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 under section 60 to 64). Section 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.
As per the Indian Income Tax laws, every
person is liable to pay taxes on his/ her income, if the taxable income exceeds
the basic exemption limit. However, in certain situations a taxpayer may have
to pay tax on the income of another person. Clubbing provisions in
the Indian income-tax Act have been included to report such income as the
taxpayer's income.
Meaning of
clubbing of income
Normally, a
person is taxed in respect of income earned by him only. However, in certain
special cases income of other person is included (i.e. clubbed) in the taxable
income of the taxpayer and in such a case he will be liable to pay tax in respect
of his income (if any) as well as income of other person too. The situation in
which income of other person is included in the income of the taxpayer is
called as clubbing of income. E.g., Income of minor child is clubbed with the
income of his/her parent. Section 60 to 64 contains various provisions
relating to clubbing of income.
A person
cannot transfer his income or an asset which is his one of source of his income
to some other person or in other words we can say that a person cannot divert
his income to any other person and says that it is not his income. If he do so
the income shown to be earned by any other person is included in the assessee’s
total income and the assessee has to pay tax on it.
[1] Transfer of income where there
is no transfer of assets [Section 60]
As per the provisions of Section
60 of the Income Tax Act, if a person owns any asset and he transfers the
income generated through this asset to anybody (whether relative or non-relative)
without transferring the asset, such income would be taxed in the hands of the
owner of the asset and not in the hands of the person who is receiving the
income.
In other words, as per section 60, if a person transfers income
from an asset owned by him without transferring the asset from which the income
is generated, then the income from such an asset is taxed in the hands of the
transferor (i.e., person transferring the income).
It is immaterial whether the transfer is revocable
or irrevocable and whether it was made before the commencement of this Act or
after its commencement.
These are applicable if the following conditions are
satisfied:
(a) The taxpayer owns an asset
(b) The ownership of asset is not transferred by
him.
(c) 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. If the
transferor transfers the asset and keeps the income for himself, the income
shall be included in the income of transferor.
FOR EXAMPLE
Mr. ‘A’ owns a commercial property in Mumbai which
he has given on Rent to ‘XYZ’ for Rs. 25,00,000 per month. He transfers this
rent to his friend and tells ‘XYZ’ to directly pay the Rent to his friend and
not to him. In the above mentioned case – the provisions of Clubbing of Income
under Section 60 would be applicable as the property is owned by Mr. ‘A’ but the rent from property is received by his
friend. And therefore, this Income would be taxed in the hands of Mr. ‘A’ and
not in the hands of his friend.
Clubbed in the hands of
Transferor who transfers the income.
Section 60 does not apply if corpus
itself is transferred
The provisions
of section 60 can have no application in a case where the corpus itself is
transferred. Once the corpus is transferred, the provisions of section
60 of the Act have no application whatsoever. (Related Assessment year :
1977-78) - [CIT v. Grandhi Narayana Rao (1988) 173 ITR 593 (AP)]
Section 60 of the Act has no
application where assets producing income are transferred along with the income
– [CIT v. Ram Prasad Mehta (1975) 100 ITR
468 (Bombay)]
[2] Income
arising from revocable transfer of assets [Section 61]
Revocable transfer is generally a transfer in which
the transferor directly or indirectly exercises control/right over the asset
transferred or over the income from the asset.
As per section 61, if a transfer is held to be a revocable, then
income from the asset covered under revocable transfer is taxed in the hands of
the transferor. The provisions of section 61 will not apply in case
of a transfer by way of trust which is not revocable during the life time of
the beneficiary or a transfer which is not revocable during the lifetime of the
transferee.
In other words, all income
arising to any person by virtue of a revocable transfer of assets is to be
included in the total income of the transferor.
This clubbing provision will
operate even if only part of income of the transferred asset had been applied
for the benefit of the transferor. Once the transfer is revocable, the entire
income from the transferred asset is includible in the total income of the
transferor.
Re-transfer to the transferor
must be in the same capacity in which he made the transfer or settlement. If a
settlement is made by a Hindu undivided family and there is a re-transfer to
one member of the family in his capacity as an individual and not in his
capacity as a member of the family this cannot be termed a re-transfer for this
purpose.
When a transfer is Revocable
[Section 63]
As per section 63, the transfer
is deemed to be revocable if—
(a) it contains any provision for the retransfer,
directly or indirectly, of the whole or any part of the income or assets to the
transferor, or
(b) it gives, in any way to the transferor, a
right to reassume power, directly or indirectly, over the whole or any part of
the income or the assets.
Examples of revocable transfers
Some of the examples of revocable transfers are as
follows:
(i) If
there is an express clause of revocation in the instrument of transfer; or
(ii) If there is a sale with a
condition of re-purchase; or
(iii) If the transfer is to a trust and if the transfer
can be revoked with the consent of two or more beneficiaries; or
(iv) If the trustees are
empowered in sole discretion to revoke the transfer; or
(v) If the transferor has power
to change beneficiary or trustees.
“Transfer” includes any
settlement, trust, covenant, agreement or arrangement.
Clubbed in the hands of
Transferor
who transfers the Assets
KEY NOTE
Section 61 not applicable, if the
transfer is Irrevocable for a specified period [Section 62]
Where no absolute right is given
to transferee and asset can revert to transferor in prescribed circumstances,
transfer is held revocable. - [Jyotendrasinhji
v. S. I. Tripathi (1993) 201 ITR 611 : 111 CTR 370 (SC)]
If
there is a right to reassume power, directly or indirectly, the transfer is
held revocable and actual exercise is not necessary
To treat a transfer to be
recovable there need to be actual re-transfer or exercise of the power to
reassume; it is sufficient if there is a provision of the nature contemplated. [CIT v. Raghbir Singh (S.) (1965) 57 ITR 408
(SC)]
[3] Transfer irrevocable for a specified period
[Section 62]
EXCEPTIONS WHERE CLUBBING PROVISIONS ARE
NOT ATTRACTED EVEN IN CASE OF REVOCABLE TRANSFER [SECTION 62]
Section 61 will not apply in the following two cases
–
(i) Transfer not revocable during the life time of
the beneficiary or the transferee –
If
there is a transfer of asset which is not revocable during the life time of the
transferee, the income from the transferred asset is not includible in the
total income of the transferor provided the transferor derives no direct or
indirect benefit from such income. If the transferor receives direct or
indirect benefit from such income, such income is to be included in his total
income even though the transfer may not be revocable during the life time of
the transferee.
(ii)
Transfer made before April 1, 1961 and not revocable for a period exceeding six
years –
Income arising from the transfer
of an asset before 1.4.61, which was not revocable for a period exceeding six
years, is not includible in the total income of the transferor provided the
transferor does not derive direct or indirect benefit from such income. In both
the above cases, as and when the power to revoke the transfer arises, the
income arising by virtue of such transfer will be included in the total income
of the transferor.
Transfer irrevocable for a
specified period - Revocable after three years - Income arising by virtue of a
revocable transfer of assets would be chargeable to tax as income of
transferors and
would be included in their total income- Trust cannot be taxed as an AOP at maximum marginal rate
would be included in their total income- Trust cannot be taxed as an AOP at maximum marginal rate
Dismissing the appeal of the
revenue the Court held that ,the Tribunal is justified in holding that ,funds
were transferred by beneficiaries to a trust created by State Government were
revocable after three years, provisions of section 62(2) is attracted
accordingly the income arising by virtue of a revocable transfer of
assets would be chargeable to tax as income of transferors and would be
included in their total income. Income cannot be assessed in the assessment of
the Trust at maximum marginal rate of tax applicable to Associate of Persons
(AOP) by invoking section 164 in respect of contributions received by the
trust. Tribunal also justified in applying the provisions of section 62 to
conclude that income arising by virtue of a revocable transfer of assets would
be chargeable to tax as income of transferors and would be included in their
total income. Accordingly the funds transferred by beneficiaries viz., 3
companies, to trust created by Settlor, viz., State of Tamil Nadu, were
revocable after specified period of three years, provisions of section 62(2) is
attracted. Court also held that since number of shares, extent of benefits and
their identity had not been disputed, there was no question of applying
provisions of said section 164 of the Act. (Related Assessment years : 2008-09, 2009-10) – [CIT v. Tamilnadu Urban Development Fund. (2019) 263
Taxman 318 (Mad)]
[4] Transfer
and revocable transfer defined [Section
63]
For the
purpose of sec 60, 61 and 62 and of this section,
(a) A transfer shall be deemed to be revocable if-
(i) It contains any
provision for the re-transfer, directly or indirectly of the whole or any part
of the income or assets to the transferor, or
(ii)
It gives the
transferor a right tore-assume power directly or indirectly over the whole or
any part of the income or assets.
In other words, if any settlement contains a clause
for forfeiture of rights of beneficiaries under certain circumstances, the
settlement will be regarded as revocable.
(b) Transfer includes any settlement, trust, covenant, agreement or
arrangement
[5] Income
by way of Salary, Commission, Fees or remuneration paid to spouse from a
concern in which an individual has a substantial interest [Section 64(1)(ii)]
In computing the total income of any individual, all
such income which arises, directly or indirectly, to the spouse of such
individual by way of salary, commission, fees or any other form of
remuneration, whether in cash or in kind, from a concern in which such
individual has a substantial interest shall be included.
Where both husband and wife have substantial
interest in a concern and both are in receipt of income by way of salary etc.
from the said concern, such income will be includible in the hands of that
spouse, whose total income, excluding such income is higher.
Where any such income is once included in the total
income of either spouse, income arising in the succeeding year shall not be
included in the total income of the other spouse unless the Assessing Officer
is satisfied, after giving that spouse an opportunity of being heard, that it
is necessary to do so.
EXCEPTION
However, this provision does not
apply where the spouse of the said individual possesses technical or
professional qualifications and the income to the spouse is solely attributable
to the application of his/her technical or professional knowledge or
experience. In such an event, the income arising to such spouse is to be
assessed in his/her hands.
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 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.).
Deemed to have substantial interest in a concern for the
purpose of Section 64(1)(ii)
An individual shall be deemed to
have substantial interest in a concern if —
(a) In case of company - 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.
(b) 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.
Relative here includes spouse, brother or sister or
any lineal ascendant or descendant of that individual [Section 2(41)].
Clubbed in the hands of
Spouse whose total income
(excluding income to be clubbed) is greater.
Conditions/
Exceptions
Clubbing not applicable if: Spouse possesses technical or professional
qualification and remuneration is solely attributable to application of that
knowledge/ qualification.
The
relationship of husband and wife must subsist at the time of accrual of the
income. – [Philip John Plasket Thomas 49 ITR 97 (SC)]
Income other
than salary, commission, fees or remuneration is not clubbed under this clause
PROVISIONS ILLUSTRATED
Mr ‘A' and
Mrs. ‘A’ hold 20% and 30% equity shares
in XYZ Ltd. respectively. They are
employed in XYZ Ltd. (taxable salary being Rs. 2,40,000 p.a. and Rs. 3,60,000
p.a. respectively) without any technical or professional qualification. Other
incomes of Mr ‘A” and Mrs. ‘A’ are Rs. 90,000 and Rs. 2,00,000 respectively.
Find out the net income of Mr. ‘A’ Mrs. ‘A’ for the assessment year 2020-21.
SOLUTION
When both husband and wife have substantial interest
in a concern & 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. In the given case, Since Mrs. ‘A’ has
higher income therefore salary of Mr. ‘A’ will be clubbed in hands of Mrs.’A’.
Computation of gross total income of Mr. ‘A’ and
Mrs. ‘A’ for the Assessment year 2020-21
|
S. No.
|
Particulars
|
Mr. ‘A’
|
Mrs. ‘A’
|
|
(i)
|
Salaries
|
2,40,000
|
3,60,000
|
|
(ii)
|
Clubbing of income as per section
64(1)(ii)
|
(2,40,000)
|
2,40,000
|
|
(iii)
|
Income from other sources
|
90,000
|
2,00,000
|
|
(iv)
|
Gross Total Income
|
90,000
|
8,00,000
|
Some situations - Clubbing of Spouse's Income
Some situations when your
spouse's income will get clubbed to your income and you'll have to pay tax on
it-
(1) Your spouse receives a salary from
a company or a firm in which you have a substantial interest, then such salary
will be clubbed with your income. Substantial Interest means you alone or with
your relatives (husband, wife, brother, sister or your lineal ascendant or
descendant) hold equity or voting power of a company which is 20% or more. Or
in case of a firm you are entitled to 20% or more of the profits. Also, if both
of your receive an income from such a firm or company, it will get taxed in the
hands of the person whose taxable income is higher. There is one exception to
this - if your spouse receives the salary due to his/her application of
technical or professional knowledge & experience then such salary will be
taxed in the hands of the person receiving it and not clubbed.
(2)
You transfer
an asset to your spouse directly or indirectly without
receiving adequate consideration (does not include where asset is transferred
as part of a divorce settlement) - income from this asset will be clubbed with
your income. For example – where the husband to reduce his tax liability
transfers an asset worth Rs 5,00,000 to his wife for Rs 1,25,000. 3/4th of
the income from this asset will be taxed in the hands of the husband. If he receives
no consideration, in that case the entire income from this asset will be
clubbed with the husband's income. Although the clubbing provisions here
exclude house property - but in case you transfer a house property to your wife
and do not receive adequate consideration, as per the Act, you will still be
considered the 'deemed owner' and the income from the asset will be clubbed
with your income.
(3)
You transfer
an asset to a person or an association of persons,
directly or indirectly, without adequate consideration, so that the benefit
arises to your spouse either now or on a deferred basis, income from such an
asset will be clubbed with your income.
(4) Assume
a situation where you provide money to your spouse
(who is non working) and that money is invested by the spouse and a certain
income is generated (from such money that you gave your spouse).The income that
arises from such investment done by her can be clubbed to your income. However,
if your spouse reinvests the income portion and earns further income then such
income may not be clubbed with your taxable income.
When
both husband and wife have substantial interest
Where both husband and wife have
a substantial interest in the concern and both are in receipt of the
remuneration in such concern, the remuneration from such concern is to be
included in the total income of the husband or, as the case may be, the wife
whose total income excluding the income referred to in that clause i.e.
64(1)(ii) is greater; (Circular No. 258, dated 14.06.1979) and where any such
income is once included in the total income of either spouse, any such income
arising in any succeeding year shall not be included in the total income of the
other spouse unless the Assessing Officer is satisfied, after giving that
spouse an opportunity of being heard, that it is necessary so to do.
Clubbing
of income – Spouse – Qualification of spouse – Income could not be clubbed
Where the spouse of assessee was
a post-graduate, and was director in many companies and had expertise in
business matters, her income could not be clubbed with that of the assessee.
(Related Assessment year : 1997- 98) – [CIT
v. Subrata Roy (2013) 219 Taxman 133 : (2014) 99 DTR 177 (All.)]
Clubbing
of income – Spouse – Qualification – Burden is on assessee
The assessee, engaged in the
business of civil construction, claimed deduction of salary paid to his wife.
According to him she was an engineer by profession and looked after plans for
executing work allotted to the assessee and helped in making administrative
decisions. The Assessing Officer disallowed the salary. On appeal, the
Commissioner (Appeals) allowed the deduction. On appeal by revenue, the
Tribunal disallowed the deduction. On appeal High Court held that, the
assessee’s wife though, was in possession of technical qualification but the
assessee was required to prove conclusively that his wife was in fact looking
after plans for execution work and was taking administrative decisions. The
assessee cannot be given benefit merely on the ground that the deduction had
been allowed in the earlier assessment years. (Related Assessment years :
2003-04, 2004-05) – [Yashwant Chhajta v.
DCIT (2013) 214 Taxman 280 : 85 DTR 26 (HP)]
[6] Income arising from
assets transferred directly or indirectly to the spouse without adequate
consideration [Section 64(1)(iv)]
Where there is a transfer of an
asset (other than house property), directly or indirectly, from one spouse to
the other, otherwise than for adequate consideration or in connection with an
agreement to live apart, any income arising to the transferee from the transferred
asset, either directly or indirectly, shall be included in the total income of
the transferor.
(i) Any
income from the accretion of the transferred asset is not to be clubbed with
the income of the transferor.
(ii) The
income arising on transferred assets alone have to be clubbed. However, income
earned by investing such income (arising from transferred asset) cannot be
clubbed.
(iii) It is also to be noted that natural love
and affection do not constitute adequate consideration. Therefore, where an
asset is transferred without adequate consideration, the income from such asset
will be clubbed in the hands of the transferor.
(iv) Where the assets transferred, directly or
indirectly, by an individual to his spouse are invested by the transferee in
the business, proportionate income arising from such investment is to be
included in the total income of the transferor. If the investment is in the
nature of contribution of capital, proportionate interest on capital will be
clubbed with the income of the transferor.
Such proportion has to be
computed by taking into account the value of the aforesaid investment as on the
first day of the previous year to the total investment in the business by the
transferee as on that day.
Conditions for applicability of
Section 64(1)(iv)
Section 64(1)(iv) is applicable if the following
conditions are satisfied—
(i)
The taxpayer is an individual.
(ii) He/she has
transferred an asset (other than a house property).
(iii) The asset is transferred to his/her spouse.
(iv) The transfer may be direct or indirect.
(v) The asset is transferred otherwise than (a) for
adequate consideration, or (b) in connection with an agreement to live apart.
(vi) The asset may be held by the transferee-spouse in the
same form or in a different form.
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.
In the case of transfer of house
property, the provisions are contained in section 27
In the case of transfer of house
property, the provisions are contained in section 27. If an individual
transfers a house property to his spouse, without adequate consideration or
otherwise than in connection with an agreement to live apart, the transferor
shall be deemed to be the owner of the house property and its annual value will
be taxed in his hands.
In other words, as per section 64(1)(iv), if an
individual transfers (directly or indirectly) his/her asset (other than house
property) to his or her spouse otherwise than for adequate consideration, then
income from such asset will be clubbed with the income of the individual
(i.e., transferor). Income from transfer of house property without adequate
consideration will also attract clubbing provisions, however, in such a case
clubbing will be done as per section 27 and not under section
64(1)(iv).
PROVISIONS ILLUSTRATED
Mr. ‘A’ started a proprietary
business on 01.04.2018 with a capital of Rs. 10,00,000. He incurred a loss of Rs.
4,00,000 during the year 2018-19. To overcome the financial position, his wife
Mrs. ‘A’, a software Engineer, gave a gift of Rs. 10,00,000 on 01.04.2019,
which was immediately invested in the business by Mr. ‘A’. He earned a profit
of Rs. 8,00,000 during the year 2019-20. Compute the amount to be clubbed in
the hands of Mrs. ‘A’ for the Assessment Year 2020-21. If Mrs. ‘A’ gave the
said amount as loan, what would be the amount to be clubbed?
SOLUTION
Section 64(1)(iv) of the
Income-tax Act, 1961 provides for the clubbing of income in the hands of the
individual, if the income earned is from the assets (other than house property)
transferred directly or indirectly to the spouse of the individual, otherwise
than for adequate consideration or in connection with an agreement to live
apart. In this case, Mr. ‘A’ received a gift of Rs. 10,00,000 on 01.04.2019
from his wife Mrs. ‘A’, which he invested in his business immediately. The
income to be clubbed in the hands of Mrs. ‘A’ for the Assessment year 2020-21
is computed as under:
|
Particulars
|
Mr. A’s
capital contribution (in Rs.)
|
Capital
contribution out of gift from Mrs. ‘A’ (in Rs.)
|
Total
(in Rs.)
|
|
Capital
as on 01.04.2019
|
6,00,000
(10,00,000
– 4,00,000)
|
10,00,000
|
16,00,000
|
|
Profit
for Previous year 2019-20 to be apportioned on the basis of capital employed
on the first day of the previous year i.e. as on 01.04.2019 (3:5)
|
3,00,000
8,00,000
× 3
8
|
5,00,000
8,00,000
× 5
8
|
8,00,000
|
Therefore,
the income to be clubbed in the hands of Mrs. ‘A’ for the Assessment year 2020-21
is Rs. 5,00,000.
In
case Mrs. ‘A’ gave the said amount of Rs. 10,00,000 as a bona fide loan, then,
clubbing provisions would not be attracted.
KEY
NOTE : The provisions of section 56(2)(x) would not be attracted in the hands
of Mr. ‘A’, since he has received a sum of money exceeding Rs. 50,000 without
consideration from a relative i.e,, his wife.
The income
from asset transferred must be calculated in the same way as it would be if the
asset has not been transferred. Exemption, Deduction or Tax Incentives in
respect of such income can be claimed by the transferor.
Clubbed in the hands of
Individual transferring the asset.
Condition
The transfer should be without adequate consideration.
The transfer should be without adequate consideration.
Situations in which the clubbing
provisions do not apply in case of income from assets transferred to spouse
The clubbing provisions of section 64(1)(iv) are not
applicable in the following situations:
(i)
IF ASSETS
ARE TRANSFERRED FOR ADEQUATE CONSIDERATION.
The transferor has received
adequate consideration in money or money’s worth. If the consideration was
inadequate, proportionate income shall be included in the income of the
transferor.
(ii) IF ASSETS
ARE TRANSFERRED IN CONNECTION WITH AN AGREEMENT TO LIVE APART.
The transfer has been made in
connection with an agreement to live apart. This separation can be either
judicial or voluntary under circumstances in which a judicial separation can be
granted.
(iii) The income from the assets transferred shall
not be included in the income of transferor after the death of spouse, either
transferor or transferee.
(iv) IF ON THE
DATE OF ACCRUAL OF INCOME, TRANSFEREE IS NOT SPOUSE OF THE TRANSFEROR.
The income from assets
transferred shall be included in the income of the transferor, only if the
relationship as spouse exists on the two dates, i.e., the date of transfer and
the date on which the income accrues or arises to the transferee.
(v) IF ASSETS ARE TRANSFERRED BEFORE MARRIAGE
If any asset has been transferred
before marriage, the income from such asset cannot be included in the income of
the transferor and even after
marriage, since the relation of husband and wife should exist both at the time
of transfer of asset and at the time of accrual of income (i.e. the
relation of husband and wife does not exist);
(vi) 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 cases, income arising from the transferred asset cannot
be clubbed in the hands of the transferor.
Only the direct income (including
capital gains) earned with the help of the transferred assets shall be included
in the income of the transferor
Any
indirect income to the transferee from the transferred assets shall not be
included in the income of the transferor.
For
example, A transfers certain shares to his wife B. Dividends received on such
shares are taxable in the hands of A. If B sells the shares and makes some
capital gains, such gains are also taxable in A’s hands. Now from the dividend
money, B purchases some more shares and receives dividends on these new shares,
such dividends are not taxable to A. In the same way, if B receives certain
bonus shares on the shares transferred by her husband and later on she receives
dividend on such bonus shares, the dividend shall not be included in the income
of the transferor because the bonus shares were never transferred by her
husband.
If some
pin-money is given to wife by her husband neither the savings out of pin-money
nor the income earned with the help of savings out of pin-money can be included
in the income of husband.
Clubbing of income–Set-off of business loss of the
wife in the assessment of husband-Entire amount of loss resulting from the
business started by wife with the gifts received from her husband is liable to
be clubbed in the hands of the assessee
The assessee
filed return declaring total income of Rs.4,59,830/-comprising, inter alia, Business income. During the course of
assessment proceedings, the Assessing Officer observed from the computation of
total income that the assessee clubbed loss from the business of his spouse
amounting to Rs.31,56,429/- in view of the provisions of Section 64 of the Act.
On being called upon to justify such a claim, the assessee submitted that
during the year under consideration he gifted a sum of Rs. 94.50 lakh to Mrs.
Priti Bhaskarwar, his wife, who started business of Futures and Options
(F&O) on 18.09.2013. The assessee claimed that she incurred loss of Rs. 31,56,429/-in
such business, which was clubbed in his hands. The Assessing Officer accepted
the primary claim of the assessee of his wife having incurred loss of Rs.31.56
lakh in the business of F&O, which was set up on 18.09.2013 and further
that loss from such business was eligible for set off against the income of the
assessee in terms of Section 64(1)(iv) read with Explanation 3 thereto.
He, however, did not accept the assessee’s contention that the entire loss of
Rs.31.56 lakh be set off against the assessee’s income. CIT (A) also affirmed
the order of the Assessing Officer. On appeal the Tribunal held
that, entire amount of loss resulting from the business started by wife
with the gifts received from her husband is liable to be clubbed in the hands
of the assessee. (Related Assessment year : 2014-15) – [Uday Gopal Bhaskarwar v. ACIT
(2020) 203 TTJ 776 : 186 DTR 65 (SMC) (ITAT Pune)]
Income earned out of Income arising from transferred
assets not liable for clubbed
Income
accruing or arising from transferred assets only will be clubbed. Any income
earned out of such income should not be clubbed, e.g. dividend from Bonus
Shares. - [CIT v. MSS Rajan (2001) 252
ITR 126 (Mad.)]
[7] Income arising from the assets transferred
without adequate consideration by the father-in-law or mother-in-law to son’s
wife [Section 64(1)(vi)]
As per section 64(1)(vi), if an individual transfers (directly or
indirectly) his/her asset to his/ her son’s wife (after 31.5.1973) otherwise than for adequate consideration, then income from such asset
will be clubbed with the income of the individual (i.e., transferor being
father-in-law/mother-in-law). The provisions of clubbing will apply even if the
form of asset is changed by the transferee-daughter-in-law.
For this purpose, where the
assets transferred directly or indirectly by an individual to his or her son’s
wife are invested by the transferee in the business, proportionate income
arising from such investment is to be included in the total income of the
transferor. If the investment is in the nature of contribution of capital, the
proportionate interest on capital will be clubbed with the income of the
transferor.
Such proportion has to be
computed by taking into account the value of the aforesaid investment as on the
first day of the previous year to the total investment in the business by the
transferee as on that day.
If the asset is transferred before marriage of son, no income will be
clubbed even after marriage, since the relation of father-in-law/mother-in-law
and daughter-in-law should exist both at the time of transfer of asset and at
the time of accrual of income.
If on the date of accrual of income, the relation of
father-in-law/mother-in-law and daughter-in-law does not exist, then the
provisions of clubbing will not apply. In other words, relationship must subsist on the
date of transfer of assets as well as on the date of accrual of income.
[8] Assets transferred to AOP or other person for
the benefit of spouse [Section 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 his/her spouse, then income
arising from asset so transferred will 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).
[9] Transfer of assets to AOP or other person for
the benefit of son’s wife [Section 64(1)(viii)]
As per section 64(1)(viii), if any individual
transfers (directly or indirectly) his/her asset to other person or an association of persons (after
31.05.1973), otherwise than for adequate consideration, for immediate or
deferred benefit of his/her son’s wife, then all income arising directly or
indirectly on asset so transferred will be clubbed with the income of transferor
(to the extent income from such asset is for the immediate or deferred benefit
of son’s wife).
PROVISIONS ILLUSTRATED
Mrs.
‘X’ transferred her immovable property to ABC Co. Ltd. subject to a condition
that out of the rental income, a sum of Rs. 1,00,000 per annum shall be
utilized for the benefit of her son’s wife.
SOLUTION
The clubbing provisions under
section 64(1)(viii) are attracted in case of transfer of any asset, directly or
indirectly, otherwise than for adequate consideration, to any person to the
extent to which the income from such asset is for the immediate or deferred
benefit of son’s wife. Such income shall be included in computing the total
income of the transferor-individual.
Therefore, income of Rs. 1,00,000
meant for the benefit of daughter-in-law is chargeable to tax in the hands of
transferor i.e., Mrs. ‘X’ in this case.
KEY NOTE - In order to attract
the clubbing provisions under section 64(1)(viii), the transfer should be
otherwise than for adequate consideration. In this case, it is presumed that
the transfer is otherwise than for adequate consideration and therefore, the
clubbing provisions are attracted.
If it is presumed that the
transfer was for adequate consideration, the provisions of section 64(1)(viii)
would not be attracted.
[10] Clubbing of Income of a minor child with the income of parent [Section
64(1A)]
As per section 64(1A), income of minor child is clubbed with the income
of his/her parent [Income of minor will be clubbed with the income of that
parent whose income (excluding minor’s income) is higher].
(i) Once
clubbing of minor’s income is done with that of one parent, it will continue to
be clubbed with that parent only, in
subsequent years. The Assessing Officer, may, however, club the minor’s income
with that of the other parent, if, after giving the other parent an opportunity
to be heard, he is satisfied that it is necessary to do so.
(ii) Where the marriage of the parents does not
subsist, the income of the minor will be includible in the income of that parent who maintains the
minor child in the relevant previous year.
(iii) The clubbing provisions are attracted even
in respect of income of minor married daughter.
(iv) Child includes step child, adopted child and
minor married daughter
(v) Minor Child (less than 18 years old)
Investment in Minors
Name
The income of the minor, which is not
clubbed in the hands of parents, if invested somewhere and income is earned
from such investment, then, in such case, the income so earned from the
investment would be clubbed in the hands of the parent. For example, if a child
is an artist who has earned an income of Rs. 50,00,000/-. Since the income is
earned by the child on the basis of his own skill, such income will not be
clubbed in the hands of his parents. Further, Rs. 50,00,000/- earned by the
child is invested in fixed deposit and interest of Rs. 50,000/- is earned out
of such investment, then, interest income would be clubbed in the hands of the
parents whose income is higher.
Exceptions - Clubbing
not applicable for
The above
clubbing provision shall not apply in the following cases –
(i)
The income derived by
the minor from manual work or from any activity involving his skill, talent or
specialised knowledge or experience will not be included in the income of his
parent.; or
(ii)
The income of a minor
child suffering from any disability of the nature specified in section 80U
shall not be included in the hands of the parent but shall be assessed in the
hands of the child.
(iii) Income out of
property transferred for no consideration to a minor married daughter, shall
not
be clubbed in the parents’ hands. [Section 27(i)]
be clubbed in the parents’ hands. [Section 27(i)]
However, accretion from such income will be clubbed
with the income of parent of such minor.
Parent in
whose hands the minor’s income is clubbed is entitled to an exemption up to Rs.
1,500 per child [Section 10(32)]
In case income of
a minor child is clubbed in hands of parent as per provision of section 64(1A),
the assessee (parent) can claim exemption of an amount being minimum of the
following –
(a) Rs. 1,500; or
(b) Income so clubbed
KEY NOTE
Such exemption
shall be available for each child (irrespective of the number of children)
whose income is so clubbed.
PROVISIONS ILLUSTRATED
Mr. ‘X’ has two minor children,
viz., Master A and Master B. Master A is a child artist and Master B is
suffering from diseases specified under section 80U. Income of A and B are
as follows:
(a)
Income of A
from stage shows: Rs. 1,00,000
(b)
Income of A
from bank interest: Rs. 1,00,000
(c)
Income of B
from bank interest: Rs. 2,20,000.
SOLUTION
As per section 64(1A), income
of minor children is clubbed with the income of that parent whose income
(excluding minor’s income) is higher. In this case, Mrs. ‘X’ is not having any
income and, hence, if any income is to be clubbed then it will be clubbed with
the income of Mr. ‘X’.
Income of minor child earned on
account of manual work or income from the skill, knowledge, talent, experience,
etc., of minor child will not be clubbed with the income of his/her parent.
Thus, income of A from stage show will not be clubbed with the income of Mr. ‘X’
but income of A from bank interest of Rs. 1,00,000 will be clubbed with the
income of Mr. ‘X’.
Income of a minor suffering from
disability specified under section 80U will not be clubbed with the
income of his/her parent. Hence, any income of B will not be clubbed with the
income of Mr. ‘X’.
The assessee can claim an exemption
under section 10(32)). Thus, in respect of interest income of Rs. 1,00,000
clubbed in the income of Mr. ‘X’, he will be entitled to claim exemption of Rs.
1,500 under section 10(32)), hence, net income to be clubbed will be Rs. 98,500
(i.e., Rs. 1,00,000 – Rs. 1,500).
Clubbing of income - Minor child
- Guardian of minor is representative assessee - Income of minor assessable in
hands of guardian - Upon death of parents income of minor child is to be taxed
in hands of grand father
It was
held that
guardian of minor is representative assessee. Income of minor assessable in
hands of guardian. On the basis of the return of income filed by the
grandfather, RPS, on behalf of the minor as nil return only an intimation of
assessment under section 143(1)(a) of the Act was issued by the
assessing authority. In order to bring to tax such escaped income, the assessing authority rightly invoked section 147 / 148. Upon death of parents income of minor child is to be taxed in hands of grand father as per Section 64(IA) of the Act. (Related Assessment years : 1995 -96 to 1999-2000) – [R. P. Sarathy v. JCIT (2019) 414 ITR 161 : 263 Taxman 149 : 177 DTR 33 (Mad), CIT v. Minor M. Pranuthi (2019) 414 ITR 161 : 177 DTR 33 (Mad)]
Clubbing of income – Income of minor – Higher income of parent
assessing authority. In order to bring to tax such escaped income, the assessing authority rightly invoked section 147 / 148. Upon death of parents income of minor child is to be taxed in hands of grand father as per Section 64(IA) of the Act. (Related Assessment years : 1995 -96 to 1999-2000) – [R. P. Sarathy v. JCIT (2019) 414 ITR 161 : 263 Taxman 149 : 177 DTR 33 (Mad), CIT v. Minor M. Pranuthi (2019) 414 ITR 161 : 177 DTR 33 (Mad)]
Clubbing of income – Income of minor – Higher income of parent
The income of minor had rightly
been clubbed with the income of the mother on the ground that the mother’s
income was higher. – [Anju Mehra v. CIT
(2013) 357 ITR 416 (P&H), Ragav Mehra v. CIT (2013) 357 ITR 416 (P&H)]
Clubbing
of income – Minor child – Adding the income of the minor child in the income of
the parent, whose income is greater, cannot be said to be arbitrary [Article
14, Hindu Minority and Guardianship Act, Section 6]
Under the Hindu law both mother
and father are the natural guardians of the minor sons or daughters. It cannot
be said that the mother is not the natural guardian during the lifetime of the
father or until he is disqualified from being the natural guardian. If that is
so, then the contention raised by the learned counsel for the petitioner that
clause (a) of Explanation to section 64(1A) which provides that for the
purposes of this sub-section, the income of the minor child shall be included
where the marriage of his parents subsists, in the income of that parent whose
total income is greater, is contrary to the provisions of section 6 of the
Hindu Minority and Guardianship Act and violative of article 14 of the
Constitution, does not arise. The object of the impugned provision is to tax
the minor’s income in the hands of the parents whose income is greater by
clubbing the income of the minor in his or her own right. When both mother and
father are natural guardians, then adding the income of the minor child in the
income of the parent, whose income is greater, cannot be said to be arbitrary,
artificial or evasive of the object sought to be achieved. (Related Assessment
years : 1993-94, 1994-95) – [Anju Mehra
v. UOI (2013) 356 ITR 149 : 262 CTR 577 : 219 Taxman 96 : 94 DTR 226 : 38
taxmann.com 383 (P&H)]
[11] Conversion of self acquired property into HUF
property i.e. Income
of HUF from property converted by the individual into HUF property [Section
64(2)]
As per section 64(2), when an
individual, being a member of HUF, transfers his property to the HUF otherwise
than for adequate consideration or converts his property [after 31.12.1969 (being self
acquired asset of the individual)] into the
property belonging to the HUF (it is done by impressing such property with the
character of joint family property or throwing such property into the common
stock of the family), then the income from such property would be included in
the total income of the individual.
In other
words, where an individual, who is a member of the Hindu Undivided Family (HUF)
who,
(a)
Converts,
his separate property of the HUF, or
(b)
Throws the
property to the common stock of the family, or
(c)
Transfers
his individual property to the family,
otherwise than for adequate
consideration, then the income from such property would be included in the
total income of the individual.
Treatment is as under -
|
Case
|
Income to be
clubbed in hands of transferor
|
|
Before
partition of the HUF
|
The
entire income from such property will be
clubbed with the income of transferor.
|
|
After partition of the HUF
|
INCOME FROM THE
ASSETS ATTRIBUTABLE TO THE SPOUSE OF TRANSFEROR.
Such property is distributed
amongst the members of the family. In such a case income derived from such
property by the spouse of the transferor will be clubbed with the income of
the individual and will be charged to tax in his hands.
|
Property
here includes any interest in property whether movable or immovable; the
proceeds of sale thereof and any money or investment for the time being
representing the proceeds of sale thereof; and where the property is converted
into any other property by any method, such other property.
KEY NOTE :
(i)
Asset need not be in its original form.
(ii) Income is to be Clubbed but Income On
Income is Not to be Clubbed.
Clubbed in the hands of
Income is
included in the hands of individual & not in the hands of HUF.
Clubbing applicable even if:
The converted property is subsequently partitioned; income derived by the spouse from such converted property will be taxable in the hands of individual.
The converted property is subsequently partitioned; income derived by the spouse from such converted property will be taxable in the hands of individual.
PROVISONS
ILLUSTRATED
Mr. ‘X’ is a
member of HUF. It consists of Mr. ‘X’, Mrs. ‘X’, Mr. ‘X’s major son (Mr. A)
& Mr. ‘X’s minor son (B). On 01.04.2018, Mr. ‘X’ transferred his house
property acquired through his personal income to the HUF without any
consideration.
On 01.07.2019,
HUF is partitioned and such property being divided equally. Net annual value of
the property for the Previous Year 2018-19 is Rs. 90,000 & that for the Previous
Year 2019-20 is Rs. 1,00,000. Tax treatment for both the years.
SOLUTION
Computation of
income from house property in the hands of Mr. ‘X’ for the Assessment year 2019-20
|
S. No.
|
Particulars
|
Amount (in Rs.)
|
|
(i)
|
Net Annual
Value (NAV)
|
90,000
|
|
(ii)
|
Less: Standard
deduction under section 24(a) [30% of NAV]
|
27,000
|
|
(iii)
|
Income from
house property
|
63,000
|
Tax treatment for
the Assessment year 2019-20:
Since Mr. ‘X’ transferred
his house property acquired out of personal income to his HUF without adequate
consideration, therefore income generated from such house property i.e.Rs. 63,000
shall be clubbed in hands of Mr. ‘X’ as per provision of section 64(2).
TAX TREATMENT FOR
THE ASSESSMENT YEAR 2020-21:
In the previous
year 2019-20, partition took place on 01.07.2019; hence the treatment shall be
as under:
|
S. No.
|
Particulars
|
Amount
|
|
(i)
|
Net Annual
Value (NAV)
|
1,00,000
|
|
(ii)
|
Less: Standard
deduction under section 24(a) [30% of NAV]
|
30,000
|
|
(iii)
|
Income from
house property
|
70,000
|
Income earned
till partition from April’ 2019 to June’ 2019 i.e. Rs. 17,500 [(Rs. 70,000/12)
* 3] shall be clubbed in hands of Mr. ‘X’ and income earned after partition
i.e. Rs. 52,500 [(Rs. 70,000/12) * 9] shall be divided among the family
members. However, as per provision of section 64(2) income of Mrs. 'X' shall
be clubbed in hands of Mr. ‘X’.
|
S. No.
|
Particulars
|
Mr. ‘X’
|
Mrs. ‘X’
|
Mr. A
|
B
|
|
(i)
|
Income from
house property before partition clubbed in hands of Mr. ‘X’ as per section
64(2)
|
17,500
|
-
|
-
|
-
|
|
(ii)
|
Share of Income
from house property Rs. 52500/4
|
13,125
|
13,125
|
13,125
|
13,125
|
|
(iii)
|
Income clubbed
as per provision of section 64(2)
|
+
13,125
|
(13,125)
|
-
|
-
|
|
(iv)
|
Income clubbed
as per provision of section 64(1A)
|
+
13,125
|
-
|
-
|
(13,125)
|
|
(v)
|
Less: Exemption
under section 10(32)
|
(1,500)
|
-
|
-
|
-
|
|
(vi)
|
Total income
from house property
|
55,375
|
Nil
|
13,125
|
Nil
|
[12] Liability
of person in respect of income included in the income of another person [Section 65]
Where,
by reason of the provisions contained in this Chapter or in clause (i) of
section 27, 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, the
person in whose name such asset stands or who is a member of the firm shall,
notwithstanding anything to the contrary contained in any other law for the
time being in force, be liable, on the service of a notice of demand by the
Assessing Officer in this behalf, to pay that portion of the tax levied on the
assessee which is attributable to the income so included, and the provisions of
Chapter XVII-D shall, so far as may be, apply accordingly :
PROVIDED
that 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.
Liability of transferee
Although
clubbing provision is applicable and income is taxable in the hands of
transferor still notice of demand can be served on the transferee and amount
recovered from him. The transferee is liable to pay the portion of tax which is
attributable to the clubbed income.
In
other words, After application of provisions of clubbing (on transfer of
property without adequate consideration as discussed above in several
sections), income is taxable and tax liability arises in the hands of the
transferor. But section 65 empowers the income tax authorities to serve demand
notice (in respect of tax on clubbed income) upon transferee.
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.
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.
Such liability cannot exceed the
value of assets so transferred.
Suppose
‘A’ transfer his asset to ‘B’ for 10 years. Income from asset will be recovered
by ‘B’ but it will e clubbed in ‘A’ s hands as it is revocable transfer.
Hence,
primary responsibility to pay tax on his income is of ‘A’. But if ‘A’ does not
pay Income tax on it, the Income Tax Department can recover it from ‘B’ also as
per provisions of Section 65.
Distinction
between Section 61 and Section 64
The main
distinction between the two sections is that section 61 applies only to a
revocable transfer made by any person while section 64 applies to revocable as
well as irrevocable transfers made only by individuals.
KEY NOTE : The
clubbed income retains the same head under which it is earned.
Income
includes loss
It is significant
to note that as per the Explanation 2 to section 64, ‘income’ would include
‘loss’. Accordingly, where the specified income to be included in the total
income of the individual is a loss, such loss will be taken into account while
computing the total income of the individual. This Explanation applies to
clubbing provisions under both sections 64(1) and 64(2).
“Explanation 2
added to section 64 by the Finance Act, 1979, with effect from 01.4.1980. That
Explanation says that: "For the purpose of this section, 'income' includes
'loss'."
Income for the purpose of Section 64
includes losses. - [CIT v. P. Doriswamy Chetty
(1990) 183 ITR 559 : 86 CTR 192 : 52
TAXMAN 346 (SC)]
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