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Clubbing of Income
QUESTION FOR PRACTICE WITH SOLUTION

Q.1. Mr. Atul transferred 2,000 debentures of Rs. 100 each of Wild Fox Ltd. to Mrs. Rekha Atul on 03.04.2013 without consideration. The company paid interest of Rs. 30,000 in September. 2013 which was deposited by Mrs. Atul with Ankur Finance Co. in October, 2013. Ankur Finance Co. paid interest of Rs. 3,000 upto March, 2013. How would both the interest income be charged to tax in assessment year 2014-15?

Solution :
As per section 64(1), income arising from assets transferred without adequate consideration by an individual to his spouse is liable to be clubbed in the hands of the individual, but if there is accretion to the asset, any income on such accretion should not be clubbed.

Therefore. Rs. 30,000. being the interest on debentures received by Mrs. Atul in September, 2011 will be clubbed with the income of Mr. Atul, since he had transferred the debentures of the company without consideration to her.

However, the interest of Rs. 3,000 upto March 2014 earned by Mrs. Atul on the interest on the debentures deposited by her with Ankur Finance Company shall be taxable in her individual capacity and will not be clubbed with the income of Mr. Atul.

Q.2. Ajay settled 1/4th share of his property under a trust for the education and maintenance of his minor daughter. Poonum. Under the terms of the trust deed, the income accruing to the trust, after meeting the expenses of maintenance and education of Poonum, was to be accumulated and paid over to her on her attaining majority. The Assessing Officer assessed the income arising from 1/4th share of the property, settled for the benefit of Poonum, in the hands of Ajay. Examine the correctness of the assessment.

Solution :
As per section 64(1A), all income of minor child are to be clubbed with the income of the parent. Even if the trust is created for the benefit of the minor child, the income of the trust shall be clubbed with the income of the parent. In the present case, the income accruing to the trust shall be clubbed with income of Mr. Ajay.

Q.3. H, a mentally retarded minor, has a total income of Rs. 1,20,000 for the assessment year 2014-15. The total income of his father L and of his mother R for the relevant assessment year is Rs. 2,40,000 and Rs. 1,80,000 respectively. Discuss the treatment to be accorded to the total income of H for the relevant assessment year.

Solution :
Section 64(1A) provides that all income accruing or arising to a minor child has to be included in the income of that parent, whose total income is greater. However, the income of a minor child suffering from any disability of the nature specified in section 80U shall not be included in the income of the parents but shall be assessed in the hands of the child. Thus, the total income of H has to be assessed in his hands and cannot be included in the total income of cither his father or his mother.

Q.4. Mr. Anil gifted a house property to Miss. Shweta on 15.03.2013. Miss Shweta married Mr. Anil 's son S on 01.02.2013. The income from the gifted property was Rs. 1,30.000, which was added by the Assessing officer in the hands of Mr. Anil under the provisions of section 64(1). Is this inclusion justified in law?

Solution :
The inclusion of the income from property in the hands of Mr. Anil is not correct. Under section 64(1), the income arising directly or indirectly to the sons wife from assets transferred to her by such individual otherwise than for adequate consideration is taxable in the hands of the individual. The relationship of father-in-law/mother-in-law and the daughter-in-law should subsist both at the time of transfer of asset and at the time of accrual of income.

Therefore if assets are transferred before marriage to the would be daughter-in-law for inadequate consideration, then there will be no clubbing even after the marriage. Since Shweta was not the daughter-in-law on the date of the transfer by Mr. Anil, the income from the transferred property cannot be taxed in the hands of Mr. Anil.

Q.5. Mr. R gifts Rs. 1 lakh to his wife Mrs. X on April 1, 2013 which she invests in a firm on interest rate of 14% per annum. On January 1, 2013, Mrs. X withdraws the money and gift it to her son's wife. She claims that interest which has accrued to the daughter-in-law, from January 1, 2014 to March 31, 2014 on investment made by her is not assessable in her hands but in the hands of Mr. R. Is this correct? What would be the position, if Mrs. X has gifted the money to minor grandson, instead of the daughter-in-law?

Solution :
Section 64(1) provides that in computing the total income of any individual, there shall be clubbed all such income as arises directly or indirectly to the son's wife, of such individual, from assets transferred directly or indirectly to the son's wife by such individual otherwise than for adequate consideration.

There is a indirect transfer by Mr. R to the daughter-in-law and therefore, the interest income shall be clubbed with income of Mr. R.

If Mrs. X had gifted the money to her minor grandson, then the interest income arising to the minor shall be clubbed under section 64(1A) in the total income of that parent (son/daughter-in-law) whose total income (before including such income) is higher.

Q.6. Mr. Umesh transferred a house property to his wife out of natural love and affection on 01.05.2000. The income thereof was taxed in the hands of Mr. Umesh applying the provisions of section 27 for assessment year 2013-14. Mrs. X sold the property on May 1, 2013. resulting in a capital gain of Rs. 20 lakhs. This is claimed to be outside the purview of section 64 as it does arise out of an asset transferred without adequate consideration, but out of the disposal of an asset by Mrs. X. the legal owner thereof. Is the claim justified?

Solution :
Section 64(1) of the Income-tax Act states that 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 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.


In the present problem transfer of the house property by Mrs. X resulted in the capital gains, hence, capital gains arising on the transfer of assets transferred by the individual would also come within the scope of the provisions 64(1) and hence the claim of Mrs, X is not correct.

Q.7. Mr. Gullu transferred a sum of Rs. 20 lakhs to his wife in 1998 and Mrs. X constructed a property out of this amount. She has since been using the property for her own residence. The transfer deed stipulates that in the case of Mr. Gullu and his wife agreeing to live apart, the property will belong to her absolutely.

Solution :
This problem is based on section 64(1) which provides that in computing the total income of an individual, all such income as arises directly or indirectly to the spouse of such individual from assets (other than house property) transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live part shall be included.

In the present problem, section 27 is not applicable as what is transferred is cash and not a property. Hence, although Mrs. X will be treated as owner of the house property, the income from house property will be included in the income of Mr. Gullu. The provision in the transfer deed stating that in case of Mr. Gullu and his wife agreeing to live apart, the property will belong to Mrs. X, is of no consequence. If there is any loss from house property, loss shall be clubbed.

FILL IN THE BLANK QUESTIONS

Q.1. Where any person transfer income without transferring the ownership, in such case the income is taxable in the hands of.........

Q.2. Transfer of Asset may be Revocable or Irrevocable. (True / False)

Q.3. If any settlement contains the clause for forfeiture of rights of beneficiaries, the settlement will be revocable. (True / False)

Q.4. Transfer includes settlement, trust, covenant, agreement or arrangement. (True / False)

Q.5. Remuneration which is solely attributable to technical / professional knowledge of the spouse will be clubbed in the hands of other spouse. (True / False)

Q.6. Irrevocable transfer includes transfer under trusts which is not revocable during the life time of the beneficiary. (True / False)

Q.7. In case of transfer is made before 1-4-1961, the transfer is not revocable for a period exceeding
(a) 4 years
(b) 3 years
(c) 6 years
(d) None of above

Q.8. Substantial interest means
(a) 20% of voting Right
(b) 10% of voting Right
(c) 20% along with relative
(d) None of the above

Q.9. Clubbing will be done, even if it not beneficial to income tax department. (True / False)

Q.10. Mr. Y transferred debenture to Mrs. X, the interest on debenture will be clubbed in the hands of
(a) Mr. X
(b) Mrs. X herself pay tax
(c) Mr. Y
(d) Any of the above

Q.11. There will be no clubbing in the case of-
(a) Adequate consideration
(b) With an agreement to live apart
(c) Relationship of Husband and Wife does not exist at the time of clubbing
(d) All of the above

Q.12. Asset transferred to any other person for the immediate benefit of spouse / son's wife will be clubbed in the hands of first transfer. (True / false)

Q.13. Income of Minor Child will be clubbed in the hands of that parent whose income is
(a) Less
(b) Higher before including income of such minor child
(c) Higher after including income of such minor child
(d) None of the above

Q.14. Income of Minor child is always taxable in the hands of parents. (True / False)

Q.15. Income of handicapped minor child will be clubbed in the hands of
(a) Parents
(b) Minor Child Only
(c) Guardian
(d) None of the above

Q.16. Income earned by HUF out of assets transferred by member (out of his self acquired income) will be clubbed in the hands of-
(a) Member who transfer the Assets.
(b) All members equally
(c) HUF Itself.
(d) None of the above

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