CLUBBING OF INCOME
“YOU INCOME BECOMES MY INCOME.”
Clubbing is done by adding the income of another person to the income of the assessee.
This other person may be a minor child, spouse, son’s wife, HUF etc.
INCOME FROM ASSETS TRANSFERRED TO SPOUSE
Section 64 (1) (iv)
When any assets other than house property is transferred by an individual to his / her spouse directly or indirectly,
Any income from such assets shall be deemed to be the income of transferor.
However clubbing shall not be done if:
(i) Asset is sold for adequate consideration or
(ii) If relationship of husband and wife does not exist either at the time of transfer or at the time of accrual of income or
(iii) Transfer is under an agreement to live apart
Example : 1
Mr. Anuj Narula has transferred one deposit to his wife Mrs. Reta Narula by charging full consideration of Rs. 10,00,000. In this case, interest income shall not be clubbed in the income of Mr. Anuj Narula.
Example : 2
Mr. Yash Aggarwal has transferred one deposit of Rs. 10,00,000 for a consideration of Rs. 7,00,000 and there is interest income of Rs. 1,00,000 from the said deposit, in this case income of Rs. 30,000 shall be clubbed.
Example : 3
Mr. Rakesh Sehgal has transferred certain assets on 01.01.2014 to his would be wife. He got married on 10.01.2014. in this case clubbing provision shall not apply.
Example : 4
Mr. Rahul Goel has gifted Rs. 5,00,000 to his wife Mrs. Preeti Goel. She invested it in the proprietary business and there were profits of Rs. 2,00,000. In this case, entire income of Rs. 2,00,000 shall be clubbed in the income of Mr. Rahul Goel.
Q.1. A proprietary business was started by Smt. Naha in the year 2008. As on 01.04.2012 her capital in business was Rs. 4,00,000. Her husband gifted Rs. 3,00,000, on 10.04.2012, which Smt. Naha invested in her business on the same date. Smt. Naha earned profits from her proprietary business for the financial years 2013-14. Rs. 2,50,000 and financial year 2013-14 Rs. 4,90,000.
Compute the income to be clubbed in the hands of Naha’s husband for the assessment 2014-15.
INCOME OF MINER CHILD
(i) All incomes that accrue to minor child will be included in the total income of that parent whose total income is grater (before including income of child).
(ii) If marriage of parents does not exist it shall be included in the income of that parent who maintains the child.
(iii) In future years it shall be included in the income of other parent is officer is satisfied that child is being maintained by the other parent.
(iv) In the following cases income of minor shall not be clubbed-
(a) Child is suffering from any disability of the nature specified in Section 80U, like physically disabled, totally blind etc.
(b) Income of child on account of manual work of activity involving skill, talent of specialised knowledge etc.
(v) If income of child is so included, the parent shall be entitled to an exemption of maximum Rs. 1,500 in respect of each minor child u/s 10(32)
Example : 1
Minor son of Mr. Yashpal Choudhary is a child actor. He has income of Rs. 5,00,000 from stage acting, this income will not be clubbed but if this amount was invested by him in a bank as fixed deposit, interest received by him shall be clubbed.
INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE
Section 64(1) (vi)
If an individual transfers any asset to his daughter-in-law, without adequate consideration, income from the asset will be included in the total income of transferor.
If transferred asset is invested by spouse / son’s wife in any business following amount shall be included.
|Income / interest||X||Amount invested out of asset|
|Transferred on the first day of the p / v|
|From business||Total investment of transferee on the first|
|day of the p /y|
Example of cross transfer: A gifts Rs. 50,000 to the wife of his friend B and B gifts Rs. 50,000 to the wife of A,
Apparently it appears that clubbing provision may be applied on these transactions, because no one transferred to his own spouse.
Such transactions, are called cross transfers.
As per judgement of Supreme Court such cross transfers shall be subjected to clubbing provisions, considering the same as tax evasion devise.
Accordingly income earned Mrs. B shall be added in the incomes of A while income of Mrs. A shall be clubbed in the income of B
INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED INTO JOINT FAMILY
PROPERTY Section 64 (2)
If an individual who is a member of the Hindu undivided family, converts his selfacquired property as the property of the HUF then income derived by HUF form such property shall be included in the income of transferor.
If partition in the family takes place than income from any asset received by the spouse shall be clubbed in the hands of transferor:
INCOME TRANSFERRED WITHOUT TRANSFER OF ASSETS
If a person transfers income to another person, without transfer of the asset from which the income arises, then such income shall be taxable in the hands of transferor:
REVOCABLE TRANSFER OF ASSETS
If there is revocable transfer of an asset by one person to another, then income from such assets shall be taxable in the hands of transfer :
REVOCABLE TRANSFER :
(i) If whole or any part of income or assets can be re-transferred to transferor.
(ii) If transferor can re-assume power over the whole or any part of incomes of assets.
REMUNERATION OF SPOUSE
Section 64(1) (II)
If spouse of an individual is receiving salary, commission, fees or any other remuneration from ant concern in which the individual is having substantial interest then such salary etc. shall be included in the income of the individual.
(i) But that portion of salary of spouse which is due to application of technical or professional knowledge or experience shall not be clubbed.
(ii) If husband and wife both have substantial interest in the concern and
Both are receiving remuneration from the concern,
Then the remuneration of both shall be clubbed in the hands of that spouse whose total income is greater, before clubbing such income.
(iii) Substantial interest
(a) For company- if individual alongwith relatives hold not less than 2-% equity shares beneficially.3.
(b) For other – if individual alongwith relatives is entitled to at least 20% of profits.
Relative means the husband, wife, brother or sister or any lineal ascendant or descendant of the individual .
1. Any income arising from the accumulated income of such property is not includible in the income of the transfer. Income on original transfer only has to be clubbed.
2. Under the above provisions, if income of one person is clubbed in the hands of transferor, then tax on income from such assets can also be demanded from the transfree,.
3. Under the above provisions, if income of one person is clubbed in the hands of transferor, then tax on income from such assets can also be demanded from the transferee.
The same provision is applicable in case of deemed owner u/s 27.
4. Steps for clubbing:
Step I: Compute the income in the hands or receiver, in the appropriate head, as if he is liable to pay tax.
Step II: After computing in the hands of receiver under relevant head, the computed amount shall be added in the hands of other person under the same head. And for all purpose it shall be income of the other person.
Step III: After this, losses shall be set off and GTI shall be computed.