Income of other Persons included in Assessee’s Total Income | Commerce & Accountancy Optional Notes for UPSC PDF Download

Clubbing of Incomes

A Slab System is employed to levy income tax on an individual's total income. As part of the Progressive Tax System, progressive tax rates are applied, meaning that as income increases, so does the tax rate. Taxpayers in higher tax brackets may transfer a portion of their income to close relatives or others with lower or fully exempt income brackets. This practice can reduce their own tax rate and avoid paying tax at a higher rate. Provisions under Sections 60 to 65 of the Income Tax Act are in place to prevent such tax avoidance practices.

Clubbing of Income

If an individual transfers income earned from an asset to another person without transferring ownership of the asset, the income from that asset will be deemed as the transferor's income and included in their total income.

Revocable Transfer of Assets (Section 61)

• If a person makes a revocable transfer of an asset to another person, any income arising from that asset will be deemed as the transferor's income and included in their total income. 
• A transfer is considered revocable if it contains provisions for the retransfer of income or assets to the transferor or if it gives the transferor the right to reassume power over income or assets.

Salary, Commission, Fees, or any Other Remuneration to the Spouse (Section 64)

• In calculating an individual's total income, any income received by the spouse in the form of salary, commission, fees, or other remuneration from a concern in which the individual has a substantial interest will be included. However, this doesn't apply if the spouse's income is solely attributable to their technical or professional qualifications.
• For companies, a substantial interest is deemed to exist if the individual and their relatives own at least 20% of the equity shares with voting rights during the previous year. For other concerns, a substantial interest is deemed to exist if the individual and their relatives are entitled to at least 20% of the profits during the previous year. If both spouses have a substantial interest in a concern and both receive remuneration, the remuneration will be clubbed with the income of the spouse with the higher total income, excluding that remuneration.The term "spouse" refers to a husband or wife, and clubbing is limited to incomes from salary, commission, fees, or other remuneration received by the spouse, directly or indirectly, in cash or kind.

Income from Assets Transferred to Spouse [Section 64(1)(iv)]

When an individual transfers an asset (excluding house property) to their spouse, any income from that asset is considered the income of the transferor. However, this doesn't apply in the following situations:

• If the transfer is made for adequate consideration.
• If the transfer is made under an agreement between the spouses to live apart. This separation can be judicial or voluntary.

In cases where the consideration is inadequate, a proportionate income will be included in the transferor's income. Income from house property transferred to a spouse is taxed under the "Income from House Property" head in the transferor's hands, not the transferee's.

Income from Assets Transferred to Daughter-in-law (Son's Wife) [Section 64(1)(vi)]

• Income arising from the transfer of an asset by an individual directly or indirectly, on or after June 1, 1973, without adequate consideration to their son's wife (daughter-in-law) is included in the total income of the transferor.

Income from Assets Transferred to a Person or Association of Persons for the Benefit of Spouse [Section 64(1)(vii)]

• Income arising from the transfer of an asset directly or indirectly by an individual without adequate consideration to a person or association of persons for the immediate or deferred benefit of their spouse is included in the total income of the transferor to the extent it benefits the spouse.

Income from Assets Transferred to a Person or Association of Persons for the Benefit of Son's Wife [Section 64(1)(viii)]

• Income arising from the transfer of an asset after May 31, 1973, directly or indirectly by an individual without adequate consideration to a person or association of persons for the immediate or deferred benefit of their son's wife is included in the total income of the transferor to the extent it benefits the son's wife.

Income to the Spouse or Son's Wife from Investment of Transferred Asset

When an individual transfers an asset directly or indirectly to their spouse or son's wife, and the transferee invests the asset in a business, the income from that business will be included in the transferor's income based on the following calculations:

If the investment is not a contribution of capital as a partner in a firm or for admission to the benefits of partnership in a firm:

• Value of the asset transferred by the transferor on the 1st day of the previous year × Income from the business to the transferee Total investment in the business by the transferor as on the 1st day of the previous year

If the investment is a contribution of capital as a partner in a firm:

• Capital contribution of the transferee as on the 1st day of the previous year × Total income received by the transferee from the firm Total capital contribution of the transferee as on the 1st day of the previous year

The share of income belonging to the assets transferred will be included in the transferor's income.

Income of a Minor Child

The income of a minor child, unless the child is a minor child with a disability as specified in Section 80U, shall be included (clubbed) in the income of the parent. Income includes any income that arises or accrues to the minor child. However, the following types of income shall not be included in the total income of the parent:

• Income that arises or accrues to the minor child from any manual work done by the child.
• Income that arises or accrues to the minor child from any activity that involves the application of the child's skill, talent, or specialized knowledge and experience.

The rules for clubbing the income of a minor child with the income of a parent are as follows:

• If the parents are married, the income shall be clubbed with the parent whose total income (excluding the income of the minor child) is greater. For example, if the exclusive income of the mother in the previous year is Rs. 6,00,000 and the father's income is Rs. 7,00,000 (without adding the minor's income in both cases), and the minor's income in the previous year is Rs. 2,00,000, then the minor's income shall be included in the income of the father because his exclusive income is greater.
• If the parents are not married, the income of the minor child shall be included (clubbed) in the income of the parent who maintains the minor child in the previous year.

Once any income of a minor is included in the total income of a parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the Assessing Officer is satisfied and gives approval for doing so. If a minor child's income is included in the total income of an individual (any parent), such individual shall be entitled to the following exemption in respect of each minor child separately:

• The income of the minor child so included or Rs. 1,500 (whichever is less)