Clubbing of Income
Income from other persons included in Assessee’s Total Income
Normally an assessee is taxed in respect of his own income only, but U/s 60 to 64 of the Act an assessee may be taxed in respect of income which legally belongs to someone else. Inclusion of an income of one person in the income of another person is known as “clubbing of Income”.
The following Incomes or assets are clubbed:-
0 Transfer of an income without transfer of assets (Sec. 60):-
1- Such income is to be clubbed in the income of transferor;
2- it is immaterial whether transfer is revocable or irrevocable and whether it is made before the commencement of this Act or after commencement of this Act.
3- Example:- Mr. A, owns 1,000, 12% debentures of Rs. 100/- each in x ltd. . Interest on such debenture of Rs. 12000/- is transferred by Mr. A to Mr. B, his friend, without transferring theownership of the debentures. Rs. 12000/- being debenture interest as received by B will be clubbed in the hands of Mr. A U/s 60.
0 Income arising from revocable transfer of assets (Sec. 61)
1- Is to be clubbed in the total income of transferor;
2- As per Sec.63 transfer is deemed to be revocable, Where the ownership can be taken back
3- The clubbing provision will operate even if only part of income of the transferred asset had been applied for the benefit of the transferor. Once the transfer is revocable, the entire income from the transferred asset is includible in the total income of the transferor.
4- Exception where clubbing provisions are not attracted even in case of revocable transfer (Sec. 62) by the transferor;
a- Transfer is not revocable during the life time of the beneficiary or the transferee provided that transferor derives no direct or indirect benefit from such income.
b- Transfer made before April 1st years.
0 Clubbing of Income arising to spouse :-
• Remuneration of spouse[Sec.64(1)(ii)]:-
a- The taxpayer is an individual;
b- He/she has a substantial interest in the concern;
c- Spouse of the taxpayer is employed in the above mentioned concern;
d- Spouse is employed in the concern without any technical and professional knowledge or
e- Where both husband and wife have substantial interest in the concern, such income will experience. Income to be clubbed in the hands of individual is limited to salary, commission, fees, or any other form of remuneration received by the spouse, directly or indirectly, whether in cash or kind, from a concern in which individual has a substantial interest. be clubbed in the hands of spouse whose total income, excluding such income is higher.
f- Where such income is clubbed in the total income of either spouse, income arising succeeding year shall not be clubbed in the total income of the other spouse unless Assessing Officer is satisfied, if it is necessary to do so.
Substantial Interest:-
a- If an individual beneficially holds (individually or along with his relatives) 20% or more of equity shares in a Company at any time during the previous year.
b- If individual entitled to 20% profit in a concern (individually or along with his relatives at any time during the previous year.
The term relative means husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
• Transfer of an income earning Assets, other than a House Property to spouse, without adequate consideration[Sec. 64(1)(iv):-
1- there is a transfer of an asset (other than House Property), directly or indirectly, from one spouse to other, any income arising to the transferee from the transferred assets either shall be included in the total income of transferor.
2- In case of transfer of House Property, without adequate consideration, the transferor shall be deemed to be the owner of house property and its annual value shall be taxed in his hands.
3- Income from accretion of transferred assets is not to be clubbed with the income of the transferor.
4- Where transferred Assets are invested by the transferee in the business, proportionate income arising from such investment is to be clubbed in the total income of the transferor. Where investment is in the nature of capital contribution, proportionate interest on capital will be clubbed with the income of the transferor. Such proportion is to be clubbed in the income of transferor.
5- Income earned by investing such income is not to be clubbed with the income of the transferor.
a- Natural love and affection do not constitute adequate consideration;
b- Assets are transferred before marriage;
c- Assets are transferred in connection with an agreement to live apart;
d- On the date of accrual of income, transferee is not the Spouse of the transferor;
e- If property is acquired by Spouse out of pin money.
• Transfer of an asset for the benefit of spouse [Sec.64(1)(vii):-
All income arising directly or indirectly to any persons or association of persons, from the asset transferred, directly or indirectly, without adequate consideration is includible in the income of the transferor to the extent such income is used by the transferee for the immediate or deferred benefit of the transferor’s spouse.
• Transfer of an income earning asset by the Assessee to any person for the benefit of son’s wife[Sec. 64(1)(viii):-
All income arising directly or indirectly to any persons or association of persons, from the asset transferred, directly or indirectly, without adequate consideration is includible in the income of the transferor to the extent such income is used by the transferee for the immediate or deferred benefit of son’s wife.
0 Clubbing of minor’s income [Sec. 64(1A) :-
The income of a minor child shall be clubbed in the income of that parent, whose income other than minor child’s income is higher. if the marriage of parents does not subsist (in case of divorce or separation of parents or in case of death of either of the parents), then income of minor child shall be clubbed with the income of that parent who maintains the child. However, an income of a minor child shall not be clubbed in the following two situations (exceptions):-
a- An income earned by that minor child by way of doing any manual work or by way of doing
b- Any income of minor child suffering from a disability of a nature specified in section 80U of If a minor child acquires an asset, out of such non clubbable income and earns any income out of that asset, then such income shall be clubbed in the hands of either of his/her parents in the way discussed above for example:- if minor child is TV serial artist earns Rs. 10 lacs, which is not clubbed in the hands of parents as it is earned by that minor child by way of applying skill, talent etc. of his/ her own but 12% debentures are acquired by that minor child out of those Rs. 10 Lacs, then interest on such debenture is liable to be clubbed, as debenture interest is not earned out of applying skill or talent, knowledge or experience of that minor child.
Exemption U/s 10(32) upto a maximum of Rs. 1500/- per annum per minor child, shall be available to that parent in whose hands the income of minor child is being clubbed. The minor child shall include adopted child as well as a step child, but not an illegal child or a child resulting out of illegal marriage.
0 Transfer of as asset by a member of an HUF to HUF [Sec.64(2)]:-
When an income earning asset belonging to any member of Hindu undivided Family, is transferred by that member to HUF, whether directly or indirectly, without adequate consideration, then income generated out of that asset will be clubbed in the hands of that member of the family.
0 Income includes loss also.
0 All deductions under Chpater VIA (U/s 80C to 80U) shall be available on Gross Total Income computed after clubbing all the clubbable incomes.
0 Liability of person in respect of income included in the income of another person [Sec. 65]:-
Sec. 61 to 64 provide for clubbing of income of one person in the hands of other person in circumstances specified therein. However, service of notice of demand (in respect of tax on such income) may be made upon the person to whom such asset is transferred (i.e. the transferee). In such case transferee is liable to pay that portion of tax levied on the transferor of which is attributable to the income so clubbed.
0 In case of cross transfer:-
In case of cross transfer also, the income from the assets transferred would be assessed in the hands of the deemed transferor if the transfers are so intimately connected as to form part of single transaction, and each transaction constitutes consideration for the other by being mutual or otherwise.
For example:- A making gift of Rs. 50000/- to the wife of his brother Mr B for purchase of a house by her and simultaneously gift by B to A’s minor son of shares in a foreign Company worth Rs. 50000/- owned by him), in the instant case transfer have been made by A and B to persons who are not their spouse or minor child so as to circumvent the provisions of this section, showing that such transfer constituted consideration for each other. an activity involving application of skill, talent, specialized knowledge or experience or the Income Tax Act.
