Recalling the Clubbing Provisions in Income Tax

Summary: The clubbing provisions under the Income Tax Act, particularly Sections 60 to 64, are crucial for ensuring that income is taxed in the hands of the rightful individual, often the transferor. Section 60 deals with income transfer without the transfer of the underlying asset, making it taxable in the hands of the transferor. Section 61 covers income from revocable transfers, while Section 62 exempts income from irrevocable transfers under specific conditions, provided the transferor does not benefit from it. Section 63 defines what constitutes a “revocable transfer.” Section 64 addresses the inclusion of income generated by a spouse, minor child, or other family members, where assets or income are transferred without adequate consideration. The provision ensures that such income is taxed as part of the transferor’s total income. These rules aim to prevent tax evasion by transferring income or assets to family members and ensure that tax liability is accurately assessed. The provisions also cover the transfer of assets to one’s spouse or son’s wife, emphasizing that income from such transfers must be included in the transferor’s total income unless specific exemptions apply.

Introduction:

Understanding the clubbing provisions under the Income Tax Act is crucial for taxpayers engaged in transactions involving the transfer of income and assets. Sections 60 to 64 specifically address scenarios where income is transferred without the underlying asset, as well as situations involving revocable transfers and income generated by family members, such as spouses and minor children. These sections ensure that income is taxed in the hands of the rightful individual, often the original owner of the asset or the transferor. This article delves into the intricacies of each section, highlighting key concepts such as revocable and irrevocable transfers, the implications of income from assets transferred to family members, and the conditions under which such incomes are taxed. By examining these provisions, we aim to provide a comprehensive understanding of how the clubbing of income affects taxation and ensures accurate tax liability assessments.

Section 60:  Income transfer without transfer of asset. :-

• “All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income.”
• Analysis :

This means where there is transfer of income without transfer of asset from which income arises then income included in the hands of the transferor whether such transfer is revocable or not.

Section 61: Revocable transfer of assets:-

• “All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.”
• Analysis :

Income arises from revocable transfer of assets then such income included and taxed in the hands of transferor.

Section 62: Transfer irrevocable for a specified period.:-

• (1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer—

(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee; or

(ii) Made before the 1st day of April, 1961, which is not revocable for a period exceeding six years:

Provided that the transferor derives no direct or indirect benefit from such income in either case.

• (2) Notwithstanding anything contained in sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.

Analysis:

This means in case of revocable transfer, income is received by transferee but tax is paid by transferor. But if transfer is revocable only after the death of beneficiary then income is not clubbed in the hands of transferor and taxable in the hands of beneficiary. Subject to condition that transferor should not enjoy any direct or indirect benefit from such transfer.

Section 63:”Transfer” and “revocable transfer” defined:-

For the purposes of sections 60, 61 and 62 and of this section,—

(a) a transfer shall be deemed to be revocable if—

(i) It contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or

(ii)  It, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets;

(b) “Transfer” includes any settlement, trust, covenant, agreement or arrangement.

Section 64(1) : “Income of individual to include income of spouse, minor child, etc.”

1. Income arises to the spouse from a concern in which individual has substantial interest.(64(1)(ii))

In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

• To the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest:
• Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience;
• Where both husband and wife have substantial interest in a concern and both are in the receipt of income by way of remuneration from concern, such income will be includible in the hands of that spouse, whose total income, excluding above income, is higher. Where any such income is once included in the total income of either spouse, income arising in succeeding year shall not be included in the total income of the other spouse, unless AO is satisfied, after giving that spouse an opportunity of being heard ,that it is necessary to do so.

Analysis:

• Suppose Mr. Laddoo Gopal and Mrs. Laddoo Gopal are both working in the same entity and receiving remuneration, and both have substantial interests in the entity. The question arises as to whose total income the remuneration of the other spouse should be clubbed with.
• If both parties are receiving remuneration due to their professional qualifications, the clubbing provisions are not applicable.
• If one spouse receives remuneration due to professional qualifications and the other does not, the income is clubbed with the spouse who is receiving remuneration due to their professional qualifications.
• If neither spouse has the required qualifications and expertise, the income should be included in the total income of the spouse who has a higher total income before considering such remuneration or commission.
• For example, if Mr. Laddoo Gopal and Mrs. Laddoo Gopal both lack the required qualifications and expertise, and Mr. Laddoo Gopal’s total income is ₹750,000 while Mrs. Laddoo Gopal’s total income is ₹850,000 before considering such remuneration or commission, then the clubbing provisions would apply to Mrs. Laddoo Gopal, as she has the higher total income.
• Additionally, this clause applies only to salary, commission, fees, or any other form of remuneration. It does not apply to profit sharing, as profit is not considered remuneration.

Substantial interest :

(i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than twenty per cent of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of his relatives;

(ii) in any other case, if such person is entitled, or such person and one or more of his relatives are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent of the profits of such concern.

2. Income arises to the spouse from the asset transferred by the individual : (64(1)(iv))

In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;

Analysis:

• Section 27(i) states that: If any individual transfers otherwise for adequate consideration any house property to his or her spouse not being transfer in relation live apart or to a minor child not being married daughter shall be deemed to be the owner of the house property so transferred.
• Therefore this section applies to income other than income of house property because property income clubbed as per 27(1).
• So income from the assets transferred for inadequate consideration to the spouse shall be included in the total income of the transferor.
• Furthermore this provision not applicable to the assets transferred before marrainge. Therefore relationship of husband and wife must exist at the time of such transfer.

3. Income arises to the son’s wife from the asset transferred by the individual : (64(1)(vi))

In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

• To the son’s wife, of such individual, from assets transferred directly or indirectly on or after the 1st day of June, 1973, to the son’s wife by such individual otherwise than for adequate consideration;

Analysis:

• Any income arising from the transfer of assets for inadequate consideration to the son’s wife shall be included in the total income of the transferor.
• However, income arising from assets transferred before the marriage is not required to be included under this provision. In such cases, Section 56 is applicable, and if the value of the gift exceeds ₹50,000, it will be taxable under income from other sources in the hands of Son’s wife.
• Furthermore, if any assets are transferred on the occasion of marriage, such transfers are exempt from tax. However, the income arising from these assets is still liable to be included in the hands of the transferor, as it constitutes a transfer of assets without adequate consideration
• For instance: Mr.Laddoo Gopal gifted a Plot to his daughter in law on the occasion of marriage then such gift is exempt from tax. After that daughter in law sold such plot, capital gain liable to be included in the hands of Mr.Laddoo Gopal.

4. Income arises to any person ,association from the asset transferred by the individual : (64(1)(vii))/ (64(1)(viii))

In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

• To any person or association of persons from assets transferred directly or indirectly otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse; and
• To any person or association of persons from assets transferred directly or indirectly on or after the 1st day of June, 1973, otherwise than for adequate consideration, to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his son’s wife. (64(1)(viii))

Analysis:

• Income arises to any Association or Person from the assets transferred for the inadequate consideration for the benefit of the spouse of the transferor individual then such income is liable to be included in the hands of such transferor individual.

Explanation relevant for clause (iv) and (vi) above—For the purposes of above provisions it is clarified that, where the assets transferred directly or indirectly by an individual to his spouse or son’s wife (hereafter in this Explanation referred to as “the transferee”) are invested by the transferee,—

• in any business, such investment being {not in the nature of contribution of capital as a partner in a firm or, as the case may be, for being admitted to the benefits of partnership in a firm,} that part of the income arising out of the business to the transferee in any previous year, which bears the same proportion to the income of the transferee from the business as the value of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the transferee as on the said day;

shall be included in the total income of the individual in that previous year.

For Example :

• Laddoo Gopal has transferred Plot worth 25, 00,000/- to his wife Mrs. Laddoo Gopal as on 25/03/2023 and after that on 28/03/2023 Mrs. Laddo Gopal Invested such plot in her real estate business for development of flats and earned profit from the business of Rs. 35,00,000/-  for the year ended 31/03/2024. Now for the purpose of above clause we should first ascertain the total investment of Mrs. Laddoo Gopal in the business as on 01^st day of previous year i.e. 01-04-2023 suppose that investment is 95,00,000/-  including the plot invested. So calculation of the income included in the hands of Mr. Laddoo Gopal is as below :
• 2500000/9500000*3500000=9,21,053 (approx.) This income should be included in the hands of Mr. Laddoo Gopal.
• Furthermore this clause is applicable only in case where total investment in the business as on 1s day of previous year includes such assets received by the transferor spouse.
• in the nature of contribution of capital as a partner in a firm, that part of the interest receivable by the transferee from the firm in any previous year, which bears the same proportion to the interest receivable by the transferee from the firm as the value of investment aforesaid as on the first day of the previous year bears to the total investment by way of capital contribution as a partner in the firm as on the said day,

shall be included in the total income of the individual in that previous year.

• For example, if an amount or asset received from an individual is invested in a partnership firm as capital, and any interest is received by the spouse of the individual who invested that amount, then such interest is clubbed into the hands of the transferor individual in the following manner:
• Suppose Mr. Laddoo Gopal has transferred his land to his spouse, Mrs. Laddoo Gopal, for inadequate consideration (i.e., at ₹10,00,000), and the said land is invested by Mrs. Laddoo Gopal in her partnership firm as a capital contribution. She also receives interest from this capital contribution to the tune of ₹200,000.
• To calculate the extent of interest that is includable in the hands of Mr. Laddoo Gopal, we should first ascertain the total capital contribution by Mrs. Laddoo Gopal in the partnership firm as of the 1st day of the previous year. Suppose this amount is ₹16,66,667 (including the investment of land worth ₹10 lakhs).
• Therefore, the income required to be clubbed in the hands of Mr. Laddoo Gopal is calculated as follows: 10,00,000/16,66,667*2,00,000=1,20,000/-.
• Furthermore the above provision is applicable only when opening capital of the previous year includes assets transferred by the individual transferor.

5. Income of Minor 64(1A)):

In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor child suffering from any disability of the nature specified in section 80U:

Provided that nothing contained in this sub-section shall apply in respect of such income as arises or accrues to the minor child on account of any—

(a) manual work done by him; or

(b) activity involving application of his skill, talent or specialised knowledge and experience.

Explanation.—For the purposes of this sub-section, the income of the minor child shall be included,—

(a) where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub-section) is greater; or

(b) where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year, and 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 Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.

• • If a minor child’s income is clubbed in the hands of parent, then an exemption of Rs.1,500 is allowed to the parent (This is applicable only if the parent opts for the old tax regime and maximum up to two minor child).
  • Examples of income where clubbing provisions are not applicable :
  • The winner of TV shows like Little Champ, Master Chef Junior, Scholarships, Stipend, Quiz contest and others.

6. Transfer between HUF and Member or vice versa 64(2):

Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971,—

(a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;

(b) the income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family;

(c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly:

Provided that the income referred to in clause (b) or clause (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse of the individual.

Explanation 1.—For the purposes of sub-section (2),—

“property” includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property.

Analysis:

• Income from such converted property shall be clubbed in the hands of individual even though such converted property received back by the spouse of such individual transferor on partition of the family.

Explanation 2.—For the purposes of this section, “income” includes loss.

Analysis:

• Whenever income is required to be clubbed in the hands of the transferor under this section, any loss arising from the properties transferred should also be allowed to the transferor of such assets in each applicable case.

In conclusion, the clubbing provisions of the Income Tax Act, encapsulated in Sections 60 to 64, play a pivotal role in ensuring that income is taxed in the hands of the appropriate individual, usually the transferor, in scenarios where income and assets are transferred within families or through specific arrangements. These sections aim to prevent tax evasion through strategic transfers and ensure the integrity of the tax system by attributing income to those who effectively control or benefit from it. By understanding the nuances of these provisions, taxpayers can better navigate their obligations and structure transactions in a compliant manner. Awareness of these rules not only aids in proper tax planning but also minimizes potential disputes with tax authorities. Ultimately, being well-informed about clubbing provisions safeguards individuals from unintended tax consequences and contributes to a fair and transparent tax environment.