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Clubbing of Income Provisions under Income Tax Act

Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income. However, there are certain cases where an assessee has to pay tax in respect of income of another person. The provisions for the same are contained in sections 60 to 64 of the Act. These provisions have been enacted to counteract the tendency on the part of the tax-payers to dispose of their property or transfer their income in such a way that their tax liability can be avoided or reduced.

For example,in the case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e. as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.

CASES WHERE INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S INCOME

Income transferred without transfer of asset (Section 60)

When a person transfers the income accruing to an asset without the transfer of the asset itself, such income is to be included in the total income of the transferor, whether the transfer is revocable or irrevocable.

Example – Mr. A confers the right to receive rent in respect of his house property to his wife, Mrs. A, without transferring the house itself to her. In this case, the rent received by Mrs. A will be clubbed with the income of Mr. A.

Income arising from revocable transfer of assets (Section 61)

Such income is to be included in the hands of the transferor.

A transfer is deemed to be revocable if it –

  1. contains any provision for re-transfer of the whole or any part of the income or assets to the transferor; or
  2. gives right to re-assume power over the whole or any part of the income or the asset.

Exceptions where clubbing provisions are not attracted even in case of revocable transfer [Section 62]

Section 61 will not apply to any income arising to any person in the following two cases –

  1. Transfer not revocable during the life time of the beneficiary or the transferee
  2. Transfer made before April 1, 1961 and not revocable for a period exceeding six years

Income arising to spouse by way of remuneration from a concern in which the individual has substantial interest (Section 64(1)(ii))

Such income arising to spouse is to be included in the total income of the individual.

However, if remuneration received is attributable to the application of technical or professional knowledge and experience of spouse, then, such income is not to be clubbed.

Income arising to spouse from assets transferred without adequate consideration (Section 64(1)(iv))

Income arising from an asset (other than house property) transferred otherwise than for adequate consideration or in connection with an agreement to live apart, from one spouse to another shall be included in the total income of the transferor.However, this provision will not apply in the case of transfer of house property, since the transferor-spouse would be the deemed owner as per section 27.

Income arising to son’s wife from an asset transferred without adequate consideration (Section 64(1)(vi))

Income arising from an asset transferred otherwise than for adequate consideration, by an individual to his or her son’s wife shall be included in the total income of the transferor.

Income arising from transfer of assets for the benefit of spouse or son’s wife (Section 64(1)(vii)/ 64(1)(viii))

All income arising to any person or association of persons from assets transferred without adequate consideration is includible in the income of the transferor, to the extent such income is used by the transferee for the immediate or deferred benefit of the transferor’s spouse or son’s wife.

Income of minor child (Section 64(1A))

All income arising or accruing to a minor child (including a minor married daughter) shall be included in the total income of his or her parent. The income of the minor child shall be included with the income of that parent, whose total income, before including minor’s income, is higher.

The parent, in whose total income, the income of the minor child or children are included, shall be entitled to exemption of such income subject to a maximum of `1,500 per child under section 10(32).

The following income of a minor child shall, however, not be clubbed in the hands of his or her parent –

  1. Income from manual work done by him oractivity involving application of minor’s skill,talent or specialized knowledge andexperience; and
  2. Income of a minor child suffering from anydisability specified in section 80U.

Conversion of self-acquired property into the property of a Hindu Undivided Family (Section 64(2))

Where an individual, who is a member of the HUF, converts his individual property into property of the HUF of which he is a member, directly or indirectly, to the family otherwise than for adequate consideration, the income from such property shall continue to be included in the total income of the individual.

Where the converted property has been partitioned, either by way of total or partial partition, the income derived from such converted property as is received by the spouse on partition shall also be included in the total income of the individual who effected the conversion of such property.

Note – As per Explanation 2 to section 64 ‘income’ includes ‘loss’. Therefore, clubbing provisions would be attracted in all the above cases, even if there is a loss and not income.

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