Clubbing of Income

Updated upto A.Y. 2018-19

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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 of 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, etc.

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.

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 above provision holds good –

  • whether the transfer is revocable or not; or
  • whether the transaction is effected before or after the commencement of this Act.

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

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.

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 –

  1. A transfer by way of creation of a trust which is irrevocable during the lifetime of the beneficiary;
  2. Any transfer which is irrevocable during the lifetime of the transferee; or
  3. 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.

As per sec. 62(2), income, in any of the above exceptional case, shall be taxable as under:

SituationTaxable in hands of
When the power to revoke the transfer arises (whether such power is exercised or not)Transferor
When the power to revoke the transfer does not ariseTransferee

Remuneration to Spouse [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.

Substantial interest

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

In case of companyHe 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 concernHe 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.
Relative here includes spouse, brother or sister or any lineal ascendant or descendant of that individual [Sec. 2(41)].

Any other income, which is not specified above, even if it accrues to spouse from the concern in which the assessee has substantial interest, shall not be clubbed.

Exception

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

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 or professional qualification acquired by obtaining a certificate, diploma or degree or in any other form, from a recognised body like University or Institute. It can be treated as fitness to do a job or to undertake an occupation requiring intellectual skill and also includes technicality generated through experience, skill etc. Technical qualification includes specialization in a particular subject (e.g. accountancy, management, commerce, science, technology etc.).

Where both, husband and wife, have substantial interest in a concern

Also Read  Profits & Gains of Business or Profession (Part III)

When both, husband and wife, have substantial interest in a concern and both are drawing remuneration from that concern without possessing any specific qualification.

Remuneration from such concern will be included in the total income of husband or wife, whose total income excluding such remuneration, is higher.

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.

When both, husband and wife, are not having any other income

When both, husband and wife, have substantial interest in a concern and both are drawing remuneration from that concern without possessing any specific qualification and both are not having any other income apart from the said remuneration.

Remuneration from such concern will not be clubbed.

Computation of salary, fee, commission, remuneration etc

Income prescribed in sec. 64(1)(ii) shall be first computed (allowing all deductions from the respective income) in the hands of recipient and thereafter net income shall be clubbed in the hands of the other spouse. E.g. salary, remuneration, etc shall be first calculated as per provisions of sec. 15 to 17, in the hands of recipient and thereafter, net taxable salary shall be clubbed in the hands of the other spouse.

Income from asset transferred to spouse [Sec. 64(1)(iv) & (vii)]

Asset transferred 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.

In the following cases clubbing provision shall not be attracted on transfer of property to spouse:

  • When such transfer is for adequate consideration; or
  • The transfer is under an agreement to live apart; or
  • Where the asset transferred is house property (as such transfer is governed by Sec. 27)

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).

Marital relationship

Marital relationship The relationship of husband and wife must subsist on the date of transfer of assets as well as on the date of accrual of income i.e. no clubbing provision shall be attracted if:

  • transfer is made before marriage; or
  • on the date of accrual of income, transferee is not the spouse of transferor.

Pin money

Pin money Income from assets acquired by spouse out of pin money or household savings is not subject to clubbing

Sec. 27(i) -vs.- Sec. 64(1)(iv) in case of transfer of house property

Where such transferred asset is a house property then the same will not be covered by sec. 64(1)(iv) but governed by sec. 27(i) [Deemed owner in case of Income from house property].

Nature of consideration

Consideration must be measurable in terms of money. Therefore natural love and affection, spiritual or religious benefit cannot be treated as adequate consideration.

Inadequate consideration

If property has been transferred to spouse or son’s wife directly or indirectly for a consideration which is inadequate, then only the part of income which is referable to transfer for inadequate consideration, shall be clubbed.

Form of Asset

The asset so transferred need not remain in its original form.

Accretion of asset

Accretion of asset Income arising to the transferee from the accretion of such property shall not be clubbed in the total income of the transferor.

Capital Gain

Capital gain Profit on sale of property, which is gifted to spouse or son’s wife, shall be clubbed in hands of the transferor.

Income on Income

Income arising to the transferee from the accumulated income of such property is not to be clubbed.

Asset transferred under a trust

Where an asset is transferred under a trust for the benefit of spouse or son’s wife the provision of sec. 64(1) shall be applicable. It does not make any difference even if the assessee appoints himself as a trustee.

Also Read  Dividend

Treatment after death

After the death of either husband or wife clubbing provision of Sec. 64(1)(iv) will not be attracted, as a widow or widower is not a spouse.

Cross Gift

If the Assessing Officer is convinced that some gifts are inter-related with each other in a circuitous way, and there is an intention to evade provisions of sec. 64(1), he may apply the provisions of sec. 64(1).

Asset invested in the business

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

If invested in Proprietary business

Income of such business*

Value of such assets as on the 1st day of the P.Y.

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

If invested in Partnership business

Interest on capital*

Value of such assets as on the 1st day of the P.Y.

Total investment in the firm by the transferee as on the same day

Profit from the firm shall not be clubbed as it is exempted u/s 10(2A).

Income from assets transferred to son’s wife [Sec. 64(1)(vi) & (viii)]

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 31.5.1973), 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 31.5.1973), 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). See notes given below sec. 64(1)(iv)

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.

Exceptions

The above 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.

Exemption [Sec. 10(32)]

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:

  1. 1,500; or
  2. Income so clubbed
Such exemption shall be available for each child (irrespective of the number of children) whose income is so clubbed.

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.

Income of the minor child shall be clubbed in hands of parent in the following manner –

Relation between parentsTax treatment
When marriage subsistsWith the income of that parent whose total income excluding this income is higher
When marriage does not subsistWith the income of that parent who maintains the minor child in the previous year

Clubbing in subsequent year(s)

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.

Child

Child in relation to an individual includes a stepchild & adopted child but does not include a grandchild [Sec. 2(15B)]

Income of married daughter

Income of married daughter Though sec. 27(i) [Deemed owner of house property] specifically excludes married daughter but sec. 64(1A) does not have this exception, hence income arising to minor married daughter shall be clubbed in the hands of parent.

When neither of the parent is alive

Also Read  Presentation on Clubbing of Income

Income of minor child cannot be added with the income of the guardian if the guardian is not the parent of the minor.

Capital gain

Capital gain Profit on sale of the property, which is gifted to minor child, shall be clubbed in hands of parent as per the provision of sec. 64(1A)

Income of the year when minor attains majority

Treatment of income when child attains the age of majority and afterwards

Income arose to the periodClubbing provision
When child does not attain age of majoritySuch income shall be clubbed in hands of parent
When child attains the age of majority and afterwardsSuch income shall not be clubbed and taxable in hands of assessee himself (i.e. child)

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.

Tax-Treatment

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]

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

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.

  1. Such liability cannot exceed the value of assets so transferred.
  2. Where any such asset is held jointly by more than one person, they shall be jointly and severally liable to pay the tax which is attributable to the income from the assets so included.

Important Notes

TDS

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].

Advance Tax

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.

Mode of Clubbing cannot be changed for the benefit of the revenue

Unless there are compelling circumstances the modes of clubbing cannot be changed by the ITO. Merely, for the benefit of the revenue such mode cannot be changed.

Computation of income to be clubbed

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.

Clubbing Head

Income shall be, first, computed in the hands of recipient and then clubbing shall be made head wise.

Deduction under chapter VIA

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.

Clubbing of negative income

As per explanation 2 to sec. 64, clubbing of income includes clubbing of negative income i.e. where an income is liable to be clubbed, loss from the same source shall also be clubbed. Clubbing provisions are mandatory and shall be applied even in those cases where the application of such provision causes loss of revenue to the Income tax department.