Clubbing of Income or Income of other person included in the Assessee’s Income:
Namastey and Hello to everyone, I am going to write my first article on CCI.
I thank CCI very much for selecting my article.
Under the Income Tax Act, 1961, an assessee is generally taxed in respect of his own income. However, there are certain cases where an assessee has to pay tax in respect of income of another person. The logic of introducing clubbing provisions is very simple that to restrict assessee to save tax by routing his income to closed ones who are in lower tax bracket as compared to assessee. In this article we shall understand the various clubbing provisions:
1. Sec 60- Income is transferred but asset is not transferred:
Income even though received and enjoyed by the transferee will be taxed in the hands of transferee.
For Instance-Debenture Interest is directed to be electronically credited through ECS in assessee’s son A/c but debentures are registered in the assessee’s own name .in such a case debenture interest will be added to assessee’s own income and to son’s income.
2. Sec61-Asset is transferred under but such transfer is revocable:
When the transferor has the power to revoke the transfer then all income arising under the same transfer to transferee shall be includible in transferor’s income.
Sec 63 explains that the transfer is said to have been revocable if:
(a) It contains any provision for the retransfer (by transferee) directly or indirectly whole or any part of income or assets to the transferor.
For Instance- Assessee just before receiving Interest transferred debentures to his brother and immediately after receipt of the debenture interest by his brother reacquires them. In such a case the debenture interest will be clubbed in the hands of assessee .This is also the example of Bond washing transactions [Sec 94(1)]
3 .Sec 64(1)(ii)-Substantial interest:
If an individual along with his /her relatives (where relative= Spouse, Father, Mother, Brother, Sister) has a substantial interest in any concern (sub interest=minimum 20% share in profits) and if the concern pays remuneration to his/her spouse which is not linked to the spouse’s Knowledge(K)/Qualification(Q)/Skills(S) etc., then remuneration even though received by the spouse will be clubbed in the hands of the individual.
If both the spouses have substantial interest and both get remuneration not linked to their K/Q/S, then the entire remuneration will be taxed in the hands of that spouse whose income is higher.
4. Sec 64(1)(v)-Transfer by individual to his /her spouse:
If an individual transfers asset(other than **House prop) to his/her spouse without consideration or adequate consideration, then income from the asset even though received by the spouse will be clubbed in the hands of individual.
**Note- because the same has been deemed to owned by the assessee(as per deemed owner concept u/s 27) even if transferred to spouse unless there was adequate consideration and as per basic rule the HP income is taxed in the hands of deemed owner.
However, to attract this section both the following conditions should be fulfilled –
(a)Relationship of husband wife should exist at the time of transfer of asset and
(b) At the time of receipt of income
If the identity of asset is changed, income from changed asset will also be clubbed.
However income from accretion to assets is not include u/s 64(1) (iv).
Let’s understand sec64 (1) (iv) by an example:
Example- On Apr.1, 2012 Mr. Zaheer gifted her wife Mrs. Amrita 50000 shares of Idea purchased by him on March1, 2012 @ Rs. 10 each Cell. On July 31 she got bonus shares in ratio of 1:1 i.e. 50000 sh . Now on Aug 19, 2012 she sold 60000 shares@Rs. 20 each (By applying FIFO method she sold 50000 original shares and 10000 bonus ones), in such a case only the gain arising from the sale of original shares will be includible in Mr. Zaheer’s income because income from sale of bonus shares (which is nothing but income from accretion-increment to assets which is not to be clubbed).
Capital Gain calculations-
From Original shares-
Sale Consideration: 1,000,000
Less: Cost of Acq(u/s 49(1) as
Cost to original owner): 5, 00,000
Shot term Capital gain: 5, 00,000
Similarly, from Bonus shares-
Sale Consideration: 2, 00,000
Less: Cost of Acq: 1,00,000
Shot term Capital gain: 1, 00,000
Further, cross transfers are also covered, Cross transfers are the transfers which are intimately (by agreement) connected so as to form part of a single transaction, and each transfer constitutes consideration for the other .In case of such cross transfers income shall be clubbed in the hands of deemed transferor.
For instance, A making gift of Rs. 50000 to the wife of his brother B for the purchase of a house by her and a simultaneous gift by B to A’s wife of shares in a foreign company owned by him (B). As such income earned by a A’s wife or B’s wife earned from transferred assets will be clubbed in the hands of deemed transferors i.e. A in case of transfer made by B to his (A’s) wife and B in case of transfer made by A to his (B’s) wife
Explanation to sec 64(1)(iv)- Clubbing of profits of business:
Income from business in relation to investment made by spouse out of gifted money shall be clubbed in the hands of donor.
If Opening Balance of Capital in Business is negative then it should be presumed that gifted money has been withdrawn first.
If gifted money is introduced in the mid of the year (i.e. not at the first day), then we should ignore such gifted money so invested in current FY and should consider it to have been invested on 1st day of next FY.
Master Note: Clubbing will be done only income earned by spouse from gifted asset , and therefore , if any other asset is purchased from the income earned from gifted assets shall not be liable to clubbing and will be taxed in the hands of spouse thus in the example of share if Amrita invest sale proceeds of CG in a FD then income from FD will not be clubbed to Zaheer’s income.
5. Sec 64(1)(vii)-Indirect transfer to Spouse:
If an individual transfers asset without adequate consideration or without consideration to any person** for immediate or deferred benefit of spouse , then any income received by that person will be included in the hands of individual .
**Note-Person means an individual , HUF ,Co. or any other person as defined under section 2(32) of I.T. Act,1961.
6. Sec64 (1)(vi)-Transfer to Daughter–in-law(DIL):
If an individual (Father–in-law_FIL or Mother-in-law_MIL) transfer assets without consideration or without adequate consideration to DIL, then any income as earned by the DIL will be clubbed in the hands of te individual(FIL/MIL)
7. Sec 64(1)(viii) Indirect transfer to DIL:
If an individual transfers assets without consideration or adequate consideration to any person**for immediate or deferred benefit of DIL, then also any income received by that person shall be included in the hands of individual (FIL/MIL).
**Note-Person means an individual, HUF, Co. or any other person as defined under section 2(32) of I.T. Act,1961.
8.Sec 64(1A) – Income of a minor to be clubbed in the hands of parents:
Minor’s income is clubbed in the hands of that parent whose Total Income is higher.
If the parents are separated, then it will be clubbed in the hands of that parent who maintains the child (i.e. finance the child).
However the following income of minor is not included in the hands of their parents:
1. Income of a disabled child from all sources.
2. Income of a minor received directly from his own skill or profession.
Further, u/s 10(32) in respect of minor’s income clubbed to a parent then the parent is entitled to an exemption of Rs. 1500 per annum per minor.
9. Sec 64(2) Transfer to HUF in which individual is a member:
If an individual transfers property to HUF without consideration or adequate consideration, then income earned from it by HUF will be clubbed in the hands of individual.
10 .Sec 65-Assessing Officer Discretion in certain cases:
The AO has the power to exempt the assessee from clubbing provisions if looking to the circumstances of case if he thinks fit to exempt as such. But the exemption made3 to assessee gives AO a right to realize the tax from any party connected to transaction related to clubbing
For Instance - If Mr. A gifts her wife 90% of his property including cash , she uses the same for carrying a business but after sometime her wife made a fraud and run away somewhere with all his property then in such a case Mr. A may get exemption from clubbing provision if AO thinks it fit to exempt as such. However, AO can search her wife and make her liable to pay tax even she is not liable due to clubbing provisions.
So, my dear colleagues and seniors your valuable comments for any improvement are welcomed.
Thanks for your reading
Saurabh Chokhra (Maheshwari)
CA Final, Articled Assistant