Solution for clubbing of income - acceptable or not ?

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Querist : Anonymous

Querist : Anonymous (Querist)

23 June 2015 Sir,

please, give your kind guidance in below mentioned case.

An amount was transferred by a husband to his wife’s bank account for generating interest income.

But, later, he realized that if wife earns interest on his such amount, then it will be clubbed to his own total income. It will not be considered as wife’s income.

For solution of this, he considered the amount given to wife, as loan given to her and all the interest earned by wife on such husband’s income , was paid back to husband as interest on husband’ s loan. Thus, total principal amount and interest earned by wife on it, was paid back to husband.

Is this arrangement acceptable?
Is there any fault in doing so?
Is doing so, an offence in the eye of the law/act/rules/regulation related with income tax ?

Thanks in advance.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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23 June 2015 and how does this make any difference as husband's tax liability still remain same!!

Querist : Anonymous

Querist : Anonymous (Querist)

23 June 2015 here, the purpose of this arrangement is only to avoid the clubbing.

because,as per my opinion,the treatment of the interest amount is very complicated , even after its clubbing in the husband's income.

The further earning on such interest earned by wife, will again raise question of clubbing .

So, by doing this arrangement of considering the interest earned by wife, as interest on loan, the clubbing provisions can be avoided.

Thus, after receiving the interest amount from wife, on the amount given to her, which is now to be considered as loan, the husband can treat that interest income as his own.

And no any further clubbing of interest on such firstly earned interest will be there as it is his own income now , on loan given to wife.

The husband has no objection against his liability remaining the same.

Is such arrangement to avoid clubbing and further clubbing on clubbing - acceptable ? ?

The husband happily wants to pay tax on interest to be received on amount given to his wife. (which is to be considered as loan)

And the wife does not come into taxable range , even after considering this interest earned by her.

Sir, what do you say ?
Share ur opinion and give proper guidance in this case.

Querist : Anonymous

Querist : Anonymous (Querist)

23 June 2015 pls share ur opinion. on my above explanation.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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23 June 2015 see the problem is a different one. How would you justify wife transferring whole of the interest to husband?

lets say I pick this case for assessment, I will question excessive payment to a related party and hence disallow the expenditure to the reasonable extent!

Querist : Anonymous

Querist : Anonymous (Querist)

23 June 2015 sir,
The wife's total income is below the exemption limit. Hence, does not need to claim any benefit against the interest paid on loan.

So, the question of disallowing the expenditure does not arise, as she is not claiming the same. Because her total income is out of the taxable range.

Further, the wife does not pay much or less amount as interest to husband.

She pays as equal amount of interest to her husband, as she has earned by making FD.

So, there is no any question of excessive payment or less payment to related party.

The purpose here, is not of evasion of tax. But it is of arranging of income even after paying the same amount of tax.

Sir,
Is this justification satisfactory ?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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23 June 2015 if her income is below exemption limit, then pay a lesser amount to husband ie keep the interest outgo below the interest inflow

Querist : Anonymous

Querist : Anonymous (Querist)

23 June 2015 So, to avoid any default by husband or by wife, the interest paid by wife should be less than the amount of interest she actually earned. IS it like that what you want to say ?

But, what difference will it make ?

The husband and the wife does not want any complications in future that she had earned much interest at higher rate from FD and then paid less interest at lower rate to husband and thus had made tax evasion BY paying tax on less amount by husband.

The husband wants to pay tax on all the interest income - full amount, received from wife.

And the wife is paying all the interest which she had earned from FD, to husband.
She does not want to keep any portion of such interest income for her own . She wants to give all the interest- full amount to her husband.

SO, in such circumstances and such beliefs and wants, and readiness to pay tax,

is such type of accounting treatment and arrangement of considering the amount as loan - acceptable ? or not ?

Are my arguements proper and valid in this case?

If not, then What can be done in this case ?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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24 June 2015 I already told you what should be done. You are unncessarily complicating a simple transaction.

Please note that business logic should not be based on the level of income.

For eg, what will you do when wife's income cross the exempted limit. Then it becomes a case that can be picked for assessment and simple question will stand, "who in his sane mind will borrow money to earn exactly the same amount of interest as being charged on the loan?" will you do that for your ownself?

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Querist : Anonymous

Querist : Anonymous (Querist)

24 June 2015 OKAY. I UNDERSTOOD NOW.
SORRY FOR THE INCONVENIENCE YOU FACED FOR EXPLAINING THIS THING TO ME.

THANKS FOR YOUR GUIDANCE, SIR.