Clubbing of Income - Taxation | Income Tax for assessment (Inter Level) PDF Download

Clubbing of Income - Taxation

Learning Sections 

Introduction 

What is clubbing of income? Clubbing means addition of income in the hands of transferrer who has transferred any asset or income to any specified person if certain conditions are satisfied.

Section 60. transfer of income no transfer of assets (direct transfer) 

Where income is arising to any person without holding any asset then such income is clubbed in the hands of that person who holds the assets. (Treated as application of income)

In this case interest from fixed deposit shall be clubbed in the hands of Mr. X as he has transferred only interest on fixed deposit and not fixed deposit itself. Here ownership of the asset is not transferred to Mr. Y.

P1 : The HUF gave the right to receive furniture rent of Rs 26,000 p.a. to Mrs. Raman without transferring the ownership rights in her favour. Explain in whose hands Rs 26,000 is taxable. ca Pcc may  2010

Ans : S 60. Rs 26,000 is clubbed in the hands of HUF under the head Other Sources.

P2 : Mr. X had a fixed deposit of Rs 1,00,000 in Axis Bank. He instructed the bank to credit the interest on the deposit @ 9% p.a. to the savings bank account of Mr. B, son of his brother, to help him in his education. Explain in whose hands interest is taxable.

Ans : S 60. Rs 9,000 is clubbed in the hands of Mr. X under the head Other Sources.

P3 : Suppose in the above question Mr. X transfers fixed deposit to Mr. B, son of his brother. What is the tax treatment?

Ans : Clubbing of income is not applicable since asset is not transferred to Spouse, Son’s wife or minor child. S 56(2) provisions of gift is applicable. B receives gift in cash in excess of Rs 50,000 i.e. Rs 1,00,000 taxable in hands of Mr. B under the head Other Sources.

CLUBBING PROVISIONS RELATING TO INCOME OF SPOUSE

1. Asset (other than House Property — treated u/s 27) is transferred by individual to his or her spouse, directly or indirectly

2. without adequate consideration [Where asset is transferred for adequate consideration clubbing provision is not applicable]

3. then income arising to spouse from the transferred asset shall be clubbed in the hands of transferrer.

4. Clubbing provision shall be applicable only when marriage subsist both at the time of transfer of asset and at the time when income arises.

Exception : Where the asset is transferred with an agreement to live apart then clubbing provision is not applicable.

Section 64(1)(vii). Any asset transferred to any person for the benefit of spouse

Where an individual transfers any asset to any person or AOP for the benefit of his or her spouse, without adequate consideration, the income from such assets shall be clubbed in the hands of transferor to the extent the benefit goes to the spouse.

Note 1: To attract clubbing provisions relating to spouse the relationship of husband and wife should subsist both at the time of transfer of asset and at the time of accrual of such income from the asset. Thus income of the spouse derived before marriage cannot be clubbed.

Clubbing Provision relating to income of son’s wife

Section 64(1)(vi).any asset transferred to son’s wife : Where any asset (including house property) is transferred by an individual to son’s wife without adequate consideration then income arising to son’s wife from the transferred asset shall be clubbed in the hands of transferor. note : Relationship of father-in-law and daughter-in-law / mother-in-law and daughter-in-law should subsist both at the time of transfer of the asset and at the time when income accrues.

Section 64(1)(viii). Any asset transferred to any person for the benefit of son’s wife : Where an individual transfers any asset to any person or AOP, without adequate consideration, the income from such assets shall be clubbed in the hands of transferor to the extent the benefit goes to the son’s wife.

Note : When income is not allowed to be clubbed.

1. Asset is transferred for adequate consideration.

2. Relationship of father-in-law and daughter-in-law / mother-in-law and daughter-in-law doesn’t subsist at the time of transfer of asset or at the time when income accrues.

Understanding section 64(1). Spouse and son’s Wife

Income from asset transferred is to be clubbed

1. Mr. X transfers fixed deposit to her wife without adequate consideration. Interest on fixed deposit is Rs 15,000. Whether Rs 15,000 shall be clubbed in the hands of Mr. X? If yes, why?

A. Yes. Rs 15,000 shall be clubbed in the hands of Mr. X u/s 64(1)(iv), since income is arising from the asset transferred by Mr. X.

Income from income is not allowed to be clubbed

2. From Q. 1....Mrs. X purchases 7% debentures from interest on transferred fixed deposit. Her interest income from debentures is Rs 5,000. Whether Rs 5,000 shall be clubbed in the hands of Mr. X?. If no, why?

A No. Rs 5,000 shall not be clubbed in the hands of Mr. X, since income is not arising from the asset transferred by Mr. X, but from the income of the asset transferred. Section 64(1)(iv) gets attracted only where income is arising from the asset transferred by spouse.

Income from change in identity of assets is to be clubbed

3. Mr. X gifts Rs 10,00,000 to her wife on her birthday. From that cash she purchases 11% debentures. Her interest income from such debenture is Rs 20,000. Whether Rs 20,000 shall be clubbed in the hands of Mr. X? If yes, why?

A. Yes. Rs 20,000 shall be clubbed in the hands of Mr. X u/s 64(1)(iv), since income is arising from the asset transferred by spouse. Change in identity of asset does not make any difference.

Income from accretion of assets is not clubbed

4. Mr. X gifts 1,000 equity shares of ACC Ltd to her wife. The company declares a bonus of 200 shares and dividend @ Rs 2 per share. Explain its tax treatment.
A. Rs 2,000 dividend from equity shares shall be clubbed in the hands of husband, since it is income from the transferred asset. Rs 400 dividend from bonus shares shall not be clubbed, since it is an income from accretion of asset.

 Amount Invested in Business :

(i) For example, X transfers Rs 1,00,000 to his wife. In addition, Mrs. X invest Rs 4,00,000 in a beauty parlour business and earned an income of Rs 80,000. Hence 

  shall be clubbed in the income of Mr. X

Section 64(1a). Clubbing of income of minor child

In computing the total income of any parent, it shall include all such income which accrues to his minor child and shall be clubbed in the hands of that parent whose total income (excluding the income to be clubbed) is greater.

If you read the sentence carefully it says that all income accruing to a minor child shall be clubbed. i.e. from whatever sources income is accruing it shall be clubbed. It is not only income arising from transferred asset but also income arising from other assets which minor child may have acquired shall also be clubbed. Income from income, income from accretion of assets shall also be clubbed.

Note 1: Where the marriage of the parent does not subsist, the income of the minor child shall be included in the hands of that parent who maintains the minor child in the relevant previous year.

Note 2: Where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the AO is satisfied (after giving that parent an opportunity of being heard) that it is necessary to do so. (When either of the parents’s income falls in higher tax bracket change is necessary).

When income of minor child is not allowed to be clubbed

1. Minor child suffering from any disability specified u/s 80U. (Also eligible for deduction u/s 80U)

2. Income accruing to a minor child where it involves manual work or application of his skill, talent or specialised knowledge and experience.

Note 1: Section 10(32) If income of minor child is so included, that parent shall be entitled to an exemption of maximum of ₹ 1,500 in respect of each minor child. (no limit to number of child)

Note 2: Where the minor child attains majority during the previous year, then the income till the date he remained minor in that previous year shall be clubbed in the hands of the parent. The day of majority, income shall be taxable in his hands only.

Note 3: Section 2(15B). Child includes step child, adopted child and minor married daughter.

Note 4: If parents of the minor child is not alive then the income of minor child cannot be clubbed and guardian of the minor child shall file the return of such income on behalf of the minor child.

Understanding section 64(1a). Income of Minor Child

Following Points applicable for all Provisions of clubbing of income

1. Clubbing provision is applicable even if there is a loss.

2. Clubbing of income is done in respective heads of income.

3. To compute gross total income first apply provisions of clubbing of income and then provisions of set off and carry forward of losses.

P1: Mr. Taxcrazy and his family members furnishes following particulars. You are required to compute total income of Mr. Taxcrazy and his family members.

1. Self-Income

a. Income from Business                88,000

b. Interest on company deposits      8,000

2. Wife’ s income

a. Income from profession                                                           1,20,000

b. Dividend from a foreign company                                                3,100

c. Rental income from commercial property gifted by her father   36,000

d. Interest on debentures gifted by her husband                           18,000

e. Interest on bank deposits less                                                   (6,000)

expenses (Fixed deposit is made in an

Indian Bank in USA)

3. Major Son’s income

a. Salary including dearness

allowance and perquisites from a foreign

company for services rendered in India                                 80,000

b. Income from TV Game show                                               2,000

c. A self occupied residential house                                         Nil

property gifted by his father in 2000

when he was 17 years old (Interest accrued

during the year remains unpaid Rs 38,000)

4. Minor Son’s income who is a renowned painter

a. Interest on Central Govt. deposits                            16,000

b. Income from painting                                                45,000

c. Reward for essay writing competition in a school     20,000 

5. Minor daughter’s income

a. Dividend from an Indian Company (shares gifted by her brother)    6,000

b. Rental income from house property situated in Australia

(House is gifted by her grandfather)                                                    25,000

c. Interest on investment in her name invested by her father              15,000

Ans: 1,14,000; 1,87,800; 52,000; 45,000; Nil.

P2: Y is a trader, particulars of his income and those of the members of his family are given below. Income from Y’s business

Salary derived from a educational institution by Mrs. Y              50,000

Interest on company deposits derived by Master Z

(minor son). These deposits were made in the

name of Z by his father’s father about 6 years ago                    12,000

Receipts from sale of paintings and drawings made

by minor A (minor daughter of Mr. and Mrs. Y and a n

oted child artist)                                                                        60,000

Income by way of lottery earnings by Master B (minor son of Y) 6,000

Discuss whether the above will from part of the assessable income of any individual and also compute the assessable income of Y.

Ans: Y: 1,05,000; Mrs. Y 50,000; Master A 60,000.

P3: X is the Karta of a HUF, whose members derive income as given below :

Income from X’s own business.                               50,000

Mrs. X a dermatologist draws salary.                        80,000

Minor son A (earning interest on fixed deposit 

with ABC Ltd., which were gifted to him

by his grandfather).                                                  15,000

Minor daughter B gave a dance

performance and received remuneration.              1,00,000

A got winnings from lottery (gross).                       2,00,000

Explain how the above will be taxed. 

Ans: 50,000; 2,93,500; 1,00,000.

P4 : Cash gift of Rs 51,000 received by minor child from a friend. His parents deposits Rs 51,000 in PPF A/c in the name of minor child. Explain tax treatment.

Ans : Rs 49,500 clubbed in the hands of parent. Rs 51,000 deduction can be claimed u/s 80C by parents. Interest on PPF is exempt from tax u/s 10(11).

P5 : Mr. A is an employee of Larsen Limited and has substantial interest in the company. His salary is 25,000 p.m. Mrs. A also is working in that company at a salary of 10,000 p.m. without any professional qualification:

Mr. A also receives 30,000 as income from securities, Mrs. A owns a house property which she has let out. Rent received from such house property is 12,000 p.m.

Mr. & Mrs. A have three minor children- two twin daughters and one son. Income of the twin daughters is 2,000 p.a. and that of his son is 1,200 p.a. Compute the income of Mr and Mrs. A.

Ans : Mr. A : 4,50,000; Mrs. A : 1,00,800

Extra Topics

Section 61, 62 & 63. revocable And irrevocablee Transfer 

1. In case of revocable transfer of assets, income shall be taxable in the hands of transferrer.

2. In case of irrevocable transfer of assets, income shall be taxable in the hands of transferee.

3. Irrevocable transfer means asset and income is transferred for the life time of the beneficiary.

Section 64(2). Income From Self Acquired Property Converted to Joint Family Property 

1. Where an individual converts its self acquired property into Hindu undivided family property,

2. otherwise than for adequate consideration

3. the income derived from the converted property shall be deemed to be the income of individual and not of the HUF.

Special Question

P1 : A Proprietary Business was started by Smt. Rani in the year 2014. As on 1-4-2015 her capital in business was Rs 3,00,000. Her husband gifted Rs 2,00,000 on 10-4-2015, which amount Smt. Rani invested in her business on the same date.  Smt. Rani earned profits from her proprietary business for the Financial year 2015-16, Rs 1,50,000 and Financial year 2016-17 Rs 3,90,000.  Compute the income, to be clubbed in the hands of Rani’s husband for the Assessment year 2017-18 with reasons

Solution

Let us assume the facts as below:

Decision to be taken for clubbing of income for the assessment year 2017-18.

Section 64(1) 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 transferred directly or indirectly to the spouse of the individual, otherwise than for adequate consideration.  In this case Smt. Rani received a gift of Rs 2,00,000 from her husband which she invested in her business. The income to be clubbed in the hands of Smt. Rani’s husband for AY 2016-17 is computed as under :

Analysis