Clubbing of income.bose


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Clubbing of income.bose

  1. 1. BY CLUBBING OF INCOMESections 60 – 65Sections 60 – 651Shankar BoseInspector of Income-taxMSTU, Puri
  2. 2. Transfer of Income without Transferof Assets[Sec. 60]Section 60 is applicable if the following conditions aresatisfied:The taxpayer owns an asset.The ownership of asset is not transferred by him.The Income from the asset is transferred to anyperson under a settlement, trust, covenant,agreement/ arrangement.The transfer may be revocable or may not berevocable.The transfer may be effected at any time.DTRTI_KOLKATA 2
  3. 3. In such cases, the income from the asset would betaxable in the hands of the transferor (the person whotransfer the asset).Section 60 has no application where corpus itself istransferred . CIT vs GRANDHI NARAYANA RAO[1988] 173 ITR593 (AP).DTRTI_KOLKATA 3
  4. 4. Revocable Transfer of Assets [Sec. 61]By virtue of Section 61, if an asset is transferred undera “revocable transfer”, income from such asset istaxable in the hands of the transferor.The transfer for this purpose includes any settlement,trust, covenant, agreement or arrangement.DTRTI_KOLKATA 4
  5. 5. S. 61 says that, if a person(i) makes a revocable transfer of assets, and(ii) such asset generates income, then such income will be taxed at the hands of thesuch income will be taxed at the hands of thetransferortransferor even if the income-earning asset was standingat that point of time in the name of the transferee.DTRTI_KOLKATA 5
  6. 6.  Sec. 62 says that even if transfer of an asset is revocable, then also theincome from such asset will not be taxed (contrary to S. 61) in the hands oftransferor If (a) the revocable transfer is made to a trust and the transfer is notrevocable at least during the lifetime of beneficiary. Or (b) the revocable transfer is made to persons other than trust andsuchtransfer is not revocable at least during lifetime of the transfereeperson. Or (c) the transfer was made before 1.4.1961 and the same was notrevocable for a period exceeding six years. And (d) the transferor does not derive any benefit from such income.DTRTI_KOLKATA 6
  7. 7. S. 63 says that a transfer will be deemed to be revocableIf (i) there is any provision for re-transfer ever of theincome or asset in any way whatsoever to the transferorAnd (ii) there is any provision through which transferorcan reassume the power over whole/part of the income orasset.DTRTI_KOLKATA7
  8. 8. The underlying principle of S. 61 read with 62 and 63 is notdifferent from S. 60.Here, even if asset is transferred, income will continue to be taxedat transferor’s hands in the following three situations :- (i) when there is any clause in the instrument of transfer torevoke the transfer during lifetime of the transferee under anycircumstances or for any reason whatsoeverOr (ii) when the transfer is not revocable during lifetime oftransferee, true, but transferor derives some benefit directly orindirectly from the incomeOr (iii) though initially at the time of transfer neither thetransferor derived any benefit nor there was any clause forrevocation of transfer of asset during lifetime of transferee/beneficiary, subsequently the transferor revokes it by any measureand income arises to him from such revoked asset.DTRTI_KOLKATA 8
  9. 9. The Calcutta High Court, in Chunilal MuljiMotani vs. CIT (1983) 139 ITR 166,176 (Cal), heldthat if a transfer is revocable then not only such partof income from transferred asset which went to thebenefit of transferor but the entire income will betaxed in the hands of the transferor.DTRTI_KOLKATA 9
  10. 10. If,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 technicalor professional knowledge or experience.Then, Salary Income of the spouse will be taxable inthe hands of the taxpayer.DTRTI_KOLKATA 10An Individual is assessable in respectof remuneration of spouse.[Sec. 64(1)(ii)]
  11. 11. Income to be clubbed in the hands of the individual islimited to salary, commission, fees or any otherremuneration received by the spouse, directly orindirectly, whether in cash or in kind.If the husband and wife both have substantial interest inthe concern and both are in receipt of remunerationfrom the concern, then the remuneration of both shall beclubbed in the hands of that spouse whose total income,before including such remuneration, is greater. [Circularno. 258, dated 14.06.1979].Remuneration which is solely attributable to theapplication of technical or professional knowledge andexperience of the spouse will not be clubbed.DTRTI_KOLKATA11
  12. 12. Meaning of “Substantial Interest”In the case of a company - If an individual beneficiallyholds (individually, or along with his relatives) 20% ormore of equity shares in a company at any timeduring the previous year.In case of a concern other than company – If anindividual is entitled to 20% profit in a concern(individually, or along with his relatives) at any timeduring the previous year.DTRTI_KOLKATA 12
  13. 13. Regard must, therefore, be had to the nature of thebusiness carried on by the concern, the nature of thetechnical or professional qualifications, knowledgeand experience possessed by the spouse to whom thepayment is made from that concern for the servicesrendered by that person.CIT vs. R.JAYALAKSHMI [1988] 101 TAXMAN350(MAD.).DTRTI_KOLKATA 13
  14. 14. INDIVIDUAL ASSESSABLE IN RESPECT OF INCOMEFROM ASSETS TRANSFERRED TO SPOUSE. [Sec.64(1)(iv)If an IndividualIndividual taxpayer transfers an asset, otherthan a house property, to his/her spouse directly orindirectly otherwise than (a) for adequateconsideration, or(b) in connection withan agreement to live apart(the asset may held by the transferee-spouse in thesame form or in a different form),any income arising from such asset shall be deemedto be the income of the taxpayer who has transferredthe asset. DTRTI_KOLKATA 14
  15. 15. This provision is not applicable toThis provision is not applicable toHouse Property because in thatHouse Property because in thatcase the transferor is deemed to becase the transferor is deemed to bethe owner of the House Propertythe owner of the House Propertyand the annual value of theand the annual value of theproperty is taxed in the hands of theproperty is taxed in the hands of thetransferor as per section 27transferor as per section 27..DTRTI_KOLKATA 15
  16. 16. Where a House Property is transferred without anadequate consideration by an individual to his/herspouse, although the transferor shall be the deemedowner of the house property and shall be subject totax under the head “Income from House Property”,but if there is any Capital Gain on the transfer ofsuch House Property, such capital gain shall firstbe computed in the hands of the transferee andthereafter the same will be clubbed with the incomeof the transferor as per the provisions of thissection i.e. Section 64(1)(iv).DTRTI_KOLKATA 16
  17. 17. HOW TO COMPUTE?The Income from assets transferred must be regarded inthe same way as it would be if the asset has not beentransferred.CIT vs. Maharaj Kumar Kamal Singh [1973]89 ITR 1(SC).Exemption, deduction or tax incentives in respect of suchincome can be claimed by the transferor. G.B.Banerjee vs. CIT[1979]117 ITR 446(Cal).DTRTI_KOLKATA 17
  18. 18. EXCEPTIONSThe income from the transferred assets shall not beclubbed in the following cases:If the transfer is for adequate consideration;The transfer is under an agreement to live apart;If the relationship of husband and wife doesn’t exist, eitherat the time of transfer of such asset or at the time accrual ofthe income. Philip John Plasket Thomas vs. CIT (1963)49 ITR 97 (SC).14/05/13 DTRTI_KOLKATA 18
  19. 19. EXAMPLE….If “A” makes a gift to his fiancée then theincome arising on the amount so gifted,shall not be taxable in the hands of “A”,even after their marriage, as therelationship of husband and wife doesn’texist at the time of making the gift.14/05/13DTRTI_KOLKATA19
  20. 20. WHERE PART AMOUNT IS CONTRIBUTEDBY SPOUSE.In KUMARA RAO (DR. N.) VS. CIT (1988) 169 ITR128(AP), the wife of the assessee constructed a Houseand spent a sum of Rs. 96,502 thereon. In that cost ofconstruction, the assessee contributed a sum of Rs.34,500.It was held, on facts, that the income from the houseproperty in proportion of 34.5/96.5 was includible inthe assessee’s income as the same could be said to beattributable to Rs. 34,500 out of total cost ofconstruction of Rs. 96,502.14/05/13 DTRTI_KOLKATA 20
  21. 21. The assessee made payments of premium on policy takenin the name of his wife. The maturity proceeds wereinvested and income earned thereon in the name of hiswife.The Assessing Officer clubbed such income in the handsof the assessee.The Gujrat High Court upheld such action. The Courtheld that proximity between asset and income had to beconsidered irrespective of time lag between transfer ofasset and income had to be considered irrespective oftime lag between transfer of asset and actual incomederived. DAMODAR K. SHAH vs. CIT (2001) 119TAXMAN 882(GUJ.).14/05/13 DTRTI_KOLKATA 21
  22. 22. INDIVIDUAL ASSESSABLE IN RESPECT OFINCOME FROM ASSETS TRANSFERRED TO SON’SWIFE [SEC. 64(1)(vi)Any income which arises from assetstransferred directly or indirectly by anindividual to his son’s wife after 1stJune,1973, otherwise than for adequateconsideration, shall be included in theincome of the transferor.14/05/13DTRTI_KOLKATA22
  23. 23. WHEN TRANSFERRED ASSET ISINVESTED IN BUSINESS………….In cases where the asset is transferred to spouse/son’s wife, the transferred asset may be utilised inthe business of the transferee and in that case thetransferred asset becomes an indistinguishable part ofthe capital employed in the business and the incomegenerated by that part of capital employed is alsodifficult to determine.14/05/13DTRTI_KOLKATA23
  24. 24. In such case the clubbable income is determined asbelow: amount of investment outof transferred asset in thebusiness as on the first day of X total profit earnedprevious year. in the investment in the business14/05/13 DTRTI_KOLKATA 24
  25. 25. It becomes further difficult when the transferred asset isinvested in partnership firm because others’ money arealso invested. So in that case clubbable income is :-amount of capital out of Interest( i.e. income )transferred asset invested receivable by thein the firm as on first day of XX transferee fromthe previous year the capital employed by the partner-transfereein the firm as on first day of previous year14/05/13 DTRTI_KOLKATA 25
  26. 26. INDIVIDUAL ASSESSABLE IN RESPECT OF INCOME FROMASSETS TRANSFERRED TO ANY PERSON FOR THE BENEFITOF THE SPOUSE OF THE TRANSFEROR [SEC. 64(1)(vii)]The income from such assets shall be included in theincome of the transferor to the extent to which theincome is for the immediate or deferred benefit ofhis/her spouse.In the case of such transfer, only the portion of incomethat is set apart for the benefit of spouse is taxable in thehands of settler.CIT vs ARVIND H. DALAL (1999) 105 TAXMAN 24(BOM).14/05/13DTRTI_KOLKATA26
  27. 27. INDIVIDUAL ASSESSABLE IN RESPECT OF INCOME FROMASSETS TRANSFERRED TO ANY PERSON FOR THE BENEFITOF THE TRANSFEROR’S SON’S WIFE [SEC. 64(1)(viii)]Where an individual transfers any assets, after 1stJune,1973, to any person or association of persons,otherwise than for adequate consideration, theincome from such assets shall be included in theincome of the transferor to the extent to which theincome is for the immediate or deferred benefit ofhis/her’s son’s wife.14/05/13DTRTI_KOLKATA27
  28. 28. Section 64(1)(vii) and (viii) will beattracted if transferor makes adeclaration of trust and appointshimself as the trustee.14/05/13DTRTI_KOLKATA28
  29. 29. CLUBBING OF INCOME OF MINORCHILD [SEC. 64(1A)]If any income accrues to the minor child of an individualthen such income will be clubbed at the hands of suchindividual even if there is no transfer of asset / incomeetc. as stated in earlier provisions.Exception to this happens only if the minor earns theincome by DOING MANUAL WORK OR APPLYINGHIS SKILL, TALENT OR SPECIALISEDKNOWLEDGE/ EXPERIENCE, OR THE MINORCHILD IS SUFFERING FROM ANY DISABILITY OFTHE NATURE SPECIFIED IN SECTION 80U LIKEPHYSICALLY DISABLED, TOTALLY BLIND ETC.14/05/13 DTRTI_KOLKATA 29
  30. 30. The minor’s income will be clubbed at that parent’shand whose total income is more - if parents’marriage is subsisting.If they are separated, it will be clubbed at thatparents hands who maintains the minor child.Once such parent is decided, the same will continueand the A.O. has to give opportunity of hearing tothe other parent if he wants to club it at his/herhands.14/05/13DTRTI_KOLKATA30
  31. 31. Where the income of a minor childhas been included in the total incomeof a parent, such parent shall beentitled to an exemption to thean exemption to theextent of such income or Rs.extent of such income or Rs.1,500(Ss 10(32))1,500(Ss 10(32)) whichever is less, inrespect of each minor child whoseincome is so included.14/05/13 DTRTI_KOLKATA 31
  32. 32. Minor child generally means, as per Indian MajorityAct, 1875 whose age is 18 years or less. But if minor’sperson and/or property is at the hands of guardian/courtof wards, then he attains majority only on completion of21 years.If father gives loan to minor son it would be very much‘transfer’ because essence of loan is enforceable contractand a minor cannot contract a loan as per IndianContract Act, 1872. So it is to be treated as transfer ofassets by father (CIT V Mriduhari Dalmia (1982) 133ITR 0550 (Del).If child was minor throughout the year but on the lastday of previous year attained majority, income accruingto him cannot be clubbed.14/05/13 DTRTI_KOLKATA 32
  33. 33. If both the parents of the minor child are not alive thenthe income of minor child cannot be clubbed and theguardian of the minor child shall file the return of suchincome on behalf of the minor. It will not be includedIt will not be includedin the income of the guardian if the guardian is not ain the income of the guardian if the guardian is not aparentparent.What is to be clubbed is the income before allowingdeduction under chapter VIA.ITO vs KULDEEP JAIN (2002) 81 ITD 379 (DEL. –TRIB.).14/05/13 DTRTI_KOLKATA 33
  34. 34. CLUBBING OF INCOME FROM PERSONAL PROPERTYCONVERTED INTO PROPERTY OF HUF [SEC. 64(2)]When an individual converts, after 31.12.69, his self-acquired separate property into property of HUF towhich he belongs, then the entire income arising fromsuch property shall be deemed to be the transferorindividual’s income, andif on partition of family, part of such property is receivedby transferor’s spouse, then income from such portion ofproperty of spouse shall be included in the transferorindividual’s total income.14/05/13DTRTI_KOLKATA34
  35. 35. Liability for payment of tax even though incomehas been taxed at else’s hands [Sec. 65]When an asset stands in one’s name but incometherefrom is taxed at somebody else’s hands due toprovisions of Ss. 60 to 64, then too the former(owners of assets) will be liable to pay the tax on thatextent of income if the A.O. serves demand notice onthem.14/05/13 DTRTI_KOLKATA 35
  36. 36. 14/05/13 MSTU_KOLKATA 36