CLUBBING OF INCOME TO INDIVIDUAL SECTION 60 64 INCOME TAX ACT

On Thursday, April 18, 2013 | 7:34 AM

Generally an assessee is taxed in respect of his own income. But sometimes in some exceptional circumstances this basic principle is deviated and the assessee may be taxed in respect of income which legally belongs to somebody else. Earlier the taxpayers made an attempt to reduce their tax liability by transferring their assets in favour of their family members or by arranging their sources of income in such a way that tax incidence falls on others, whereas benefits of income is derived by them . So to counteract such practices of tax avoidance, necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax on his own income as well as income belonging to others on fulfillment of certain conditions. Inclusion of other’s Incomes in the income of the assessee is called Clubbing of Income and the income which is so included is called Deemed Income. It is as per the provisions contained in Sections 60 to 64 of the Income Tax Act.

1.TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SECTION. 60)

Section 60 is applicable if the following conditions are satisfied:
  1. The taxpayer owns an asset 
  2. The ownership of asset is not transferred by him.
  3. 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 

Illustration : Amitabh Bachan owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual) interest being Rs. 100,000. On April 1, 2005, he transfers interest income to Sharukh Khan, his friend without transferring the ownership of these debentures. Although during 2005-06, interest of Rs. 100,000 is received by Sharukh Khan, it is taxable in the hands of Amitabh Bachan as per Section 60


2. REVOCABLE TRANSFER OF ASSETS (SECTION 61)

‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or income from such an asset, either whole or in parts at any time in future, during the lifetime of transferee. It also includes a transfer which gives a right to re-assume power of the income from asset or asset during the lifetime of transferee. 

If the following conditions are satisfied section 61 will become applicable.
  • An asset is transferred under a “revocable transfer”, 
  • The transfer for this purpose includes any settlement, or agreement 
  • Then any income from such an asset is taxable in the hands of the transferor and not the transferee (owner).
Note:-In the case of irrevocable transfer of asset , the income from such assets will be deemed to be the income of the transferee (To whom the asset has been transferred), provided that the transfer is not for the benefit of the spouse of the transferor.

3. INCOME OF SPOUSE
The following incomes of the spouse of an individual shall be included in the total income of the individual:

A REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL INTEREST [SECTION 64 (1) (ii)]

Concern – Concern could be any form of business or professional concern. It could be a sole proprietor, partnership, company, etc. 

Substantial interest - An individual is deemed to have substantial interest, if he /she (individually or along with his relatives) beneficially holds equity shares carrying not less than 20 per cent voting power in the case of a company or is entitled to not less than 20 percent of the profits in the case of a concern other than a company at any time during the previous year.

If the following conditions are fulfilled this section becomes applicable.
  • If spouse of an individual gets any salary, commission, fees etc (remuneration) from a concern
  • The individual has a substantial interest in such a concern 
  • The remuneration paid to the spouse is not due to technical or professional knowledge of the spouse.
Then such salary, commission, fees, etc shall be considered as income of the individual and not of the spouse.

Illustration - X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical or professional qualification to justify the remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X.

When both husband and wife have substantial interest 
Where both the husband and wife have a substantial interest in a concern and both are in receipt of the remuneration from such concern both the remunerations will be included in the total income of husband or wife whose total income,excluding such remuneration, is greater.


(B)INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SECTION 64(1) (IV)]
Income from assets transferred to spouse becomes taxable under provisions of section 64 (1) (iv) as per following conditions:-
  • The taxpayer is an individual 
  • He/she has transferred an asset (other than a house property)
  • The asset is transferred to his/her spouse
  • The asset is transferred without adequate consideration. Moreover there is no agreement to live apart.
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. 

Illustration - X transfers 500 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be included in the income of X.

When Section 64(i) (iv) is not applicable On this basis of the aforesaid discussion and judicial pronouncements, section 64 is not applicable in the following cases:
  • If assets are transferred before marriage.
  • If assets are transferred for adequate consideration.
  • If assets are transferred in connection with an agreement to live apart.
  • If on the date of accrual of income, transferee is not spouse of the transferor. 
  •  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 five cases, income arising from the transferred asset cannot be clubbed in the hands of the transferor 

4. INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)]

Income from assets transferred to son’s wife attract the provisions of section 64 (1) (vi) as per conditions below:-
  1. The taxpayer is an individual.
  2. He/she has transferred an asset after May 31, 1973.
  3. The asset is transferred to son’s wife.
  4. The asset is transferred without adequate consideration.
In the case of such individuals, the income from the asset is included in the income of the taxpayer who has transferred the asset.

5. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1) VII)]

Income from assets transferred to a person for the benefit of spouse attract the provisions of section 64 (1) (vii) on clubbing of income. If: 
  • The taxpayer is an individual.
  • He/she has transferred an asset to a person or an association of persons.
  • Asset is transferred for the benefit of spouse.
  • The transfer of asset is without adequate consideration.
In case of such individuals income from such an asset is taxable in the hands of the taxpayer who has transferred the asset.

6. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64 (1) (VIII)]
Income from assets transferred to a person for the benefit of son’s wife attract the provisions of section 64 (1) (vii) on clubbing of income. If, 
  1. The taxpayer is an individual. 
  2. He/she has transferred an asset after May 31, 1973.
  3. The asset is transferred to any person or an association of persons.
  4. The asset is transferred for the benefit of son’s wife.
  5. The asset is transferred without adequate consideration.
In case of such individual, the income from the asset is included in the income of the person who has transferred the asset.

7. INCOME OF MINOR CHILD (SEC. 64 (1A)
All income which arises or accrues to the minor child shall be clubbed in the income of his parent (Sec. 64(1A), whose total income (excluding Minor’s income) is greater. However, in case parents are separated, the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year.

Exemption to parent [Sec10 (32)]
An individual shall be entitled to exemption of Rs. 1,500 per annum(p.a.) in respect of each minor child if the income of such minor as included under section 64 (1A) exceeds that amount. However if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

When Section 64(1A) is not applicable
In case of income of minor child from following sources, the income of minor child is not clubbed with the income of his parent.
  • Income of minor child on account of any manual work.
  • Income of minor child on account of any activity involving application of his skill, talent or specialized knowledge and experience.
  • Income of minor child (from all sources) suffering from any disability of the nature specified under section 80U .
8. OTHER RELATED POINTS 

Can negative income be clubbed?
If clubbing provisions are applicable and income from such a source is negative it will still be clubbed in the income of assessee. 

Head of income under which an income belonging to somebody else would be clubbed

The other person’s income is taxable under the head under which it would have been taxable if it is the income of the assessee himself. 

For example Mr. X gifts Mrs. X Rs 2 lakhs from which she starts a business. Now as per clubbing provisions whatever is the profit from this business it will be taxable in the hands of Mr. X. Since it is an income taxable under the head ‘Profits & gains of Business & profession’ that is why it will be taxable under the same head and income will be calculated as if it is the business of Mr. X.

9. GLOSSARY

Transferor- The person who transfers any of his belongings, specifically his assets/income to another person is known as Transferor.

Transferee-The person to whom the transferor transfers his / her assets is known as transferee.

Revocable- he right to reacquire or take back anything legally which was given earlier under an agreement or settlement.

Minor- A person who is below the age at which he or she legally becomes an adult. In India at present a person becomes adult at the age of 18 years.

DOWNLOAD PROVISION FOR CLUBBING OF INCOME 
10.CLUBBING PROVISIONS AT A GLANCE 

SECTION
NATURE OF TRANSACTION
CLUBBED IN THE 
HANDS OF
CONDITIONS/EXCEPTIONS
RELEVANT REFERENCE
60
Transfer of Income without transfer of Assets.
Transferor who transfers
the income.
Irrespective of:
1. Whether such transfer is
revocable or not.
2. Whether the transfer is
effected before or after the
commencement of IT Act.
1. Income for the purpose of
Section 64 includes losses. [P. Doriswamy Chetty 183 ITR 559 (SC)] [also see Expl. (2) to Section 64]
2. Section 60 does not apply if corpus itself is transferred. [Grandhi Narayana Rao 173 ITR 593 (AP)]
61
Revocable transfer of Assets.
Transferor who transfers
the Assets.
Clubbing not applicable if:
1. Trust/transfer irrevocable during the lifetime of  beneficiaries/transferee or
2. Transfer made prior to 1-4-1961 and not revocable for a period of 6 years.
Provided the transferor derives no direct or indirect benefit from such income in either case.
Transfer held as revocable
1. If there is provision to re transfer directly or indirectly whole/part of income/asset to transferor;
2. If there is a right to reassume power, directly or indirectly, the transfer is held revocable and actual exercise is not necessary.
[S. Raghbir Singh 57 ITR 408 (SC)]
3. Where no absolute right is given to transferee and asset can revert to transferor in prescribed circumstances, transfer is held revocable. [Jyotendrasinhji vs. S. I. Tripathi 201 ITR 611 (SC)]
64(1)(ii)
Salary, Commission,
Fees or remuneration
paid to spouse from a concern in which an individual has a
substantial* interest.
Spouse whose total
income (excluding
income to be clubbed)
is greater.
Clubbing not applicable if:
Spouse possesses technical
or professional qualification
and remuneration is solely
attributable to application of
that knowledge/qualification.
1. The relationship of husband
and wife must subsist at the
time of accrual of the income. [Philip John Plasket Thomas 49 ITR 97 (SC)]
2. Income other than salary, commission, fees or remuneration is not clubbed under this clause
64(1)(iv)
Income from assets
transferred directly or indirectly to the spouse without adequate consideration.
Individual transferring
the asset.
Clubbing not applicable if:
The assets are transferred;
1. With an agreement to
live apart.
2. Before marriage.
3. Income earned when relation does not exist.
4. By Karta of HUF gifting co-parcenary property to his wife.
L. Hirday Narain vs. ITO 78 ITR 26 (SC)
5. Property acquired out of pin money.
R.B.N.J. Naidu vs. CIT 29 ITR 194 (Nag.)
1. Income earned out of Income arising from transferred assets not liable for clubbed.
[M.S.S. Rajan 252 ITR 126
(Mad)]
2. Cash gifted to spouse and he/she invests to earn interest. [Mohini Thaper vs. CIT 83 ITR 208 (SC)]
3. Capital gain on sale of property which was received without consideration from spouse [Sevential M. Sheth vs. CIT 68 ITR 503 (SC)]
4. Transaction must be real.
[O.N. Mohindroo 99 ITR 583
(Delhi)]
64(1)(vi)
Income from the assets transferred to son’s wife.
Individual transferring
the Asset.
Condition:
The transfer should be without adequate consideration.
Cross transfers are also covered
[C.M.Kothari 49 ITR 107 (SC)]
64(1)(vii), (viii)
Transfer of assets by an individual to a person or AOP for the immediate or deferred benefit of his:
(vii) - Spouse.
(viii) - Son’s wife.
Individual transferring
the Asset.
Condition:
1. The transfer should be
without adequate consideration.
1. Transferor need not necessarily have taxable income of his own.
[P. Murugesan 245 ITR 301
(Mad)]
2. Wife means legally wedded
wife. [Executors of the will of
T.V. Krishna Iyer 38 ITR 144
(Ker)]
64(1A)
Income of a minor child
[Child includes step child, adopted child and minor married daughter].
1. If the marriage subsists, in the hands of the parent whose total income is greater; or;
2. If the marriage does not subsist, in the hands of the person who maintains the minor child.
3. Income once included
in the total income of either of parents, it shall continue to be included in the hands of same parent in the subsequent year unless AO is satisfied that it is necessary to do so (after giving that parent opportunity of being heard)
Clubbing not applicable for:—
1. Income of a minor child
suffering any disability specified u/s. 80U.
2. Income on account of manual work done by the minor child.
3. Income on account of any
activity involving application
of skills, talent or specialized knowledge and experience.
1. Income out of property transferred for no consideration to a minor married daughter, shall not be clubbed in the parents’ hands. [Section 27]
2. The 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)]
64(2)
Income of HUF from
property converted by the individual into HUF property.
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.
Fiction under this section must
be extended to computation of
income also. [M.K. Kuppuraj
127 ITR 447 (Mad)]

DOWNLOAD PROVISION CLUBBING OF INCOME 
Labels: , ,

3 comments:

  1. we have received interesting email on above subject and we are sharing the same with you.

    1. As far as my understanding goes, spouse or relatives can gift anything (except cash above 50k in a FY) will not be taxable in the hands of receiver. Is that True. ? Do we need to have any Gift Deed in that case...???

    Ans:Yes ,relative can gift to you in cash or kind without any Limit . Nothing is taxable in you hand for gift amount received. Further Gift tax is also not applicable on donner. Gift deed is not mandatory but it beneficial if you have the same . You can give /receive gift through deed on simple paper also.

    However as we have informed you in the article that clubbing provisions remains applicable.

    read more
    http://www.simpletaxindia.net/2007/09/got-gift-from-relative-no-tax-on-it.html

    2. Can you please elaborate the term " without adequate consideration". X transfers 500 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be included in the income of X.

    Ans: Adequate consideration means fair value of asset transferred or we can say , what would we have realise if asset has been transferred to any third person.

    In present case of debenture you can check listing price from stock market.

    2.1 In other case if X transfers with an agreement of receiving just 20% of the market value of 500 debentures from his wife, then any income wife generates will that be clubbed, or it will be taxable in the handed of wife???? Can husband show this as a loss of 80% on debenture ?

    Ans :In this case we can say that 20 % debenture is transferred with adequate consideration and balance without consideration .so Income on 80 % debenture shall be added back in X( husband) income .

    3. Can husband gift (with a gift deed) some shares, say 40 lacs of Infosys to his wife. And wife just keeps the stock in here demat account, may plans to sell after 2-3 years only. On sales of such shares after 2-3years what should be the tax treatment on the loss or gain part and who will be liable..????

    Ans:Shares held for more than one year and sold through stock exchange (STTpaid) is exempted from tax(section 10(38)) . So there is no taxable income on sale of shares after one year. So exempted income will be added back to husband income but no tax is payable by Husband or wife as income from long term capital gain from shares is exempted.

    4. When spouses live apart, I mean they divorce. If the law says husband has to provide monthly 4lacs to his wife (assume wife doesn't have any income and no other investments for the purpose of tax saving) out of his salary income of Rs. 12lacs (assume he has not other investment for the purpose of tax saving). Here as per tax law who will be liable to pay tax and on what income ????

    Ans :In above case husband have to pay tax on his salary income(12lakh) as normally he pay without taking in to effect of this transaction .

    On 4 lakh amount received by wife tax payable is nil as this is not an income .But if she invest this amount in any instrument and receive any income from it then that income remain taxable in here hand. suppose she invested in fdr then she has to add the interest on fdr in her income .

    So difference in live apart and without live apart is that in live apart tax on interest on FDR is to be payable by wife, where as in non live apart case ,interest income from fdr is to be added back in Husband's income under clubbing provisions .

    ReplyDelete

  2. Very informative indeed!-One query-Are there any conditions/limits attached to "Pin money"? Is it defined under the IT Act? -moiz

    ReplyDelete
    Replies

    1. NOT defined under the act but decided by courts one of the main case is

      R.B.N.J. Naidu vs. CIT 29 ITR 194 (Nag.)

      Delete