Clubbing of Income Under the Income Tax Act,1961

CA Nisha Pariyani

Introduction

• Generally person is liable to pay tax only on the income which is earned by him.
• However provisions of Section 60 to 64 of Income Tax Act 1961 may make you liable to pay tax on income which is not earned by you…
• Inclusion of others income in the income of assessee is called “Clubbing of income” and such clubbed income is termed as “Deemed Income”.

Following acts of yours will attract the provision of Sec 60:

1. You own an asset.

2. Asset is not transferred by You.

3. You have transferred the income earned from such assets to any person.

Section 61: Revocable Transfer of Assets

Extract of Section 61:

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.

Example:

Mr. X transfers house Property to his friend Mr.Y for SEVEN YEARS. Here the transfer is revocable after seven years and therefore, the  income from House Property will be clubbed with the income of Mr.X.

Section 62: Transfer irrevocable for a specified period.

Where an asset is transferred to ANY PERSON:

1. By way of trust which is not revocable during the lifetime of the beneficiaries, or

2. In the case of any other transfer ,which is not revocable during the lifetime of the transferee

3. Transfer made before the 1st day of April, 1961, which is not revocable for a period exceeding six years

then all income arising from such asset shall be clubbed in the income of the transferee subject to transferors derives no direct or indirect benefit from such income in either case. 

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.

Extract of Section 62:

62 (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.

Example:

Mr. A transfers his house property to Mr. B for the lifetime of Mr. B. The transfer is irrevocable and the income from HP from the date of trf. shall be included in the income of Mr. B. On the death of Mr. B, the income from HP shall be included in income of Mr. A from the date of death. The income shall be included in income of Mr. A even if Mr. A does not revoke the transfer on the death of Mr. B (because law says income shall be included in transferor’s income as and when power to revoke arises to transferor.”ACTUAL REVOCATION IS NOT RELEVANT”

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.

INCOME OF SPOUSE 

The following incomes of the spouse of an individual shall be included in the total income of the individual:

a. Remuneration received by spouse from a concern in which individual has substantial interest [section 64 (1) (ii)]:

—If the following conditions are fulfilled this section becomes applicable:—

• If spouse of an individual gets any salary, commission, fees etc (remuneration) from a
• The individual has a substantial interest in such a concern.
• The remuneration paid to the spouse is not due to technical or professional knowledge of the spouse.

Then such salary, commission, fees, etc shall be considered as income of the individual and not of the spouse.

Extract of Section 64(1)(ii):

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

 (ii)  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

Example:

—Illustration – Mr. He has a substantial interest in A Ltd. and Mrs. She is employed by A Ltd. without any technical or professional qualification to justify the remuneration. In this case, salary income of Mrs. She shall be taxable in the hands of Mr. He

 When both husband and wife have substantial interest

Where both the husband and wife have a substantial interest in a concern and both are in receipt of the remuneration from such concern both the remunerations will be included in the total income of husband or wife whose total income, EXCLUDING SUCH REMUNERATION, IS GREATER.

**Special comment: where such income is once included in the total income of either spouse, any such income arising in the subsequent year will not be included in the total income of other spouse unless the A.O is satisfied after giving that spouse an opportunity of being heard that it is necessary to do so.

*Concern means any form of business or professional concern. It could be a sole proprietor, partnership, company, etc.

*Substantial interest An individual is deemed to have substantial interest, if he /she (individually or along with his relatives) beneficially holds equity shares carrying not less than 20 per cent voting power in the case of a company or is entitled to not less than 20 percent of the profits in the case of a concern other than a company at any time during the previous year.

b. Income from ASSETS TRANSFERRED to spouse [section 64(1) (iv)]

Income from assets transferred to spouse becomes taxable under provisions of  section 64 (1) (iv) as per following conditions:-

i.  He/she has transferred an asset (other than a house property*) to his/her spouse

ii. The asset is transferred without adequate consideration. Moreover there is no agreement to live apart.

If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.

* In case of House Property Section 27 applies.

**Special Comment: The relationship of husband and wife must exist both at the time of transfer of assets and at the time when income accrues in for the applicability of clubbing provisions.

Extract of Section 64(1)(iv)

64(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

(iv) 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 ;

Example:

Illustration – Mr. He transfers 500 debentures of IFCI to his wife without adequate consideration.

Interest income on these debentures will be included in the income of Mr. He.

NON APPLICABILITY OF SECTION 64(I)(iv):

• If assets are transferred before marriage.
• If assets are transferred for adequate consideration.
• If assets are transferred in connection with an agreement to live apart.
• If on the date of accrual of income, transferee is not spouse of the transferor.
• If property is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her dress and usual household expenses).

In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the hands of the transferor.

c. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1) VII)]

1. He/she has transferred an asset to a person or an association of persons.

2. Asset is transferred for the benefit (immediate/deferred)of spouse.

3. The transfer of asset is without adequate consideration.

In case of such individuals income from such an asset is taxable in the hands of the taxpayer who has transferred the asset.

Extract of Section 64(1)(vii):

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

(vii) 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 .

Not Only to Wife but Transfer of Asset to your Daughter in law may also attract Clubbing Provisions:

Transfer of Asset to Daughter in law

a. INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)]

Income from assets transferred to son’s wife attract the provisions of section 64 (1) (vi) as per conditions below:-

1. He/she has transferred an asset after May 31, 1973.

2. The asset is transferred to son’s wife.

3. The asset is transferred without adequate consideration.

In the case of such individuals, the income from the asset is included in the income of the taxpayer who has transferred the asset.

**Special Comment: The relationship of Father in law/Mother in law and Daughter in law  must exist both at the time of transfer of assets and at the time when income accrues in for the applicability of clubbing provisions.

Tax Planning: If assets are transferred BEFORE marriage to the would be DAUGHTER IN LAW for inadequate consideration, then there will be NO Clubbing EVEN AFTER MARRIAGE.

Extract of Section 64(1)(vi)

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

(vi) 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

b. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64 (1) (VIII)]

1. He/she has transferred an asset after May 31, 1973.

2. The asset is transferred to any person or an association of persons.

3. The asset is transferred for the benefit (immediate/deferred)of son’s wife.

4. The asset is transferred without adequate consideration.

In case of such individual, the income from the asset is included in the income of the person who has transferred the asset.

Extract of Section 64(1)(viii):

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

(viii) 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.

INCOME OF MINOR CHILD (SEC. 64 (1A)

i. All income which arises or accrues to the minor child shall be clubbed in the income of his parent, whose total income (excluding Minor’s income) is greater.

ii. However, in case parents are separated, the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year.

Points to Remember:

i. where such income is once included in the total income of either PARENT, any such income arising in the subsequent year will not be included in the total income of other PARENT unless the A.O is satisfied after giving that PARENT an opportunity of being heard that it is necessary to do so.

ii.If both mother & father are dead then the income of minor child will be included in his income and return shall be filed through legal guardian

Exemption to parent [Sec10 (32)]

An individual shall be entitled to exemption of Rs. 1,500 per annum in respect of each minor child if the income of such minor as included under section 64 (1A) exceeds that amount. However if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

WHEN SECTION 64 (1A) IS NOT APPLICABLE

 In case of income of minor child from following sources, the income of minor child is not clubbed with the income of his parent.

i. Income of minor child on account of any manual work.

ii. Income of minor child on account of any activity involving application of his skill, talent or specialized knowledge and experience.

iii. Income of minor child (from all sources) suffering from any disability of the nature specified under section 80U .

Extract of Section 64(1A)

(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.

Section 64(2): Income From HUF

Where, in the case of an individual being a member of a Hindu undivided family, at any time after the 31st day of December, 1969, has converted his self-acquired property 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), the income arising from such converted/transferred property shall be dealt with in the following manner:

1. The entire income from converted/transferred property shall be taxable in the hands of the individual (transferor)

2. If the converted/transferred property is subsequently partitioned amongst the members of the family, the income derived from such converted/transferred property as is received by the spouse of the transferor will be taxable in the hands of the transferor

Extract Of Section 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 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.

Other Points for Clubbing of Income under Income Tax Act, 1961

Can negative income be clubbed?

If clubbing provisions are applicable and income from such a source is negative it will still be clubbed in the income of asses see.

Head of income under which an income belonging to somebody else would be clubbed?

The other person^,s income is taxable under the head under which it would have been taxable if it is the income of the asses see himself.

For example Mr. X gifts Mrs. X Rs 2 lakhs from which she starts a business. Now as per clubbing provisions whatever is the profit from this business it will be taxable in the hands of Mr. X. Since it is an income taxable under the head ‘Profits & gains of Business & profession^, that is why it will be taxable under the same head and income will be calculated as if it is the business of Mr. X.

Conclusion- Sometimes an individual is taxed in respect of others income. The income legally belongs to somebody else but it is clubbed with the income of some other person in some special circumstances. These provisions are contained in sections 60 to 64.

Section 60 & 61 contains provisions when income from an asset is transferred without transferring the asset or transferring an asset but the transfer is revocable. In both the situations income from such assets is treated as income of the transferor.

Any remuneration received by the spouse from a concern in which individual has substantial interest is taxable in the hands of individual. Similarly income from any asset transferred to spouse will continue to be taxable in the hands of former. Income from any asset transferred for the benefit of spouse is taxable in the hands of transferor. Similarly income from any asset transferred to son^,s wife or for the benefit of son^,s wife again becomes taxable in the hands of transferor. The other person^,s income is taxable under the head under which it would have been taxable if it is the income of the assessee himself.

Also Read:

Clubbing of Income under Income Tax Act,1961 -Section 60 to 64

Clubbing Provisions of Income of Minor

(Republished With Amendments)