Clubbing of Income

STUDY NOTE - 10
CLUBBING OF INCOME

This Study Note includes

• Clubbing provisions for inclusion in assessee’s income, income of some other

person

10.1 CLUBBING OF INCOME

Certain provisions are included in the act as anti tax avoidance measures. Provisions for inclusion in
assessee’s income, income of some other person, who is not at arm’s length, are a kind of such provisions.
Such provisions arrest tax leakage likely to result from certain transactions with relatives or diversion
of title without loosing control over the same, etc.

ENCOMPASS OF CLUBBING PROVISIONS

1 Clubbing of income where control over assets or Sections 60, 61,

income is retained while title is transferred 64(1)(iv),(vi),(vii),(viii)

2 Clubbing of income of relatives under certain Sections 64(ii)

circumstances.

3 Clubbing of income of minor child Section 64(1A)

TRANSFER OF ASSETS [ Sec. 60]

Where any person transfers income without transferring the ownership of the asset, such in-
come is taxable in the hands of the transferor. Such transfer may be revocable or irrevocable.
The provision applies irrespective of the time when the transfer has been made i.e. it may be
before or after the commencement of the Income-tax Act.
REVOCABLE TRANSFER OF ASSETS [Sec. 61]
Any income arising to any person by virtue of revocable transfer of assets is chargeable to tax
as the income of transferor. For this purpose, transfer may include any settlement or agree-
ment.
The transfer is said to be revocable if it contains any provision for the re-transfer of the whole
or any part of the income or assets to the transferor a right to reassume power over the whole or
any part of the income or assets.

154 Applied Direct Taxation

If any settlement contains a clause for forfeiture of rights of beneficiaries under certain circum-
stances, the settlement will be regarded as revocable – CIT v. Bhubaneshwar Kuer 53 ITR 195
(SC).
This section is, however, not applicable in the following cases-

(i) Where the income arises to any person by virtue of a transfer by any of the trust, which is
not revocable, during the lifetime of the beneficiary and, in case of any transfer, which is
not revocable, during lifetime of the transferee.

(ii) Where the income arises to any person by virtue of a transfer made before 1.4.1986, which
is not revocable for a period of six years or more. However, income will be chargeable to
tax as the income of the transferor as and when the power to revoke the transfer comes
into play.

Case Law:

Circumstances prevailing in each year must be looked into - In determining whether the settle-
ment is irrevocable for the requisite period, regard must be had to the effect of the settlement in
the light of the circumstances actually existing in each year of assessment - CIT v. Ratilal Nathalal
25 ITR 426.
IRREVOCABLE TRANSFER OF ASSETS FOR SPECIFIED PERIOD [Sec.62]
(1) The provisions of section 61 shall not apply to any income arising to any person by virtue
of a transfer—
(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in
the case of any other transfer, which is not revocable during the lifetime of the trans-
feree ; or
(ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding
six years :
Provided that the transferor derives no direct or indirect benefit from such income in
either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any person
by virtue of any such transfer shall be chargeable to income-tax as the income of the trans-
feror as and when the power to revoke the transfer arises, and shall then be included in his
total income.

Case Law:

In determining whether the settlement is irrevocable for the requisite period, regard must be
had to the effect of the settlement in the light of the circumstances actually existing in each year
of assessment - CIT v. Ratilal Nathalal 25 ITR 426.

Applied Direct Taxation 155

 Clubbing of Income

TRANSFER AND REVOCABLE TRANSFER DEFINED [Sec.63]

For the purposes of sections 60, 61 and 62 and of this section,—

(a) a transfer shall be deemed to be revocable if—
(i) it contains any provision for the re-transfer directly or indirectly of the whole or any
part of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly
over the whole or any part of the income or assets ;
(b) “transfer” includes any settlement, trust, covenant, agreement or arrangement

Case Laws:

The provision only contemplates cases where the settlor can lawfully reassume power over the
income or assets. A provision enabling the settlor to give directions to trustees to employ the
assets or funds of the trust in a particular manner or for a particular charitable object contem-
plated by the trust cannot be said to confer a right to reassume power within this provision.
Otherwise settlor can never name himself a sole trustee - CIT v. Jayantilal Amratlal 67 ITR 1.
The use of the word ‘indirectly’ does not seek to bring within the purview of section 63(a) cases
where the settlor was under the guise of a trust seeking to discharge his own liability. The
provision contemplates cases in which there is a provision for retransfer of the income or assets
and such provision is for retransfer directly or indirectly. It also contemplates cases where
there is a provision which confers a right upon the settlor to reassume power over the income
or assets directly or indirectly. It is the provision for retransfer directly or indirectly of income
or assets which brings the case within the provision. Cases in which there is a settlement but
there is no provision in the settlement deed for a right to reassume power do not fall under the
provision even if under the settlement the settlor obtains a benefit - CIT v. S. Raghbir Singh 57
ITR 408 .

REMUNERATION OF SPOUSE [Sec. 64(1)(ii)]

An individual assessee is chargeable to tax in respect of any remuneration received by the

spouse from a concern in which the individual has substantial interest. However, remunera-
tion which is solely attributable to technical or professional knowledge and experience of the
spouse, will not be clubbed. Where both the spouses have a substantial interest in the concern
and both are in receipt of the remuneration for such concern, such remuneration will be in-
cluded in the total income of the husband or wife whose total income excluding such remu-
neration is greater.

The individual is deemed to have substantial interest, if the beneficiary holds equity share
carrying not less than 20% voting power in the case of a company or is entitled to not less
than 20% of the profits, in any other concern, not being a company at time during the Previous
Year.

156 Applied Direct Taxation

INCOME FROM ASSETS TO SPOUSE [Sec. 64(1)(iv)]

Where an asset (other than House Property) is transferred by an individual to his or her spouse
directly or indirectly otherwise than for adequate consideration or in connection with an agree-
ment to live apart any income from such asset will be deemed to be the income of transferor.
However, this section is not applicable in the following cases—

(a) if assets are transferred before marriage.

(b) if assets are transferred for adequate consideration.
(c) if assets are transferred in connection with an agreement to live apart.
(d) if on the date of accrual of income, the transferee is not spouse of the transferor.
(e) if property is transferred by the Karta of HUF, gifting co-parcenary property to his wife.
(f) the property is acquired by the spouse out of the pin money (i.e., an allowance given to the
wife by her husband for her dress and usual household expenses).

INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE OR MINOR CHILD

[Sec. 64(1)(vi)]

If an individual directly or indirectly transfers the assets after 1.6.73 without adequate consid-
eration to son’s wife or son’s minor child (including son’s minor step child or son’s minor
adopted child), income arising from such assets will be included in the total income of the
transferor from the Assessment Year 1976-77 onwards.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE

OR MINOR CHILD [Sec. 64(1)(vii)]

Where an asset is transferred by individual, directly or indirectly, without adequate consider-

ation to a person or persons for the immediate or deferred benefits of his or her spouse, income
arising from the transferred assets will be included in the total income of the transferor to the
extent of such benefit. If no income is accrued out of the property transferred by an individual,
then nothing will be included in the income of the individual.

INCOME FROM ASSET TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S

WIFE [Sec. 64 (1)(viii)]

Where an asset is transferred by an individual, directly or indirectly, or after 1.6.73 without

adequate consideration to a person or an association of persons for the immediate or deferred
benefits of son’s wife, income arising directly or indirectly from transferred asset will be in-
cluded in the total income of the transferor to the extent of such benefit with effect from the
Assessment Year 1985-86.

Applied Direct Taxation 157

 Clubbing of Income

INCOME OF MINOR CHILD [Sec. 64(1A)]

In computing the total income of any individual, there shall be included all such income as
arises or accrues to his minor child. However, income of the following types will not be in-
cluded in the total income of the individual where income arises or accrues to the minor child
on account of any—

(a) manual work done by him; or

(b) activity involving application of his skill, talent or specialised knowledge and experience.

CONVERSION OF SELF-ACQUIRED PROPERTY INTO JOINT FAMILY AND SUBSE-

QUENT PARTITION [Sec. 64(2)]

Where a member of a HUF has converted his self-acquired property into joint family property
after 21.12.1969, income arising from the converted property will be dealt with as follows :-

(i) For the Assessment Year 1976-77 onwards, the entire income from the converted property
is taxable as the income of the transferor.
(ii) If the converted property is subsequently partitioned amongst the members of the family,
the income derived from such converted property, as is receivable by the spouse and mi-
nor child of the transferor will be taxable in his hands.
[Refer to Problem No. 24 of Study Note 4]

INCOME FROM THE ACCRETION TO ASSETS

In the above mentioned cases the income arising to the transferee from the property trans-
ferred, is taxable in the hands of the transferor. However, income arising to the transferee from
such property is not includible in the total income of the transferor. Thus, if Mr. A transfers Rs.
60,000 to his wife without any adequate consideration and Mrs. A deposits the money in a
bank, the interest received from the bank on such deposits is taxable in the hands of Mr. A. If
however, Mrs. A purchases shares in a company from the accumulated interest, the dividend
received by Mrs. A, will be taxable in her hands and will not be clubbed with the income
of Mr. A.
CLUBBING OF NEGATIVE INCOME [EXPLANATION TO Sec. 64]
The income of a specified person is liable to be included in the total income of the individual in
the circumstances mentioned earlier. For the purposes of including income of the specified
person in the income of the individual, the word “income” includes a loss.

Case Laws:
Section 64 applies only to the computation of the total income of any individual. It does not
cover the case of a karta of a HUF gifting coparcenary property to his wife - L. Hirday Narain
v. ITO 78 ITR 26.

158 Applied Direct Taxation

Where the provision contemplates that the assets must be those of the husband, it does not
mean that the same assets should reach the wife. It may be that the assets, in the course of being
transferred, may be changed deliberately into assets of a like value of another person - CIT v.
Keshavji Morarji 66 ITR 142.

RECOVERY OF TAX U/S. 60 TO 64 [Sec. 65]

As per incomes belonging to ss. 60 to 64 to other persons are included in the total income of the
assessee in such cases, by virtue of sec. 65, the actual recipient of income is liable, on the service
of notice of demand, to pay the tax assessed in respect of income included in the income of
other person (where the Income Tax Officer so desires).

CLUBBING OF INCOME CHART:

Section Person Nature of income to be Person in whose Deduction

whose clubbed hands to be
income to be clubbed
clubbed
64(1)(ii) Spouse Salary, commission, fees, Spouse having —
remuneration from substantial interest
concern where in the concern
individual has
substantial interest. If
spouse possesses
technical/ professional
qualification and income
is solely attributable to
the application of such
knowledge, it is not to be
clubbed.
64(1)(iv) Spouse From assets transferred Transferor —
to spouse for inadequate
consideration other than
(i) transfer under an
agreement to live apart,
or (ii) an income from
house property
includible u/s. 27(i),
interest on
capital contributed in the
firm out of the
transferred funds will
however, be clubbed.

Applied Direct Taxation 159

Clubbing of Income

64(1)(vi) Son's wife From assets transferred Transferor —

(after 1-6-1973) to son’s wife
for inadequate
consideration. Interest on
capital contributed in the
firm out of the transferred
funds will however be
clubbed.
64(1)(vii) Spouse Income for immediate or Transferor —
deferred benefit of spouse
from assets transferred for
inadequate consideration to
an AOP or a person.
64(1)(viii) Son's wife Income for immediate or Transferor —
deferred benefit of son’s
wife from assets transferred
for inadequate
consideration (after 1-6-
1973) to an AOP or a
person.
64(1A) Minor child Any income i) 1st year: that Up to Rs.
(except a accruing/arising to a parent whose 1,500 per
minor child minor, except income from: income is higher. minor [S.
suffering from a) manual work, or Subsequent 10(32)]
any disability years; the same
mentioned in application of his skill, parent — unless
S. 80U) or talent, or specialised the AO is
b)
knowledge and satisfied that it
experience should be
clubbed with the
other parent.
ii) where marriage
does not subsist,
in the hands of
the custodian
parent.
64(2) HUF Income from property Transferor —
converted to HUF property
or transferred to HUF by an
individual (after 31-12-
1969) for inadequate
consideration. If converted
property is partitioned,
income from partitioned
property received by
spouse, is clubbed in the
hands of the individual.

160 Applied Direct Taxation