • 8. Contd…. 3. If an asset is transferred before April 1 , 1961 and it is revocable within six years. 4. If the transfer contains any provision to re-transfer the asset(or income therefrom) to the transferor directly or indirectly, wholly or partly. 5. If the transferor has any right to reassume power over the asset (or income therefrom) directly or indirectly, wholly or partly.
  • 9. Consider the following cases:-  X transfers a house property to a trust for the benefit of A&B. However, X has a right to revoke the trust during the lifetime of A and/or B. Its is revocable transfer and income arising from the house property is taxable in the hands of X.  X transfer a house property to A. However , X has a right to revoke the transfer during the lifetime of A. it is a revocable transfer and income arising from the house property is taxable in the hands of X.  X transfer an asset on March 31, 1961. It is revocable on or before June 6, 1963. It is a revocable transfer. Income arising from the asset is taxable in the hands of X. conversely, if X transfers an asset before April 1, 1961 and it is revocable after 6 years (say, on April 10, 1967), it is not taken as a revocable transfer.
  • 10. Contd….  X transfer as asset. Under the terms of transfer, on or after April 1, 1998, he has a right to utilize the income of the asset for his benefit. However, he has not exercised this right as yet. On or April 1, 1998, income of the asset would be taxable in the hands of X, even if he has not exercised the aforesaid right.  X transfers an asset. Under the terms of transfer, he has a right to use the asset for the personal benefits of his family members whenever he wants. Till date, he has not exercised the right. It is revocable transfer. The entire income from the asset would be taxable in the hands of X.
  • 11. Conclusions  The following conclusions can be drawn- • There is asset which is transferred under a “revocable transfer”. • Income from the aforesaid asset is taxable in the hands of transferor. • Such income is taxable as and when the power to revoke arises. • The above rule is applicable even if the power to revoke has not been exercised so far.
  • 12. When an individual is Assessable in respect of Remuneration of SPOUSE {SEC.64(1)(ii)}  Section 64(1)(ii) is applicable if the following conditions are satisfied - • The taxpayer is an individual. • He/she has a substantial interest in a concern. • Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above- mentioned concern. • Spouse is employed in the concern without any technical or professional knowledge or experience.  If the above conditions are satisfied, then salary income of the spouse will be taxable in the hands of the taxpayer.
  • 13. Contd….  Concern – Concern could be any form of business or professional concern. It could be a sole proprietor, partnership, company, etc.  Substantial interest - An individual is deemed to have substantial interest, if he/she (individually or along with his relatives) beneficially holds equity shares carrying not less than 20 per cent voting power in the case of a company or is entitled to not less than 20 percent of the profits in the case of a concern other than a company at any time during the previous year.  Relative – Relative in relation to an individual means the husband,wife,brother or sister .  When both husband and wife have substantial interest in a concern and both are employed by the concern without professional qualification , remuneration will included in the total income of husband or wife whose total income, excluding such remuneration , is greater.
  • 14. Illustration  X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical or professional qualification to justify the remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X .Where both the husband and wife have a substantial interest in a concern and both are in receipt of the remuneration from such concern both the remunerations will be included in the total income of husband or wife whose total income, excluding such remuneration, is greater.
  • 15. INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC. 64(1)(IV)]  Income from assets transferred to spouse becomes taxable under provisions of section 64 (1) (iv) as per following conditions:- • The taxpayer is an individual • He/she has transferred an asset (other than a house property) • The asset is transferred to his/her spouse • The transfer may be direct or indirect. • The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an agreement to live apart. • The asset may be held by the transferee-spouse in the same form or in a different form.  If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.
  • 16.  ILLUSTRATION- X transfers 500 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be included in the income of X. Section 64 is not applicable in the following cases: 1) If assets are transferred before marriage. 2) If assets are transferred for adequate consideration. 3) If assets are transferred in connection with an agreement to live apart. 4) If on the date of accrual of income, transferee is not spouse of the transferor. 5) If property is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her dress and usual household expenses).  In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the hands of the transferor.
  • 17. INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)]  Income from assets transferred to son’s wife attract the provisions of section 64(1) (vi) as per conditions below:- • The taxpayer is an individual. • He/she has transferred an asset after May 31, 1973. • The asset is transferred to son’s wife. • Transfer may be direct or indirect. • The asset is transferred otherwise than for adequate consideration. • The asset may be held by the transferee in the same form or different form.  If the above conditions are satisfied , then income from the asset is included in the income of the taxpayer who has transferred the asset.
  • 18. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1)(VII)]  Income from assets transferred to a person for the benefit of spouse attract the provisions of section 64 (1) (vii) on clubbing of income. If: • The taxpayer is an individual. • He/she has transferred an asset to a person or an association of persons. • Transfer may be direct or indirect. • Asset is transferred for the immediate or deferred benefit of his/her spouse. • The transfer of asset is without adequate consideration.  If the above conditions are satisfied then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.
  • 19. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64 (1)(VIII)]  Income from assets transferred to a person for the benefit of son’s wife attract the provisions of section 64 (1) (viii) on clubbing of income. If: • The taxpayer is an individual • He or she has transferred an asset after May 31, 1973. • The asset is transferred to any person or an association of persons. • Transfer may be direct or indirect. • The asset is transferred for the immediate or deferred benefit of his/her son’s wife. • The asset is transferred otherwise than for adequate consideration.  If the above conditions are satisfied, then income from the asset to the extent of such benefit is included in the income of the taxpayer who has transferred the asset.
  • 20. INCOME OF MINOR CHILD {SEC. 64 (1A)}  All income which arises or accrues to the minor child shall be clubbed in the income of his parent (Sec. 64(1A), whose total income (excluding Minor's income) is greater. However, in case parents are separated, the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year.  When clubbing is not attracted- the following income will be taxable in the hands of minor child: 1) Income of minor child( from all sources) suffering from any disability of the nature specified under sec. 80U. 2) Income of minor child on account of any manual work. 3) Income of minor child on account of any activity involving application of his skill , talent or specialized knowledge and experience.
  • 21. Exemption under sec. 10(32)  In case the income of an individual includes the income of his / her minor child in terms of above provisions, such an individual shall be entitled to exemption of Rs.1,500 in respect of each minor child. Where , however, the income of any minor so includible is less than Rs.1500, the aforesaid exemption shall be restricted to the income so included in the total income of the individual.
  • 22. Tax implication of conversion of self-acquired property into joint family property and subsequent partition [Sec. 64(2)]  The following transactions are covered by section 64(2) – • Case 1- Where an individual (being member of HUF) converts (after December 31, 1969) his self-acquired property into property belonging to the family. It is done by impressing such property with the character of joint family property or throwing such property into common stock of the family. • Case 2- When such individual transfers his self-acquired property, directly or indirectly, to the other family otherwise than for adequate consideration.
  • 23. Other points:  Income from accretion of property transferred- In this case , income arising to the transferee from the property transferred is taxable in the hands of transferor. Income arising to the transferee from the accretion of such property or from accumulated income of such property Is , however , not included in the total income of transferor.  Example X transfers a sum of 10 lac to his wife without any consideration. Mrs X deposits the money in a bank. Interest received from the bank on such deposit is taxable in the hands of X. If , however , Mrs.X purchases a house from the acc. Interest income , rental income received by Mrs.X is taxable in her hands and will not be clubbed with the income of X.
  • 24. Can negative income be clubbed?  If clubbing provisions are applicable and income from such a source is negative it will still be clubbed in the income of assessee. Consider the following cases: 1. Mr. X gifts Mrs. X Rs 2 lakhs from which she starts a business. Now as per clubbing provisions whatever is the profit from this business it will be taxable in the hands of Mr. X. Since it is an income taxable under the head ‘Profits & gains of Business & profession’ that is why it will be taxable under the same head and income will be calculated as if it is the business of Mr. X. 2. Minor son of Y has a business. For the previous year 2014-15 , loss from business is Rs.20,000 . The loss of 20,000 will be included in the income of Y or Mrs. Y whosoever has higher income.