Sie sind auf Seite 1von 13

CLUBBING OF INCOME

INTRODUCTION

Generally, an assessee is taxed on income accruing to him only and he is not liable to tax for
income of another person. However, there are certain exceptions to the above rule (mentioned u/s
60 to 64). Sec. 60 to 64 deals with the provisions of clubbing of income, under which an assessee
may be taxed in respect of income accrued to other person, e.g. certain income minor child shall
be clubbed in the hands of his parents, income from asset transferred to spouse for inadequate
consideration shall be clubbed in the hands of the transferor, etc1. These provisions have been
enacted to counter act the tendency on the part of the taxpayers, to dispose of their income or
income generating assets to escape tax liability an assessee is taxed in respect of his own income.

1
Systematic Approach to Income Tax Service Tax & VAT, Dr. Girish Ahuja Dr. Ravi Gupta, 21st edition, Bharat Law
House Pvt. Ltd., New Delhi, p. 507.

1|Page
But sometimes in some exceptional circumstances this basic principle is deviated and the assessee
may be taxed in respect of income which legally belongs to somebody else. Earlier the taxpayers
made an attempt to reduce their tax liability by transferring their assets in favor of their family
members or by arranging their sources of income in such a way that tax incidence falls on others,
whereas benefits of income is derived by them . So to counteract such practices of tax avoidance,
necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act Hence, a
person is liable to pay tax on his own income as well as income belonging to others on fulfillment
of certain conditions. Inclusion of others Incomes in the income of the assessee is called Clubbing
of Income and the income which is so included is called Deemed Income2. It is as per the
provisions contained in Sections 60 to 64 of the Income Tax Act.

GENEAL RULES

The income, which is to be clubbed, shall be first computed in the hands of recipient and all
expenditure related to such income shall be allowed as per the respective provisions of the Act and
thereafter the net income shall be clubbed. Then Income shall be, first, computed in hands of
recipient and then clubbing shall be made head wise. E.g.: Bank interest of minor child shall be
clubbed under the head Income from other sources of the parent 3. If the clubbed income is
eligible for deduction then such deduction shall be allowed to the assessee in whose hands such
income is clubbed.

TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SECTION. 60) 4

Where an income is transferred without transferring the asset yielding such income, then income
so transferred shall be clubbed in the hands of the transferor. The above provision holds well

Whether the transfer is revocable or not; or

Whether the transaction is effected before or after the commencement of this Act; or

Where the transfer is made under a settlement, trust, covenant, agreement or arrangement

2
http://gicofindia.com/(last visited on 7-07-2016)
3
http://www.irdaindia.org/(last visited on 7-07-2016)
4
The income tax Act 1961

2|Page
If a person transfers income to another person, without transfer of the asset from which the income
arises, then such income shall be taxable in the hands of transferor.

Section 60 is applicable if the following conditions are satisfied:

1. The taxpayer owns an asset

2. The ownership of asset is not transferred by him.

3. The income from the asset is transferred to any person under a settlement, or agreement.

If the above conditions are satisfied, the income from the asset would be taxable in the hands of
the transferor Illustration: 5Amitabh Buchan owns Debentures worth Rs 1,000,000 of ABC Ltd.,
(annual) interest being Rs. 100,000. On April 1, 2005, he transfers interest income to Sharukh
Khan, his friend without transferring the ownership of these debentures. Although during 2005-
06, interest of Rs. 100,000 is received by Sharukh Khan, it is taxable in the hands of Amitabh
Bachan as per Section 60 6

REVOCABLE TRANSFER OF ASSETS (SECTION 61)7

If an assessee transfers an asset under a revocable transfer, then income generated from such asset,
shall be clubbed in the hands of the transferor. Transfer includes any settlement, trust, covenant,
agreement or arrangement [Sec. 63(b)]8. If there is revocable transfer of an asset by one person to
another, then Income from such assets shall be taxable in the hands of transferor Revocable
transfer means As per sec. 63(a), a transfer shall be deemed to be revocable if It contains any
provision for the retransfer (directly or indirectly) of any part or whole of the income/assets to the
transferor; or It, in any way, gives the transferor a right to re-assume power (directly or indirectly)
over any part or whole of the income/assets. The transferor of asset assumes a right to re-acquire
asset or income from such an asset, either whole or in parts at any time in future, during the lifetime

5
http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=FINA&schT=FIN&csId=53a83704-446e-4cfa-9d50-
aa879a7551fd&&pId=74ff37e3-476e-48c6-81a2-5f2ac4386354&sch=section 80d &title=Taxman - Direct Tax Laws(
last visited on 7-08-2010)
6
SYSTEMATIC APPROACH TO INCOME TAX SERVICE TAX AND VAT , Dr. Girish Ahuja Dr. Ravi Gupta , 21st edition ,
Bharat Law House Pvt. Ltd. , New Delhi, p. 521.
7
The income tax Act 1961
8
ibid

3|Page
of transferee. It also includes a transfer which gives a right to re-assume power of the income from
asset or asset during the lifetime of transferee. If the following conditions are satisfied section 61
will become applicable.

An asset is transferred under a revocable transfer,

The transfer for this purpose includes any settlement, or agreement

Then any income from such an asset is taxable in the hands of the transferor and not the
transferee (owner).

Note:-In the case of irrevocable transfer of asset, the income from such assets will be deemed to
be the income of the transferee (To whom the asset has been transferred), provided that the transfer
is not for the benefit of the spouse of the transferor. 9

Exceptions [Sec. 62]

As per sec. 62(1), the provision of sec. 61 shall not apply to an income arising to a person by virtue
of

(i) A transfer by way of creation of a trust which is irrevocable during the lifetime of the
beneficiary;
(ii) Any transfer which is irrevocable during the lifetime of the transferee; or
(iii) Any transfer made before 1.4.61, which is not revocable for a period exceeding 6 year. In
any case, the transferor must not derive any benefit (directly or indirectly) from such
income.

REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL


INTEREST [SECTION 64 (1) (ii)]10

The total income of an individual shall include income arising (directly or indirectly) to the spouse
by way of salary, commission, fees or any other remuneration (whether in case or in kind) from a
concern in which such individual has substantial interest. Stress: Any other income, which is not

9
The Income tax Act 1961
10
The income tax Act, 1961

4|Page
specified above, even if it accrues to spouse from the concern in which the assessee has substantial
interest, shall not be clubbed.

Substantial interest: An individual shall be deemed to have substantial interest in a concern if He


beneficially holds not less than 20% of its equity shares at any time during the previous year. Such
share may be held by the assessee or partly by assessee and partly by one or more of his relatives.
Other concern He is entitled to not less than 20% of the profits of such concern at any time during
the previous year. Such share of profit may be held by the assessee himself or together with his
relatives.

Concern Concern could be any form of business or professional concern. It could be a sole
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 less than 20 per cent voting power in the case of a company or is entitled to
not less than 20 percent of the profits in the case of a concern other than a company at any time
during the previous year. If the following conditions are fulfilled this section becomes applicable.

If spouse of an individual gets any salary, commission, fees etc. (remuneration) from a concern

The individual has a substantial interest in such a concern

The remuneration paid to the spouse is not due to technical or professional knowledge of the
spouse. Then such salary, commission, fees, etc. shall be considered as income of the individual
and not of the spouse.

Illustration - X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any
technical or professional qualification to justify the remuneration. In this case, salary income of
Mrs. X shall be taxable in the hands of X. When both husband and wife have substantial interest
Where both the husband and wife have a substantial interest in a concern and both are in receipt
of the remuneration from such concern both the remunerations will be included in the total income
of husband or wife whose total income, excluding such remuneration, is greater.

EXCEPTION

Income generated through technical or professional qualification of the spouse:

5|Page
If income to spouse (as stated above) has been generated due to his/her technical or professional
qualification, skill etc. then such income is not to be clubbed in the total income of the individual.

Technical or professional qualification:

The term technical or professional qualification must be construed in a liberal manner as the term
has not been defined in the Act. It does not necessarily relate to technical acquired by obtaining a
certificate, diploma or degree or in any other form, from a recognized body like University or
Institute. It can be treated as fitness to do a job or undertake an occupation requiring intellectual
skill and also included technically generated through experience, skill etc. Technical qualification
includes specialization in a particular subject 9e.g. accountancy, management, commerce, science,
technology etc.

INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SECTION 64(1) (IV)] 11

In computing the total income of an individual [subject to the provisions of sec, 27(I), income
arising from assets transferred (directly or indirectly) to spouse (otherwise than in connection with
an agreement to live apart) without adequate consideration, shall be included in the income of that
individual. Stress: In the following cases clubbing provision shall not be attracted on transfer of
property to spouse

When such transfer is for adequate consideration.

The transfer is under an agreement to live apart.

When any assets other than house property is transferred by an individual to his / her spouse
directly or indirectly, any income from such assets shall be deemed to be the income of transferor.
However clubbing shall not be done if:

1. Asset is sold for adequate consideration, or

2. If relationship of husband and wife does not exist either at the time of transfer or at the time of
accrual of income, or

3. Transfer is under an agreement to live apart.

11
The Income Tax Act, 1961

6|Page
12
If house property is transferred by an individual to the spouse otherwise than for adequate
consideration, then Sec. 64(1) (IV) shall not apply but Sec. 27 shall apply. Income from assets
transferred to spouse becomes taxable under provisions of section 64 (1) (IV) as per 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 asset is transferred without adequate consideration. Moreover there is no agreement to live
apart. If the above conditions are satisfied, any income from such asset shall be deemed to be the
income of the taxpayer who has transferred the asset.

Illustration - X transfers 500 debentures of IFCI to his wife without adequate consideration.
Interest income on these debentures will be included in the income of X. When Section 64(I) (IV)
is not applicable on this basis of the aforesaid discussion and judicial pronouncements, section 64
is not applicable in the following cases:

If assets are transferred before marriage.

If assets are transferred for adequate consideration.

If assets are transferred in connection with an agreement to live apart.

If on the date of accrual of income, transferee is not spouse of the transferor.

If property is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her
husband for her dress and usual household expenses). In the aforesaid five cases, income arising
from the transferred asset cannot be clubbed in the hands of the transferor

INCOME FROM ASSETS TRANSFERRED TO SONS WIFE [SEC. 64 (1) (VI)] 13

12
1st Discussion paper released on Direct Tax Code, http://finmin.nic.in/DTCode/Discussion Paper.pdf( last visited
on 6-07-2016 )
13
The Income Tax Act 1961

7|Page
In computing the total income of an individual, income arising [directly or indirectly] from assets
transferred to sons wife (after 31.5.73), without adequate consideration, shall be included in
income of that individual. Aforesaid relationship must subsist on the date of transfer of assets as
well as on the date of accrual of income. If an individual transfers any asset to his daughter-in-law,
without adequate consideration, income from the asset will be included in the total income of
transferor. The relationship of father-in-law (or mother-in-law) and daughter in law should subsist
both at the time of transfer of asset and at the time of accrual of income. Income from assets
transferred to sons wife attract the provisions of section 64 (1) (VI) as per conditions below:-

1. The taxpayer is an individual.

2. He/she has transferred an asset after May 31, 1973.

3. The asset is transferred to sons wife.

4. The asset is transferred without adequate consideration. In the case of such individuals, the
income from the asset is included in the income of the taxpayer who has transferred the asset.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF


SPOUSE [SEC. 64 (114) VII)]

In case an asset is transferred to other person or an association of persons, otherwise than for
adequate consideration, for immediate or deferred benefit of spouse, then income on asset so
transferred shall be clubbed in the hands of the transferor (to the extent income from such asset is
for the immediate or deferred benefit of his or her spouse).

When an individual is assessable in respect of income from assets transferred to a person for the
benefit of spouse [Sec. 64(1) (vii)]

1. The taxpayer is an individual.

2. He/she has transferred an asset.

3. The transfer may be direct or indirect.

4. The asset is transferred to a person or an association of persons

14
Ibid

8|Page
5. It is transferred for the immediate or deferred benefit of his/her spouse.

6. The transfer is without adequate consideration.

Income from assets transferred to a person for the benefit of spouse attract the provisions 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.

Asset is transferred for the benefit of spouse.

The transfer of asset is without adequate consideration. In case of such individuals income from
such an asset is taxable in the hands of the taxpayer who has transferred the asset.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF


SONS WIFE [SEC. 64 (1) (VIII)]15

In case an asset is transferred to other person or an association of persons (after 31.3.73), otherwise
than for adequate consideration, for immediate or deferred benefit of sons wife, then income on
asset so transferred shall be clubbed in the hands of the transferor (to the extent income from such
asset is for the immediate or deferred benefit of sons wife]

Income from assets transferred to a person for the benefit of sons wife attract the provisions of
section 64 (1) (vii) on clubbing of income. If,

1. The taxpayer is an individual.

2. He/she has transferred an asset after May 31, 1973.

3. The asset is transferred to any person or an association of persons.

4. The asset is transferred for the benefit of sons wife.

5. The asset is transferred without adequate consideration. In case of such individual, the income
from the asset is included in the income of the person who has transferred the asset.

15
The Income Tax Act 1961

9|Page
INCOME OF MINOR CHILD (SEC. 64 (1A) 16

Income of a major child shall be clubbed with income of the parent whose total income (excluding
this income) is higher. Where any such income is once clubbed with the total income arising in
any subsequent years shall not be clubbed with the total income of the other parent, unless the
Assessing Officer is satisfied. However, the Assessing Officer will do so only after giving an
opportunity of being heard to the other spouse. When marriage does not subsist between parents:
In case marital relationship does not subsist at the time of accrual of income to the minor child,
income of minor child shall be clubbed with income of that parent who maintains the minor child
during the previous year.

All income which arises or accrues to the minor child shall be clubbed in the income of his parent
(Sec. 64(1A), whose total income (excluding Minors income) is greater. However, in case parents
are separated, the income of minor will be included in the income of that parent who maintains the
minor child in the relevant previous year. Exemption to parent [Sec10 (32)] An individual shall be
entitled to exemption of Rs. 1,500 per annum(p.a.) in respect of each minor child if the income of
such minor as included under section 64 (1A) exceeds that amount. However if the income of any
minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be restricted to the income so
included in the total income of the individual.

EXCEPTION

Income of minor child on account of any manual work.

Income of minor child on account of any activity involving application of his skill, talent or
specialized knowledge and experience.

Income of minor child (from all sources) suffering from any disability of the nature specified
under section 80U.

Exemption [Sec. 10(32)]: 17

16
The Income Tax Act 1961
17
The income Tax Act 1961

10 | P a g e
In case income of a minor child is clubbed in hands of parent as per provision of sec. 64(1A), the
assessee (parent) can claim exemption of an amount being minimum of the following

a) Rs.1500; or

b) Income so clubbed.

CONVERSION OF SELF-ACQUIRED PROPERTY INTO HUF PROPERTY [SEC. 64(2)]

Applicability

An individual, being a member of an HUF, has converted a property after 31.12.1969 (being self-
acquired asset of the individual) into property of HUF of which he is a member, otherwise than for
adequate consideration.

For the purpose of computation of total income of such individual for any assessment year
commencing on or after 1.4.1971, the income derived from such converted property (property so
converted or transferred by individual to HUF) or any part thereof shall be deemed to arise to the
individual and not to the family.

Where the converted property has been the subject matter of partition (whether partial or total)
amongst the members of the family, the income derived from such converted property as is
received by the spouse shall be clubbed in the hands of transferor.

LIABILITY OF THE TRANSFEREE [SEC.65] 18

Applicability

Where, by reason of the

provisions contained in this Chapter; or


provisions contained in sec.27(I)

The income from any asset (or from membership in a firm) of a person other than the assessee, is
included in the total income of the assessee.

Impact

18
Ibid

11 | P a g e
On the service of a notice of demand by the Assessing Officer in this behalf, the person in whose
name such asset stands (or who is a member of the firm] shall be liable to pay that portion of the
tax levied on the assessee which is attributable to the income so included.

CONCLUSION

Since paying of tax is a mandatory provision. Direct taxation is a mandatory provision no one can
evade from taxation. Clubbing of income is the provision which has a historical background for
bringing this concept into legislation. So that no one can be exempted from paying tax. Generally
before income of other person was used as an exemption which in turn made India economically
backward? Since in impact of the issues. This legislation in income tax act has been included so
that no one is exempted from paying tax.

Since the objective of this paper is to briefly discuss the concept of clubbing of income. This is
being briefly discussed enough. The clubbing of income concept is the more smart legislation in
order to pay tax. This is considered to be a main legislation. The various sections of the clubbing
of income, need for clubbing of income are briefly discussed and analyses.

To conclude clubbing of income is the concept introduced by the legislation in which no one is
exempted from paying taxes by showing the transfer of shares or property, or spouses or minor
child. Therefore it is necessary for the government not to maintain any loophole in this provision.

Bibliography

BIBLIOGRAPHY

PRIMARY SOURCES

i. Income Tax Act, 1961.

SECONDARY SOURCES

BOOKS

Vinod K Singhania Kapil Singhania Direct Taxes Law & Practice (second
Edition,2016,taxmann publications)

12 | P a g e
M. M. Sury, Income Tax in Theory and Practice, (First Edition, 2002, New century publication)

Manoharan T.N Direct Tax Laws (third edition, 2013, snow white publications)

13 | P a g e