TL Clubbing

Clubbing of Income

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). These provisions have been enacted to counteract the tendency on the part of the taxpayers to dispose off their income or income generating assets to escape tax liability.

Section

Particulars

Notes

Transfer of income without transferring assets [Sec. 60]

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 transfer may be revocable or irrevocable.

Revocable transfer [Sec. 61]

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.

Revocable transfer [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.

Exceptions [Sec. 62]
The provision of sec. 61 shall not apply to an income arising to a person by virtue of -

A transfer by way of creation of a trust which is irrevocable during the lifetime of the beneficiary;
Any transfer which is irrevocable during the lifetime of the transferee; or
Any transfer made before 1.4.61, which is not revocable for a period exceeding 6 years.

In any case, the transferor must not derive any benefit (directly or indirectly) from such income. However, all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.

Remuneration to spouse from a concern in which the assessee has substantial interest [Sec. 64(1)(ii)]

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 cash or in kind) from a concern in which such individual has 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 (or entitled to not less than 20% of the profits of such concern) 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 (it includes spouse, brother or sister or any lineal ascendant or descendant of that individual)

When both, husband and wife, have substantial interest in a concern and both are drawing remuneration from that concern without possessing any specific qualification, then remuneration from such concern will be included in the total income of husband or wife, whose total income excluding such remuneration, is higher. Further, where such income is once included in the total income of either of the spouse, then such income arising in any subsequent years cannot be included in the total income of the other spouse unless the Assessing Officer is satisfied that it is necessary to do so. However, Assessing Officer will do so only after giving to the other spouse an opportunity of being heard.

Income generated through technical or professional qualification of the spouse is not to be clubbed in the total income of the individual.

Assets transfer to Spouse [Sec. 64(1)(iv)]

In computing the total income of an individual [subject to the provisions of sec. 27(i)], income arising from assets transferred to spouse without adequate consideration, shall be included in the income of that individual.

The relationship must subsist on the date of transfer of assets as well as on the date of accrual of income.
The asset so transferred need not remain in its original form.
Income arising to the transferee from the accretion of such property shall not be clubbed in the total income of the transferor
Income arising to the transferee from the accumulated income of such property is not to be clubbed.

If assets so transferred, is invested in business then tax treatment shall be as under:

Invested in

Income to be clubbed

Proprietary

Income of such business*Value of such assets on 1st day of the P.Y.

Total investment in the business by the transferee on the same day

Partnership

Interest on capital * Value of such assets on the 1st day of the P.Y.

Total investment in the business by the transferee on the same day

Assets transferred to AOP or other person for the benefit of spouse [Sec. 64(1)(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).

Transfer to son's wife [Sec. 64(1)(vi)]

In computing the total income of an individual, income arising (directly or indirectly) from assets transferred to son's 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.

Transfer to AOP or other person for the benefit of son's wife [Sec. 64(1)(viii)]

In case an asset is transferred to other person or an association of persons (after 31.5.73), otherwise than for adequate consideration, for immediate or deferred benefit of son??s 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 son's wife).

Income of minor child [Sec. 64(1A)]

Income of a minor 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 of either parent, then any such 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.

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.
The clubbing provision shall not apply in the following cases -
1. The income arises or accrues to the minor child due to any manual work done by him; or
2. The income arises or accrues to the minor child due to his skill, talent, specialised knowledge or experience; or
3. The minor child is suffering from any disability of nature specified u/s 80U.
In case income of a minor child is clubbed in hands of parent, 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)]

An individual, being a member of an HUF, has converted1 a property after 31/12/1969 (being self acquired asset of the individual) into property of HUF of which he is a member, other wise than for adequate consideration, then 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.

Notes

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.
Income shall be, first, computed in the hands of recipient and then clubbing shall be made head wise.
If the clubbed income is eligible for deduction u/s 80C to 80U, then such deduction shall be allowed to the assessee in whose hands such income is clubbed.
Where an income is includible u/s 64 and tax has been deducted at source from such income, the credit of tax deducted at source shall be given to the person in whose hands the income is taxable [Sec. 199].
The advance tax paid by the income earner (say spouse or minor child) with reference to such income is not eligible for adjustment towards the tax liability of the individual in whose hands such income has been clubbed. In such case, it is open to the payer of advance tax (i.e. spouse or the minor child) to apply for refund of advance tax so paid.