Clubbing of Incomes & Deemed Incomes - Computation of Total Income, Income Tax Laws | Income Tax Laws - B Com PDF Download

In the Indian Income Tax Act, there are provisions of Clubbing of Income.

But , the question is What is Clubbing of Income and why it is so?

Clubbing of income means Income of other person included in assessee’s total income, 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. 

For example: Income of husband which is shown to be the income of his wife is clubbed in the income of husband and is taxable in the hands of the husband.

Income of a minor child is taxable in the hands of his parents.

Why it is so?

Under the Income Tax Act a person has to pay taxes on his 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.

For example: A purchased a house property in the name of his wife B. A let out this house property . The rental income earned by A in name of his wife B is taxable in the hands of A.

Clubbing of Income takes place in the following cases:

1. Transfer of income without transfer of Asset:  If any person transfers income without transferring the ownership of  the asset , such income will be taxable in the hands of the transferor. Ex. X owns 4000, 14% debentures of A ltd. of Rs. 100 each , he transfers interest income to his friend Y without transferring the ownership of Debentures . In this case although interst will be received by Y but it is taxable in the hands of X.

2. Revocable transfer of Asset: If any person transfers any asset to any other person in such form and condition that such transfer is revocable at any time during the lifetime of the transferee , the income earned through such asset is chargeable to tax as the income of the transferor. For ex. X transfers a house property to A. However , X has right to revoke the transfer during the life time of A . It is a revocable transfer and income arising from the house property is taxable in the hands of X.

3. Remuneration to Spouse: An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience clubbing provisions will not take place. For ex. X  has substantial interest in A ltd. and Mrs. X is employed by A ltd. without any technical or professional qualification. In this case salary income of Mrs. X shall be taxable in the hands of X.

4. Income from assets transferred to spouse: Where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor. For ex.  Mrs. A transfer’s 100 debentures of IFCI to her husband without adequate consideration. Interest income on these debentures will be included in the income of Mrs. A.

5. Income from asset transferred to son’s wife: If an individual , directly or indirectly transfers asset , without adequate consideration to son’s wife , income arising from such asset is included in the income of the transferor. For ex.  Mrs. A transfer’s 100 debentures of IFCI to her son’s wife without adequate consideration. Interest income on these debentures will be included in the income of Mrs. A.

6. Income from asset transfer to a person for the benefit of spouse/ son’s wife: If an individual , directly or indirectly transfers asset , without adequate consideration to a person or an association of persons for the benefit of his/her spouse /son’s wife , income arising from such asset directly or indirectly is included in the income of the transferor. For Ex. X transfers Government bonds without consideration to an association of persons, subject to the condition that , the interest income from these bonds will be utilized for the benefit of Mrs. X or Mrs. X son’s wife . Interest from bonds will be included in the income of X.

7. Income of a minor child: All income which arises to the minor shall be clubbed in the income of his parents. Income will be included in the income of that parent whose total income is greater.  This case has two exceptions.(1) Income of minor child suffering from specified disability . (2) Income of minor child on account of manual work or involving application of his skill/talent etc.

*Substantial Interest: An individual is deemed to have substantial interest if he beneficially holds equity shares carrying not less than 20% voting powering case of a company or is entitled to not less than 20% of the profits in case of a concern other than a company , at any time during the previous year.

 Loss or expenditure already allowed in computation of income from other sources and subsequently recovered shall be treated as the income of the previous year in which it is recovered.

 Some special points to remember:

Deemed Incomes:

Section 68: Cash Credits

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. 

Deemed Dividend (Sec. 2(22)):

Dividend for the purpose of Income Tax is a wider term than what is understood in common parlance. The Act provides an inclusive definition of Dividend in section 2(22), and covers the following distributions and payments-

• Distribution of accumulated profits, whether capitalized or not, when such distribution by the company to its shareholders, entails the release of all or any part of the company’s assets.
• Distribution of debentures, debenture-stock or deposit certificates in any form, with or without interest and distribution of bonus shares to preference shareholders, to the extent the company possess accumulated profits, whether capitalized or not.
• Distribution on liquidation, to the extent such distribution is attributable to the accumulated profits of the company immediately after its liquidation, whether capitalized or not.
• Distribution on reduction of capital, to the extent the company possesses accumulated profits are capitalized or not.
• Payment of any sum by a company in which the public are not substantially interested, by way of Advance or Loan, to the extent the company possesses accumulated profits, to-
  • A Shareholder, who is beneficial owner of shares carrying not less than 10% voting power.
  • Any concern in which such shareholder is a member or partner, having beneficial entitlement to not less than 20% of such concern’s income.
  • Any payment on behalf, or for the individual benefit, of such shareholder.

   Meaning of Accumulated Profits:

1. General: All profits up to the date of liquidation
2. Special: If liquidation is consequent to compulsory acquisition Govt. or Govt. Corporation, profits up to date of liquidation, except profits of three successive previous years immediately preceding the year of liquidation.

Exceptions: Dividend does not include-

1. Distribution covered by (c) and (d) above, in respect of shares issued for full cash consideration, where the shareholder is not entitled to participate in the surplus assets upon liquidation.
2. Advance or loan to a shareholder or concern, by a company carrying on lending business, in the ordinary course of is business.
3. Dividend paid by a company, which is set-off wholly, or in part against previous payments made and deemed as dividend by (e) above; to the extent it is so set-off.
4. Payment made on purchases of its own shares as per Sec.77A of the companies Act, 1956
5. Distribution of shares pursuant of a de-merger by the resulting company, to the shareholders of the de-merged company, whether or not, there is a reduction of capital in the de-merged company.

Dividends are deemed to be the income of the relevant previous year in the following manner :
 

Provisions of the Act on the place of accrual of dividend income: