INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL INCOME IPCC PAPER 4 TAXATION CHAPTER 5

AJAY MALCHAND SHARMA

ADVOCATE

INTRODUCTION

CHAPTER OUTLINE:

Introduction

Clubbing where income is transferred- section 60

Revocable transfer- section 61

CONTD..

Exceptions of clubbing for revocable transfer-

section 62

Definition of transfer and revocable transfer- section

63

CONTD..

•Spouse- section 64(1) •Son’s wife- section 64(1) •Minor child- section 64(1A) •HUF- section 64(2)

Clubbing of income

arising to- section 64

Levy and collection of tax- section 65

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS- SECTION 60

If only the income is transferred to any person without transferring any assets which produce such income , in that case the income transferred shall be added in the hands of the transferor and tax on such income shall be payable by the transferor only and not by the transferee of such income.,

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS- SECTION 60) CONTINUE-----

It does not matter whether the transfer of the income is revocable or not.

WHAT IS THE MEANING OF REVOCABLE TRANSFER OF INCOME ----

As per section 63 (a) (i) revocable transfer means re-transfer of the income directly or indirectly again to the transferor. Similarly under Section 63(a)(ii) revocable transfer of income also means right to assume power directly or indirectly over the whole or part of income.

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS- SECTION 60) --CONTINUE

Mr. A owns a motor car and the same is given to a company on hire at a monthly hire charge of Rs.20,000. Mr. A declares that henceforth the monthly hire charges on the car shall belong his wife. Though the ownership of the car remains with Mr. A. In this case the income shall be included in the income of Mr A only as there is transfer of income without transfer of the car. Thus Mr. A shall be liable to pay tax on such income even if the same is transferred to his wife.

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS-CONTINUE

Thus the point where the income arises at that point tax liability gets attracted and merely diverting it to someone else shall not absolve the transferor of the income from tax liability.

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS-CONTINUE

We can say that section 60 basically reiterates the basic principle of Income Tax Act that income is taxable at the point where it arises and the subsequent application of the same is immaterial.

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS-CONTINUE

Thus the transfer of income without transfer of asset which creates such income is nothing but application of income and such application shall not be relevant for determining the tax liability. C.I.T V/S DR. RAMESHWARLAL PAHWA (1980) 123 ITR 681 (DEL)

TRANSFER OF INCOME WHEN THERE IS NO TRANSFER OF ASSETS-CONTINUE

Even if the income arising from the house property is transferred by creating the overriding title on such income while the ownership of the house remains with the owner still the income shall be taxed in the hands of the owner only. S. Kartar Singh v/s. CIT (1969) 73 ITR 438(Del)

SECTION 61: RECOVERABLE TRANSFER OF ASSETS- CONTINUE

Any income arising to a person by virtue of a revocable transfer of the asset shall be included in the income of the transferor only.

RECOVERABLE TRANSFER OF ASSETS-CONTINUE

Thus under section 61 any income arising or derived in respect of the asset which is transferred under revocable transfer shall be treated as the income of the transferor only.

RECOVERABLE TRANSFER OF ASSETS-CONTINUE ….. Revocable transfer is defined under section 63 of

the Income tax Act .

1 •As per section 63 (a) (i) revocable transfer means re-

transfer of the income or asset directly or indirectly again to the transferor.

2 •Similarly under Section 63(a)(ii) revocable transfer

of income or asset also means right to assume power directly or indirectly over the whole or part of income or asset.

RECOVERABLE TRANSFER OF ASSETS-CONTINUE

1

• Under revocable transfer there may not be actual re transfer or there is no need to exercise the power to re- assume the ownership of income or assets. Even if the condition is mentioned about re –transfer it will be treated as revocable transfer as decided in the case of Raghbir Singh (1965) 57 ITR 408 (SC).

2 • Even a clause to this effect is sufficient to make it

revocavble.

3 • CIT v/s. Jitendra Nath Mallick (1963) 50 I|TR 313

(Kol)

4 • The power of re-transfer must be to the transferor

only and not to any other person. Jyotindrasinji v/s. S. I Tripathi and Ors (1993) 201 ITR 611(SC)

IRREVOCABLE TRANSFER OF ASSETS-CONTINUE

a A cinema actress was granted by the producer a picture in the form of her remuneration for acting in the films , she could use the picture up to a lmited duration and in a defined territory. She had transferred such rights in favor of the trust for certain beneficiaries. It was held that it was transfer of the assets and the income from exploitation cannot be included in the income of the actress. Ms. Subbulaxmi v/s/ CIT (1955) 28 ITR 561 (MAD)

TRANSFER IRREVOCABLE FOR A SPECIFIED PERIOD—SECTION 62

1 •Even there is revocable transfer of asset in certain

situations section 61 shall not be applicable.

2 • If the income arising to any person who is appointed

as a beneficiary under a trust and such trust is not revocable during the life time of the beneficiary .

3 •The transferor does not derive any benefit out of the

same transfer directly or indirectly.

TRANSFER IRREVOCABLE FOR A SPECIFIED PERIOD—SECTION 62

1 •However the income shall again be

included in then hands of the transferor when the power to revoke arises.

2 •It means that when the transferor re

takes the income by revocation of the same it shall be included again in the income of the transferor.

INCOME OF INDIVIDUAL TO INCLUDE INCOME OF SPOUSE: SECTION 64(I)(II)

If the individual has a substantial interest in any concern and such concern pays any salary, commission, fees, or any other remuneration to the spouse then salary , interest, remuneration paid to the spouse shall be added in the hands of that individual having substantial interest.2 The salary, commission, remuneration may be paid in cash or in kind to the spouse by the concern.

INCOME OF INDIVIDUAL TO INCLUDE INCOME OF SPOUSE: (CONTINUE)

What is the meaning of substantial interest

1 • An individual shall be demed to have a substantial

interest in a concern in which he is having 20% or more of voting power or profit in that concern –As per Clause II (i) & (ii) of section 64.

2 • Meaning of concern : It includes any Company, firm

or HUF etc. U/s. Explanation 3(a) to section 2(22) of Income Tax Act.

EXAMPLE OF REMUNERATION PAID TO SPOUSE FROM THE CONCERN:

Mr. P is a partner of a partnership concern and is entitled to 50% share of the profit of the firm. Mrs. P is employed as a manager , however she does not have any technical or professional qualification , She gets a salary of Rs.10,000 P.m..In this case the taxable salary of Mrs. P will be clubbed (added) with the total income of Mr. P under the Head “Income from Salaries”

Spouse Meaning: For Husband spouse is his wife For Wife spouse is her Husband

EXAMPLE

Mrs. T is a partner of a partnership concern and is entitled to 50% share of the profit of the firm. Mr. T is employed as a manager and is receiving the salary of Rs.20,000 p.m. on account of his technical qualification. In this case the taxable salary of Mr. T will not be clubbed (added) with the total income of Mrs. T as Mr. T is her spouse and he possesses technical qualification.

INCOME OF INDIVIDUAL TO INCLUDE INCOME OF SPOUSE: (CONTINUE)

1 •Section 64(I)(ii) shall not apply to any

income arising to the spouse where the spouse possess technical or professional qualification.

2 •The income of the spouse is solely

attributable to the application of technical or professional knowledge and experience.

INCOME OF INDIVIDUAL TO INCLUDE INCOME OF SPOUSE SECTION 64 (I)(II)

1 • Qualification means being eligible for technical or professional work.

2 • A person can be said to be in possession of requisite technical

qualification when by virtue thereof he is eligible to perform that function.

3 • Similarly professional qualification must mean qualification which is

necessary for carrying on the particular profession.

4 • Technical or Professional qualification do not need any diploma or any

formal degree from a recognized body like university or an Institute. • Batta Kalyani v/s. CIT (1985) 154 ITR 59 (AP)

INCOME ARISING ON ACCOUNT ASSETS TRANSFERRED TO THE SPOUSE OTHERWISE THAN FOR ADEQUATE CONSIDERATION : SECTION 64 (I)(IV)

1 •If the assets are transferred to the spouse without

adequate consideration in that case any income arising on such assets shall be added in the income of the transferor u/s. 64(1)(iv) of the Income Tax Act. .

2 •However clubbing provisions shall not be applicable if

the house property is transferred u/s. 27(i) of the Income Tax Act.

INCOME ARISING ON ACCOUNT ASSETS TRANSFERRED TO THE SPOUSE OTHERWISE FOR ADEQUATE CONSIDERATION SHALL NOT BE APPLICABLE IN THE FOLLOWING SECTION 64(1)(IV)

If the transfer of asset is for adequate consideration. The transfer of asset to spouse is under an agreement to live apart. If the relationship of husband and wife does note exit either at the time of transfer of the asset or at the time of accrual of the income. Phillip John Plasket Thomas v/s. CIT (1963) 49 ITR 97 (SC)

INCOME ARISING ON ACCOUNT ASSETS TRANSFERRED TO THE SPOUSE OTHERWISE FOR ADEQUATE CONSIDERATION SECTION 64(1)(IV) EXAMPLE :

Mr. K makes a gift to his fiancée (would be wife) , then the income arising on the amounts so gifted shall not be taxable in the hands of Mr. K, even after their marriage as the relationship of husband and wife does not exist at the time of making the gift.

INCOME ARISING ON ACCOUNT ASSETS TRANSFERRED TO THE SPOUSE OTHERWISE FOR ADEQUATE CONSIDERATION 64(1)(IV) EXAMPLE :

Mr. L makes a gift to his wife and later on divorces his wife , the income arising after the divorce shall not be clubbed . Note : Natural love and affection is a good consideration but that cannot be treated as an adequate consideration for the purpose of section 64(1)(iv) as it was held in Tulsidas Kilachand v/s. CIT (1961) 42 ITR 1 (SC)

INCOME ARISING ON ACCOUNT ASSETS TRANSFERRED TO THE SPOUSE OTHERWISE FOR ADEQUATE CONSIDERATION SECTION 64(1)(IV) EXAMPLE :

Where the assessee made payments of premium on policy taken in the name of his wife , the maturity proceeds of the Life Insurance policy were invested by the wife, the income earned thereon in the name of the wife, shall be clubbed in the hands of the husband. Damodar K Shah V/s. CIT 2001-119 Taxman 882 Guj

INCOME ARISING ON ACCOUNT ASSETS TRANSFERRED TO THE SPOUSE OTHERWISE FOR ADEQUATE CONSIDERATION- SECTION 64(1)(IV) EXAMPLE

Income on assets transferred by the non resident to his wife shall be clubbed in the hands of the husband if the income on such assets accrues or received in India. CIT V/s. F.Y. Khambati (1986) 159 ITR 203 (Mum)

ASSETS TRANSFERRED OUT OF IDADEQUATE CONSIDERATION64(1)(IV)

If the assets transferred are transferred to spouse for inadequate consideration in that case the proportionate amount of income which is attributable to inadequate consideration shall be added to the income of the transferor.

ASSETS TRANSFERRED OUT OF IDADEQUATE CONSIDERATION64(1)(IV) EXAMPLE Example Mr X transfers a piece of land worth Rs.1,50,000 to his wife for Rs.1,00,000 only. She earns income from letting out of this piece of land and earns Rs.30,000 P.a. . In this case the inadequate consideration is Rs.50,000 (Rs.15,0000 less Rs.1,00,000). Therefore 30,000 x 50,000 /150,000 = RS.10,000 will be added in the hands of the transferor. Case law: Patwardhan (H.N) v/s. CIT (1970) 76 ITR 279(Bom) CIT V/s. Amarchand B Doshi (1992) 194 ITR 56(Bom)

ASSETS TRANSFERRED OUT OF IDADEQUATE CONSIDERATION64(1)(IV) EXAMPLE

1. If pin money is given to the spouse and out of that the spouse purchases the property in that case the income arising from the property shall not attract clubbing provisions .

2. Case law : R.Dalmia v/s. CIT (1982) 133 ITR 169 (Del)

3. What is pin money: Pin money is the small amount given to fulfill the usual basic needs of the person.

ASSETS TRANSFERRED OUT OF IDADEQUATE CONSIDERATION64(1)(IV) EVEN IF TRANSFERRED ASSETS HAVE CHANGED THE SHAPE AND IDENTIFICATION THEN ALSO CLUBBING PROVISIONS SHALL BE APPLICABLE. EXAMPLE:

Mr. H has given shares as a gift to his wife worth Rs.15,00,000. After some time she sells the shares and purchases the house . Subsequently the house is put on rent. The rental income from this changed asset in the form of the house shall be added (clubbed) in the hands of the husband . Case law : CIT V/s. Smt.Pelleti Sridevamma (1995) 216 ITR 826 (SC)

ASSETS TRANSFERRED TO SON’S WIFE OTHERWISE THAN ADEQUATE CONSIDERATION SECTION 64(1)(VI)

As per section 64(1)(vi) any income which arises from assets transferred directly or indirectly by an individual to son’s wife after 1.6.1973 , otherwise than for adequate consideration, such income shall be included in the hands of the transferor.

Mr A Gifts bonds issued by Reserve Bank Of India whose face value is Rs.1,00,000 to his son’s wife. .These bonds carry interest of 8% P.A. Even though the yearly interest of Rs.8,000 is received by his son’s wife the amount of RS.8,000 shall be included (added) or (clubbed) in the income of Mr. A who is her father in law. In the hands of father in law it will be taxable under the head “income from other sources”.

Example :

Income generated from assets transferred directly or indirectly otherwise the for adequate consideration to the person by the individual for the immediate or deferred benefit of spouse.

Assets transferred to other persons for benefit of spouse- section 64(1)(vii)

Income generated from assets transferred directly or indirectly otherwise than for adequate consideration to the person by the individual for the immediate or deferred benefit of son’s wife.

Assets transferred to other persons for benefit of son’s wife section 64(1)(viii)

INCOME OF MINOR CHILD- SECTION 64(1A)

In computing the total income of any individual, there shall be included all such incomes arising or accruing to the minor child.

Who is a child under income tax? Under section2(15B), child in relation to an individual includes a step child and adopted child. Which means person of any age can be regarded as a child to the individual

However, incase of section 64(1A) ONLY MINOR CHILD’S INCOME SHALL BE CLUBBED.

INCOME OF MINOR CHILD- SECTION 64(1A)..CONTD

The Following incomes arising to the minor shall not be clubbed, as per first proviso of section 64(1A).

Under, section 64(1A)(a)- manual work done by him.

Activity involving application of his skill, talent or specialized knowledge and experience.

If the Minor child is suffering from any disability specified under section 80 U .

INCOME OF MINOR CHILD- SECTION 64(1A)..CONTD

Where the marriage of parents subsists, the income of minor child shall be included with the income of that parent whose income is greater.

Once, it is included in one parent then it will not be changed in future unless assessing officer has reasons to do so.

Minor shall be entitled for deduction under section10 (32) for amounting to rupees 1500 each.

The income arising to the minor married daughter shall also be clubbed.

Even if minors income from manual work or from any activity is not clubbed, then also the income earned on investments made by the minor on such income shall be clubbed.

INCOME FROM HUF-SECTION 64(2)

Where a member of a HUF has converted or transferred self acquired property for inadequate consideration, the income shall be added in the hands of the transferor member.

INCOME FROM HUF-SECTION 64(2)

Clubbing provision under section 64(2) are not attracted if the self acquired property is not given under the gift but has been let out. Shammi Kapoor Vs ITO. (1982) 8 Taxman 112 ( Bombay tribunal)

OTHER CASE LAWS

Income arising on transferred assets alone shall be clubbed. However, any income earned on such income invested cannot be clubbed.

Mr. X transferred his flat to his wife, who derived rental income therefrom. Such rental income was assessed in husbands income. Wife invested such rental income in fixed deposits and derived interest income. Such interest cannot be clubbed in the case of the husband. CIT Vs M.S.S.Rajan(2001) 252 ITR 126 ( MAD)

Income arising on transferred assets alone shall be clubbed. However, any income earned on such income invested cannot be clubbed.

OTHER CASE LOWS-CONTD..

For the purpose of clubbing it is not essential that the assesse’s own income excluding such income to be clubbed must exceed the taxable income. Even if the assesse’s income is below taxable and after adding other persons income it becomes more than the threshold limits the clubbing provisions shall be applicable. Sivalal Sogaji vs. ITO (1982) 140 ITR 39 (A.P)

The income will have to be first determined under appropriate head of income and included in the total income of the individual. Deduction under chapter VI-A is permissable in the hands of the tranferor. CIT Vs Amar Chand Jalan (1986) 160 ITR 805 (Bom). CIT Vs Abhay.L.Khatan(1985) 162 ITR 648(BOM)

LEVY AND COLLECTION OF TAX- SECTION 65

According to section 65 , wherever clubbing provision is attracted, the person in whose name asset stands shall be liable on the service of a notice of demand to pay the tax levied on the assessee.

Where, any such asset is held jointly by more than one person, they shall be jointly liable to pay tax in respect of income from such assets.

LEVY AND COLLECTION OF TAX- SECTION 65- CONTD..EXAMPLE

The tax liability of Mr. P for assessment year 2013-14 is Rs 8 lakhs which includes Rs. 2 lakhs being tax on income clubbed from Mrs. P. Incase of income tax demand for Rs. 8 lakhs as per section 65 Mrs. P shall be liable to pay Rs. 2 lakhs being the amount of tax arising on account of clubbing provision.

CAN THE NEGATIVE INCOME BE CLUBBED?

If income is negative and clubbing provisions are applicable in that case the negative income shall be clubbed.

PROBLEMS

On April, 8 1973, Mr. A had transferred shares in a foreign company to Mrs.K who is his daughter in law. During the previous year 2012-13, Mrs. K has received dividend of Rs. 3 lakhs from the foreign company. Discuss the clubbing provisions.

SOLUTION

Shares in foreign company were transferred before 1st june, 1973 to daughter-in-law without consideration. Therefore, clubbing provisions are not applicable on that. However, dividend income received during assessment year 2013-14 shall be taxable in the hands of Mrs. K.

PROBLEMS

On April, 8 1993, Mr. K had transferred Debentures of Siemens Ltd. To Mrs. K without any consideration. During the previous year 2012-13 Mrs. K had received interest of Rs.3,50,000 from Siemens Ltd. Every year Mrs. K deposits interest income in fixed deposit with TCS ltd and during 2012-13 she received fixed deposit interest of Rs. 30000 from TCS. Discuss.

SOLUTION

Debentures of Siemens Ltd were transferred in 1993 by Mr. K to Mrs. K without consideration. Interest income of Rs. 3,50,000 will be included and taxable in the hands of Mr. K. However, Interest on debenture is deposited in fixed deposit with TCS shall not be included in the hands of Mr. K. The same shall be included in the hands of Mrs. K.

PROBLEMS

•Minor son of Mr. V has a fixed deposit of Rs 4 lakhs in SBI at 7 percent interest.

•Minor daughter of Mr. V owns a business. She incurred loss of Rs. 70000 in that.

• Income from House property of Mr. V is Rs. 12,00,000.

•Mr. V is entitled for deduction of Rs. 1,00,000 under section 80C.

Mr. V submits the

following information for the year ended 31st

march, 2013.

SOLUTION

Computation of Income in the hands of Mr. V for assessment year 2013-14. 1. Income from House Property 12,00,000 2. Business income(minor daughter) (-)70,000 3. Income from other sources 28,000 ( Interest on fixed deposit-minor son) 4. Less: deduction under section 10(32) 1,500 26,500 Gross Total Income 11,56,500 5. Less: Deduction under section 80C (1,00,000) Total taxable income 10,56,000

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