CLUBBING OF INCOME

What is clubbing of income?

Generally an assessee is taxed in respect of his own income. But sometimes in some exceptionalcircumstances this basic principle is deviated and the assessee may be taxed in respect of incomewhich legally belongs to somebody else.

Earlier the taxpayers made an attempt to reduce their tax liability by transferring their assets in favorof their family members or by arranging their sources of income in such a way that tax incidence fallson others, whereas benefits of income is derived by them .

So to counteract such practices of tax avoidance, necessary provisions have been incorporated insections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax on his own income as wellas income belonging to others on fulfillment of certain conditions. Inclusion of other’s Incomes in theincome of the assessee is called Clubbing of Income and the income which is so included is calledDeemed 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, specificallyhis assets/income to another person is known as Transferor.

Transferee-The person to whom the transferor transfers his / her assetsis known as transferee.

Revocable- he right to reacquire or take back anything legally which wasgiven earlier under an agreement or settlement.

Minor- A person who is below the age at which he or she legallybecomes an adult. In India at present a person becomes adult at the ageof 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 toMayur Tadvi, his friend without transferring the ownership of thesedebentures. Although during 2005-06, interest of Rs. 100,000 is received byMayur 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 istaxable in the hands of the transferor. The transfer for this purpose includes anysettlement, 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 thebeneficiary.

2. If an asset is transferred to a person and it is revocable during the lifetime oftransferee.

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 incometherefrom) to the transferor directly or indirectly, wholly or partly.

5. If the transferor has any right to reassume power over the asset (or incometherefrom) 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 torevoke the trust during the lifetime of A and/or B. Its is revocable transfer and incomearising 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 thelifetime of A. it is a revocable transfer and income arising from the house property istaxable in the hands of X.

X transfer an asset on March 31, 1961. It is revocable on or before June 6, 1963. It is arevocable transfer. Income arising from the asset is taxable in the hands of X. conversely, ifX 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 aright to utilize the income of the asset for his benefit. However, he has notexercised this right as yet. On or April 1, 1998, income of the asset would be taxablein 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 forthe personal benefits of his family members whenever he wants. Till date, he hasnot exercised the right. It is revocable transfer. The entire income from the assetwould 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 orexperience.

If the above conditions are satisfied, then salary income of the spouse will be taxable inthe hands of the taxpayer.

Contd….

Concern – Concern could be any form of business or professional concern. It could be asole 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 lessthan 20 per cent voting power in the case of a company or is entitled to not less than 20percent of the profits in the case of a concern other than a company at any time duringthe 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 areemployed by the concern without professional qualification , remuneration will includedin the total income of husband or wife whose total income, excluding suchremuneration , is greater.

Illustration

X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without anytechnical or professional qualification to justify the remuneration. In this case, salaryincome of Mrs. X shall be taxable in the hands of X .Where both the husband and wifehave a substantial interest in a concern and both are in receipt of the remunerationfrom such concern both the remunerations will be included in the total income ofhusband 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) asper 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 anagreement 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 ofthe taxpayer who has transferred the asset.

ILLUSTRATION- X transfers 500 debentures of IFCI to his wife without adequateconsideration. Interest income on these debentures will be included in the income ofX.

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 thewife by her husband for her dress and usual household expenses).

In the aforesaid five cases, income arising from the transferred asset cannot beclubbed 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) asper 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 incomeof 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 theprovisions 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 ofsuch benefit is taxable in the hands of the taxpayer who has transferred the asset.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FORTHE 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 ofsection 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 isincluded 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 ofhis 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 theincome 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 ofminor child:

1) Income of minor child( from all sources) suffering from any disability of the naturespecified 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 , talentor specialized knowledge and experience.

Exemption under sec. 10(32)

In case the income of an individual includes the income of his / her minor child interms of above provisions, such an individual shall be entitled to exemption ofRs.1,500 in respect of each minor child. Where , however, the income of any minorso includible is less than Rs.1500, the aforesaid exemption shall be restricted to theincome 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) hisself-acquired property into property belonging to the family. It is done by impressing suchproperty with the character of joint family property or throwing such property into commonstock of the family.

• Case 2- When such individual transfers his self-acquired property, directly or indirectly, tothe other family otherwise than for adequate consideration.

Other points:

Income from accretion of property transferred- In this case , income arising to thetransferee from the property transferred is taxable in the hands of transferor. Incomearising to the transferee from the accretion of such property or from accumulatedincome 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 themoney in a bank. Interest received from the bank on such deposit is taxable in the handsof X. If , however , Mrs.X purchases a house from the acc. Interest income , rental incomereceived 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.