Direct Taxation
Clubbing of income
Part A: Discussion of basic theories explaining different
relevant provisions of the Income Tax Act, 1961.
Part B: Six Illustrations with Solutions.
Transfer of income without transfer of
asset [Sec 60]
When
the income from an asset is transferred by the taxpayer to any person under a
settlement, trust, covenant, agreement or arrangement without transferring the ownership
of the asset, the income from the asset would be taxable
in the hands of the taxpayer regardless of the fact that the transfer of income may or may not be revocable,
provided the asset is owned by the taxpayer.
Revocable transfer of asset [Sec 61]
When an
asset is transferred by the taxpayer under a “revocable
transfer” to any person under a settlement, trust, covenant,
agreement or arrangement, the income from such asset is taxable
in the hands of the taxpayer.
Salary income of the spouse [Sec 64(1) (ii)]
When spouse of the taxpayer is employed in a concern
without any technical or professional knowledge or experience, salary income of
the spouse will be taxable in the hands of the taxpayer, provided the taxpayer
is an individual and he/she has a substantial interest in the concern. [The taxpayer
may or may not be an employee of the same concern.]
When husband and wife both have a substantial interest
in a concern and both are in receipt of the remuneration from such concern
without any technical or professional knowledge or experience, remuneration
will be included in the total income of husband or wife whose total income,
excluding such remuneration, is greater.
Explanations:
1.
Concern − Here, the expression “concern” covers both business
concern and professional concern and both proprietary and non-proprietary
concerns.
2.
Substantial interest − An individual has a “substantial interest” in any
concern in any of the following two situations:
(a) IN
THE CASE OF A COMPANY
If the individual beneficially holds (individually or along with his/her relatives) 20% or more of equity shares in the company at any time
during the previous year.
(b) IN
THE CASE OF A CONCERN OTHER THAN COMPANY
If the
individual is entitled (individually or along
with his/her relatives) to 20% share in the
profit of the concern at any time during the previous year.
3.
Relative − “Relative” in relation to an individual means the
husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
Income from assets transferred to spouse
[Sec 64(1) (i v)]
When the taxpayer (being an individual) has transferred an asset (other than a house property) to his/her spouse,
directly or indirectly,
(a) Otherwise than for adequate consideration, or
(b) Otherwise than in connection with an agreement to live
apart,
Any income from such asset shall be deemed to be the
income of the taxpayer who has transferred the asset. In case of such transfer the asset may be held by the
transferee-spouse in the same form or in a different form. If
consideration is payable in part, only the part of income referable to transfer
for inadequate consideration is assessable in the hands of transferor.
If the spouse (transferee) invests the asset in a
business, the amount of income that will be clubbed in the hands of the
taxpayer (transferor) will be determined as follows:
The amount of income which shall be clubbed
in the hands of the taxpayer
= Y x (It ÷ I)
Where,
|
Y = |
Taxable income of the spouse from the business. |
|
It = |
Value of the assets transferred by the taxpayer
without adequate consideration (which are invested by the spouse in the said
business), on the first day of the previous year of the
taxpayer (i.e. assessee). |
|
I = |
Total investment by the spouse in the said business on the first day of the previous year of the business.
[In the case of a newly set up business, the first day
of previous year is the date of setting up of the business.] |
If an assessee gifts debentures of a company to the
spouse and, subsequently, the company issues bonus debentures to the spouse,
interest on bonus debentures will not be includible in the hands of the
assessee u/s 64(1)(iv) as there is no transfer of bonus debentures by the
assessee to the spouse.
When clubbing u/s 64(1) (i v) is not applicable
Section 64(1) (i v) is not applicable in the following
cases:
1. If assets are transferred before
marriage.
2. If assets are transferred for adequate consideration.
3. If assets are transferred in connection with
an agreement to live apart.
4. If on the date of accrual of income,
transferee is not spouse of the transferor.
5. 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).
6. If the asset transferred is house
property.
Income from assets transferred to son’s
wife [Sec 64(1) (v i)]
When the taxpayer has transferred an asset (after 31st May,
1973) to his/her son’s wife, directly or indirectly, otherwise than for
adequate consideration, any income from such asset shall be deemed to be the
income of the taxpayer who has transferred the asset, provided the taxpayer is
an individual. In case of such transfer the asset may be held by the transferee
in the same form or in a different form.
Income from assets transferred to a person
for the benefit of spouse
[Sec 64(1) (vii)]
When the taxpayer has transferred an asset to a person or an association
of persons, directly or indirectly, for the immediate or deferred benefit of
his/her spouse, otherwise than for adequate consideration, any income from such
asset to the extent of such benefit shall be deemed to be the income of the
taxpayer who has transferred the asset, provided the taxpayer is an individual.
Income from assets transferred to a person
for the benefit of son’s wife
[Sec 64(1) (viii)]
When the taxpayer has transferred an asset (after 31st May,
1973) to a person or an association of persons, directly or indirectly, for the
immediate or deferred benefit of his/her son’s wife, otherwise than for
adequate consideration, any income from such asset to the extent of such
benefit shall be deemed to be the income of the taxpayer who has transferred
the asset, provided the taxpayer is an individual.
Income of minor child [Sec 64(1A)]
All income which arises or accrues to the minor child shall be clubbed
in the income of his parent. The income of minor
will be included in the income of that parent whose total income (i.e. GTI –
Deductions u/s 80C to 80U), excluding the income includible u/s 64(1A), is
greater. If the first income
of the minor child in his lifetime is included in the income of parent A during
the previous year (whose total income, excluding the income of the minor, is
higher than that of the other parent B during the previous year), in the
subsequent years (during the minority of the child) income of the minor child
will be included in the income of A, even if the income of B is higher than
that of A in any of the subsequent years. However, if in the subsequent year,
the Assessing Officer wants to include the income of the minor child in the
income of B, it can be so done only if it is necessary to do so and that too
after giving an opportunity of being heard to B.
Where the marriage of the parents does not subsist,
the income of minor will be includible in the income of that parent who
maintains the minor child in the relevant previous year.
The minor’s income, in case both the parents are not alive, cannot be
assessed in the hands of the grandparents or any other relatives or even in the
hands of the minor.
When clubbing u/s 64(1A) is not
applicable
Section 64(1A) is not applicable in the following
cases:
1. Income of minor child (from all sources)
suffering from any disability of the nature specified u/s 80U is not subject to
clubbing provisions of the Act u/s 64 (1A).
2. Income of minor child on account of any
manual work.
3. Income of minor child on account of any
activity involving application of his skill, talent or specialised knowledge
and experience.
Exemption u/s 10(32)
In case the income of an individual includes an income
of his/her minor child u/s 64(1A), such individual shall be entitled to exemption of Rs 1,500 in respect of each minor child.
Where, however, the income of any minor so includible is less than Rs 1,500, the
aforesaid exemption shall be restricted to the income so included in the total
income of the individual.
Conversion of
self-acquired property into joint family property [Sec 64(2)]
CLUBBING
BEFORE PARTITION OF THE FAMILY
Where an individual (being member of a Hindu Undivided
Family) converts (after 31st
December, 1969) his self-acquired property into property belonging to the
family, income from such converted property is chargeable to tax in the hands
of the converter.
Where an individual (not being member of a Hindu Undivided
Family) transfers his self-acquired
property, directly or indirectly, to the family otherwise than for adequate
consideration, income from such transferred property is chargeable to tax in
the hands of the transferor.
CLUBBING
AFTER PARTITION OF THE FAMILY
If the property converted/transferred by an individual
is subsequently transferred amongst the members of the family due to partition
of the family (whether partial or total), the income derived from such
converted/transferred property, as is received by the spouse of
the converter/transferor, will be included in the income of the converter/transferor.
Other
important points
1.
Income arising to the transferee from the accretion of the property
transferred or from accumulated income of such property is not includible in the
total income of the transferor.
2.
If income is negative and clubbing provisions are applicable, then
negative income would be clubbed.
3. The Assessing Officer has the power for the recovery of tax from the person to whom the income actually accrued, if the Assessing Officer so desires.
Part B
Direct Taxation
Clubbing of Income
Selected Problems
Illustration:
1
Ram and Mrs. Ram hold 20% and 30% equity shares in Anand
Ltd. respectively. They are employed in Anand Ltd. (taxable salary being Rs 2,
40,000 p.a. and Rs 3, 60,000 p.a. respectively) without any technical or professional
qualification. Other incomes of Ram and Mrs. Ram are Rs 70,000 and Rs 1, 00,000
respectively. Find out the net income of Ram and Mrs. Ram for the assessment
year 2023-24.
Illustration:
2
Mr. & Mrs. Om both are working in A Ltd. without
possessing any technical or professional qualification. From the following
details compute their income for the A.Y. 2023-24:
|
Particulars |
Mr. Om |
Mrs. Om |
|
Taxable salary from A Ltd. |
Rs 2,20,000 |
Rs 70,000 |
|
Other income |
Rs 50,000 |
Rs 80,000 |
|
Share holding: |
|
|
|
Case: 1 |
15% |
6% |
|
Case: 2 |
3% |
17% |
|
Case: 3 |
18% |
1% |
Illustration:
3
Mr. X and Mrs. X are working in A Ltd. without possessing
any qualification. From the following details compute their income for the A.Y.
2023-24:
|
Particulars |
Mr. X |
Mrs. X |
|
Share holding |
15% |
6% |
|
Taxable salary from A Ltd. |
Rs 1,20,000 |
Rs 60,000 |
|
Other income: |
|
|
|
Case: 1 |
Rs 50,000 |
Rs 80,000 |
|
Case: 2 |
Rs 90,000 |
Rs 65,000 |
|
Case: 3 |
Nil |
Nil |
Illustration:
4
Mr. X gifted 1,000 shares of a non-domestic company
worth Rs 6, 00,000 (acquired on 15/3/2022) to Mrs. X out of natural love and
affection as on 15/4/2022.
On 31/1/2023, Mrs. X received dividend Rs 60,000 on
such shares in India.
On 1/2/2023, Mrs. X sold such shares for Rs 10, 00,000
and received consideration in India.
Show tax treatment, if on 1/2/2023, Mrs. X invested Rs
10, 60,000 in -
Case A: A house property from which rent accrued in the
previous year 2022-23 is Rs 53,000.
Case B: A newly formed partnership firm and contributed initial
capital. Interest (taxable portion) on such contribution received Rs 13,250,
and share of profit received Rs 20,000.
Case C: A newly started proprietorship business and contributed
initial capital. Profit accrued for the year is Rs 42,400.
Illustration:
5
Mr. & Mrs. Mantri have income under the head
“Profits & gains of business or profession” of Rs 3, 00,000 and Rs 4,
00,000 respectively. They have 7 children. From the following details compute
taxable income of Mr. and Mrs. Mantri for the A.Y. 2023-24:
● 1st child (aged 26 years) is a chartered accountant.
His annual income from profession is Rs 4, 00,000. His income from house
property for the P.Y. 2022-23 is Rs 30,000. He has a son (4 years old) who has
earned interest on fixed deposit of Rs 5,000.
● 2nd child (aged 17 years being a married daughter)
who is a stage singer, earned income of Rs 1,00,000 during the P.Y. 2022-23.
She earned interest on fixed deposit Rs 8,000. Such fixed deposit has been made
out of such singing income.
● 3rd child (aged 16 years) is suffering from disability
specified u/s 80U (to the extent 55%) blind. He has received interest income of
Rs 40,000 for loan given to a private firm. He is dependent on Mrs. Mantri.
● 4th child (aged 14 years) has earned income of Rs 45,000
during the P.Y. 2022-23 out of his physical and mental effort. Expenditure incurred
to earn such income is Rs 15,000. His loss from house property is Rs 30,000.
● 5th child (aged 12 years) is a partner in a partnership
firm from which he earned interest income (taxable) of Rs 40,000 and share of
profit of Rs 35,000. Other two partner of the firm are Mr. & Mrs. Mantri.
● 6th child (aged 9 years) has 1,000 debentures of Rs
100 each of a public sector company acquired through will of his Grandfather.
Interest income on such debentures is Rs 10,000. Expenditure incurred to
collect such interest is Rs 200. Such debentures were sold and long-term
capital gain earned Rs 25,000.
● 7th child (aged 7 years) has earned interest on
fixed deposit Rs 500.
Illustration:
6
Mr. Todi is a member of HUF. It consists of Mr. Todi,
Mrs. Todi, Mr. Todi’s major son (Mr. A) & Mr. Todi’s minor son (B).
On 1/4/2021, Mr. Todi transferred his house property
acquired through his personal income to the HUF without any consideration.
On 1/7/2022, HUF is partitioned and such property
being divided equally.
Net annual value of the property for the P.Y. 2021-22
is Rs 80,000 & that for the P.Y. 2022-23 is Rs 1, 00,000.
Show the tax treatment for both the years.
Click here for Solution: 6 in PDF
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