General Law Applicable to Clubbing of Income
Clubbing of Income
Generally, person is taxed in respect of his won income, but sometimes in some circumstances this basic is deviated.
In case the taxpayer made an attempt to reduce their tax liability by transferring their assets in favour of their family members or by arranging their sources of income in such a way that tax incidence falls on others, where the benefits of income is derived by them, Provisions of Clubbing of Income comes into picture.
Section 60 to 64 of the Income Tax Act, 1961 deals with the Inclusion of other’s incomes in the income of the assessee. The provision is called Clubbing of Income and the income which is so included called Clubbed Income.
Below are the General Provisions Applicable to Clubbing of Income
1. For the chapter of clubbing, the clubbing shall continue to apply even if the transferee has converted the transferred assets to some other form. For example, a house property is transferred to son’s wife and she sells the house property and buys debentures, then income from the debentures shall be clubbed with the income of transferor.
2. For the chapter of clubbing, income shall include loss also. Therefore, losses are also to be clubbed.
3. If the transferee sells the transferred assets, then capital gains shall also be clubbed with the income of the transferor.
4. Income arising out if income earned in transferred assets shall not be clubbed. Therefore, if debentures are transferred to son’s wife without consideration and she receives debentures interest which is invested in bank FDR, then debenture interest shall be clubbed with the income of the transferor but the bank interest shall not be clubbed. Therefore, capital gains on bonus shares will not be clubbed with income of transferor where shares have been transferred and the transferee receives bonus shares.
5. The Supreme Court in the case of J.H.Gotla held that the clubbed income shall be retained under the same head in which it is earned. Therefore, business income of a minor child shall be clubbed in the hands of the parent under the head “Profits and Gains of a Business or Profession”. The business losses of the parent can be set off against such income.
6. While clubbing of the income, the deductions available under the five heads of income shall be allowed and the income after such deductions shall be clubbed.
7. Clubbing will take place even if the assets are indirectly transferred or transferred through cross transfers. For example, if Mr.A transfers an asset to his friend Mr.B for inadequate consideration and Mr.B thereafter transfers the asset to the daughter-in-law of Mr.A for inadequate consideration, then the income from the asset arising to daughter-in-law shall be clubbed with the income of Mr.A.
Similarly, if Mr.A makes a gift to Mrs.X of Rs. 1,00,000 and Mr.X makes a gift of Rs.1,00,000 to Mrs.A, there is a indirect transfer from Mr.A to Mrs.A and from Mr.X to Mrs.X and hence clubbing of income will take place.
8. Mr.X gives an interest free loan of Rs. 20,00,000 to Mrs.X. Out of the loan, Mrs.X purchased a house and earns rental income therefrom. Here, clubbing shall not apply because loan is not a transfer. Clubbing takes place where asset is transferred by the Individual to spouse. Giving loan is not the transfer of assets.
However, if Mr.X gives Rs. 20,00,000 as gift, then clubbing shall apply.
9. The HUF is a partner in a firm ABC through its Karta Mr.X and has 25% shares in the profits of the firm. Wife of Mr.X is employed by firm ABC. In this case, clubbing shall not apply because Mr.X is partner in representative capacity and not in his individual capacity. Clubbing applies when an individual is a partner in his individual capacity and has substantial interest in firm and his spouse get remuneration from the firm.
10. If a trust is created for the benefit of a minor child, then the income of the trust shall be clubbed with the income of parent under section 64(1A). This shall apply even if the trust deed provides that the income shall be accumulated by trust and shall be given to minor child when he attains majority. Clubbing provision under section 64(1A) shall apply since the income accrues for the benefit of minor child although it may be given on attaining majority