Clubbing of Income

CLUBBING OF INCOME SECTION 60 TO 64
IncomeTaxrates201213
Generallyanassesseeistaxedinrespectofhisownincome.Butsometimesinsomeexceptional
circumstancesthisbasicprincipleisdeviatedandtheassesseemaybetaxedinrespectofincome
whichlegallybelongstosomebodyelse.Earlierthetaxpayersmadeanattempttoreducetheirtax
liabilitybytransferringtheirassetsinfavouroftheirfamilymembersorbyarrangingtheirsources
ofincomeinsuchawaythattaxincidencefallsonothers,whereasbenefitsofincomeisderivedby
them . So to counteract such practices of tax avoidance, necessary provisions have been
incorporatedinsections60to64oftheIncomeTaxActHence,apersonisliabletopaytaxonhis
ownincomeaswellasincomebelongingtoothersonfulfillmentofcertainconditions.Inclusionof
others Incomes in the income of the assessee is called Clubbing of Income and the income which
issoincludediscalledDeemedIncome.ItisaspertheprovisionscontainedinSections60to64of
theIncomeTaxAct.
1.TRANSFEROFINCOMEWITHOUTTRANSFEROFASSET(SECTION.60)
Section60isapplicableifthefollowingconditionsaresatisfied:
1. Thetaxpayerownsanasset
2. Theownershipofassetisnottransferredbyhim.
3. Theincomefromtheassetistransferredtoanypersonunderasettlement,oragreement.
Iftheaboveconditionsaresatisfied,theincomefromtheassetwouldbetaxableinthehandsofthe
transferor
Illustration:AmitabhBachanownsDebenturesworthRs1,000,000ofABCLtd.,(annual)interest
beingRs.100,000.OnApril1,2005,hetransfersinterestincometoSharukhKhan,hisfriend
withouttransferringtheownershipofthesedebentures.Althoughduring200506,interestofRs.
100,000isreceivedbySharukhKhan,itistaxableinthehandsofAmitabhBachanasperSection
60
2.REVOCABLETRANSFEROFASSETS(SECTION61)
Revocable transfer means the transferor of asset assumes a right to reacquireassetorincome
fromsuchanasset,eitherwholeorinpartsatanytimeinfuture,duringthelifetimeoftransferee.It
alsoincludesatransferwhichgivesarighttoreassumepoweroftheincomefromassetorasset
duringthelifetimeoftransferee.
Ifthefollowingconditionsaresatisfiedsection61willbecomeapplicable.
An asset is transferred under a revocable transfer,
Thetransferforthispurposeincludesanysettlement,oragreement
Thenanyincomefromsuchanassetistaxableinthehandsofthetransferorandnot
thetransferee(owner).
1
2
3
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Note:Inthecaseofirrevocabletransferofasset,theincomefromsuchassetswillbedeemedtobe
theincomeofthetransferee(Towhomtheassethasbeentransferred),providedthatthetransferis
notforthebenefitofthespouseofthetransferor.
3.INCOMEOFSPOUSE
Thefollowingincomesofthespouseofanindividualshallbeincludedinthetotalincomeofthe
individual:
A REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL
INTEREST[SECTION64(1)(ii)]
Concern Concerncouldbeanyformofbusinessorprofessionalconcern.Itcouldbeasole
proprietor,partnership,company,etc.
SubstantialinterestAnindividualisdeemedtohavesubstantialinterest,ifhe/she(individually
oralongwithhisrelatives)beneficiallyholdsequitysharescarryingnotlessthan20percentvoting
powerinthecaseofacompanyorisentitledtonotlessthan20percentoftheprofitsinthecaseof
aconcernotherthanacompanyatanytimeduringthepreviousyear.
Ifthefollowingconditionsarefulfilledthissectionbecomesapplicable.
Ifspouseofanindividualgetsanysalary,commission,feesetc(remuneration)froma
concern
2
Theindividualhasasubstantialinterestinsuchaconcern
3
Theremunerationpaidtothespouseisnotduetotechnicalorprofessionalknowledge
ofthespouse.
1
Thensuchsalary,commission,fees,etcshallbeconsideredasincomeoftheindividualandnotof
thespouse.
IllustrationXhasasubstantialinterestinALtd.andMrs.XisemployedbyALtd.withoutany
technicalorprofessionalqualificationtojustifytheremuneration.Inthiscase,salaryincomeof
Mrs.XshallbetaxableinthehandsofX.
Whenbothhusbandandwifehavesubstantialinterest
Whereboththehusbandandwifehaveasubstantialinterestinaconcernandbothareinreceiptof
theremunerationfromsuchconcernboththeremunerationswillbeincludedinthetotalincomeof
husbandorwifewhosetotalincome,excludingsuchremuneration,isgreater.
(B)INCOMEFROMASSETSTRANSFERREDTOSPOUSE[SECTION64(1)(IV)]
Incomefromassetstransferredtospousebecomestaxableunderprovisionsofsection64(1)(iv)as
perfollowingconditions:
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Thetaxpayerisanindividual
He/shehastransferredanasset(otherthanahouseproperty)
Theassetistransferredtohis/herspouse
The asset is transferred without adequate consideration. Moreover there is no
agreementtoliveapart.
1
2
3
4
Iftheaboveconditionsaresatisfied,anyincomefromsuchassetshallbedeemedtobetheincome
ofthetaxpayerwhohastransferredtheasset.
IllustrationXtransfers500debenturesofIFCItohiswifewithoutadequateconsideration.
InterestincomeonthesedebentureswillbeincludedintheincomeofX.
WhenSection64(i)(iv)isnotapplicableOnthisbasisoftheaforesaiddiscussionandjudicial
pronouncements,section64isnotapplicableinthefollowingcases:
1
Ifassetsaretransferredbeforemarriage.
2
Ifassetsaretransferredforadequateconsideration.
3
Ifassetsaretransferredinconnectionwithanagreementtoliveapart.
4
Ifonthedateofaccrualofincome,transfereeisnotspouseofthetransferor.
5 Ifpropertyisacquiredbythespouseoutofpinmoney(i.e.anallowancegiventothewife
byherhusbandforherdressandusualhouseholdexpenses).
Intheaforesaidfivecases,incomearisingfromthetransferredassetcannotbeclubbedinthehands
ofthetransferor
4.INCOMEFROMASSETSTRANSFERREDTOSONS WIFE [SEC. 64 (1) (VI)]
Income from assets transferred to sons wife attract the provisions of section 64 (1)(vi)asper
conditionsbelow:
1.
2.
3.
4.
Thetaxpayerisanindividual.
He/shehastransferredanassetafterMay31,1973.
The asset is transferred to sons wife.
Theassetistransferredwithoutadequateconsideration.
Inthecaseofsuchindividuals,theincomefromtheassetisincludedintheincomeofthetaxpayer
whohastransferredtheasset.
5.INCOMEFROMASSETSTRANSFERREDTOAPERSONFORTHEBENEFITOF
SPOUSE[SEC.64(1)VII)]
Incomefromassetstransferredtoapersonforthebenefitofspouseattracttheprovisionsofsection
64(1)(vii)onclubbingofincome.If:
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He/shehastransferredanassettoapersonoranassociationofpersons.
Assetistransferredforthebenefitofspouse.
Thetransferofassetiswithoutadequateconsideration.
1
2
3
4
Incaseofsuchindividualsincomefromsuchanassetistaxableinthehandsofthetaxpayerwho
hastransferredtheasset.
6.INCOMEFROMASSETSTRANSFERREDTOAPERSONFORTHEBENEFITOF
SONS WIFE [SEC. 64 (1)(VIII)]
Incomefromassetstransferredto a person for the benefit of sons wife attract theprovisionsof
section64(1)(vii)onclubbingofincome.If,
He/shehastransferredanassetafterMay31,1973.
Theassetistransferredtoanypersonoranassociationofpersons.
The asset is transferred for the benefit of sons wife.
Theassetistransferredwithoutadequateconsideration.
1.
2.
3.
4.
5.
Incaseofsuchindividual,theincomefromtheassetisincludedintheincomeofthepersonwho
hastransferredtheasset.
7.INCOMEOFMINORCHILD(SEC.64(1A)
Allincomewhicharisesoraccruestotheminorchildshallbeclubbedintheincomeofhisparent
(Sec. 64(1A), whose total income (excluding Minors income)isgreater.However,incaseparents
areseparated,theincomeofminorwillbeincludedintheincomeofthatparentwhomaintainsthe
minorchildintherelevantpreviousyear.
Exemptiontoparent[Sec10(32)]
AnindividualshallbeentitledtoexemptionofRs.1,500perannum(p.a.)inrespectofeachminor
childiftheincomeofsuchminorasincludedundersection64(1A)exceedsthatamount.However
if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be
restrictedtotheincomesoincludedinthetotalincomeoftheindividual.
WhenSection64(1A)isnotapplicable
Incaseofincomeofminorchildfromfollowingsources,theincomeofminorchildisnotclubbed
withtheincomeofhisparent.
Incomeofminorchildonaccountofanymanualwork.
Incomeofminorchildonaccountofanyactivityinvolvingapplicationofhisskill,
talentorspecializedknowledgeandexperience.
3
Incomeofminorchild(fromallsources)sufferingfromanydisabilityofthenature
specifiedundersection80U.
1
2
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8.OTHERRELATEDPOINTS
Cannegativeincomebeclubbed?
Ifclubbingprovisionsareapplicableandincomefromsuchasourceisnegativeitwillstillbe
clubbedintheincomeofassessee.
Headofincomeunderwhichanincomebelongingtosomebodyelsewouldbeclubbed
The other persons income is taxable under the head under which it would have beentaxableifitis
theincomeoftheassesseehimself.
ForexampleMr.XgiftsMrs.XRs2lakhsfromwhichshestartsabusiness.Nowasperclubbing
provisionswhateveristheprofitfromthisbusinessitwillbetaxableinthehandsofMr.X.Sinceit
is an income taxable under the head Profits & gains of Business & profession that is why it will
betaxableunderthesameheadandincomewillbecalculatedasifitisthebusinessofMr.X.
9.GLOSSARY
TransferorThepersonwhotransfersanyofhisbelongings,specificallyhisassets/incometo
anotherpersonisknownasTransferor.
TransfereeThepersontowhomthetransferortransfershis/herassetsisknownastransferee.
Revocableherighttoreacquireortakebackanythinglegallywhichwasgivenearlierunderan
agreementorsettlement.
MinorApersonwhoisbelowtheageatwhichheorshelegallybecomesanadult.InIndiaat
presentapersonbecomesadultattheageof18years.
10.CLUBBINGPROVISIONSATAGLANCE
SECTION
NATURE OF
CLUBBED IN CONDITIONS/EXCEPTIONS RELEVANT
TRANSACTION THE
REFERENCE
HANDS OF
60
Transfer of
Transferor
Irrespective of:
Income without who transfers 1. Whether such transfer is
transfer of
the income.
revocable or not.
Assets.
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]
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2. Section 60
does not apply if
corpus itself
is transferred.
[Grandhi
Narayana Rao
173 ITR 593
(AP)]
61
Revocable
transfer
of Assets.
Transferor Clubbing not applicable if: Transfer held as who

transfers 1. Trust/transfer irrevocable revocable
the Assets. during the lifetime 1. If there is of
beneficiaries/transferee or provision to re
2. Transfer made prior to 1-4not revocable for a
whole/part of
transfer directly
or indirectly
period of 6 years.
Provided the transferor
derives no direct or indirect
1961 and
income/asset to
transferor;
benefit from such income in 2. If there is a

either case. 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, Spouse whose Clubbing not applicable if: 1. The Commission, total Spouse
possesses technical relationship of Fees or income or professional qualification husband
remuneration (excluding and remuneration is solely and wife must paid to spouse income to
be attributable to application of subsist at the from a concern clubbed) that
knowledge/qualification. time of accrual of in which an is greater. the income. individual has
a [Philip John substantial* Plasket Thomas
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interest.
49 ITR 97 (SC)
2. Income othe
than salary,
commission, fe
or remuneratio
is not clubbed
under this clau
64(1)(iv) Income from
Individual
assets
transferring
transferred
the asset.
directly or
indirectly to the
spouse without
adequate
consideration.
64(1)(vi) Income from the Individual assets

transferring transferred to the Asset.
sons wife.
64(1)(vii), Transfer of
Individual
(viii)
assets by an
transferring
individual to a
the Asset.
person or AOP
for the
immediate or
deferred benefit
of his:
(vii) - Spouse.
Clubbing not applicable if:

The assets are transferred;
1. With an agreement to
live apart.
1. Income
earned out of
Income arising
from transferred
assets not liable
2. Before marriage.
for clubbed.
3. Income earned when
[M.S.S. Rajan
relation does not exist.
252 ITR 126
4. By Karta of HUF gifting co- (Mad)]
parcenary property to his
2. Cash gifted to
wife.
spouse and
he/she invests to
L. Hirday Narain vs. ITO 78
ITR 26 (SC)
earn interest.
5. Property acquired out of pin [Mohini Thaper
vs. CIT 83 ITR
money.
208 (SC)]
R.B.N.J. Naidu vs. CIT 29 ITR 3. Capital gain
194 (Nag.)
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)]
Condition:
Cross transfers
The transfer should be without are also covered
adequate consideration.
[C.M.Kothari 49
ITR 107 (SC)]
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)]
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(viii) - Sons
wife.
64(1A)
Income of a
minor child
[Child includes
step child,
adopted child
and minor
married
daughter].
2. Wife means
legally wedded
wife. [Executor
of the will of
T.V. Krishna Iy
38 ITR 144
(Ker)]
1. If the
marriage
subsists, in
the hands of
the parent
whose total
income is
greater; or;
Clubbing not applicable 1. Income out

for:
of property
1. Income of a
transferred for
no
minor child
consideration
suffering any
to a minor
disability specified
married
u/s. 80U.
2. If the
marriage does
not subsist, in
the hands of
the person
who maintains
the minor
child.
account of
manual work
done by 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)
2. Income on
3.
Income on account
of
any
activity
involving
application
of skills, talent or
specialized knowledge
and experience.
daughter, shall
not be clubbed
in the parents
hands.
[Section 27]
2. The parent
in whose
hands the
minors
income is
clubbed is
entitled to an
exemption up
to Rs. 1,500
per child.
[Section
10(32)]
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CLUBBING OF INCOME SECTION 60 TO 64