Clubbing of Income under Income Tax : Section 60 – 64

 

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Normally, a person is taxed in respect of income earned by him only. However, in certain special cases income of other person is included (i.e. clubbed) in the taxable income of the  taxpayer and in such a case he will be liable to pay tax in respect of his income (if any) as well as income of other person too. The situation in which income of other person is included in the income of the taxpayer is called as clubbing of income.

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Following Sections prescribe provisions for clubbing of income -

1. Section 60 - Transfer of income without transfer of assets.

2. Section 61 - Revocable transfer of assets.

3. Section 64(1)(ii) - Remuneration of spouse

4. Section 64(1)(iv) - Income from assets transferred to spouse

5. Section 64(1)(vi) - Income from assets transferred to son’s wife

6. Section 64(1)(vii)& (viii) - Income from assets transferred to a person for the benefit of son/son’s wife.

7. Section 64(1A) – Income of minor child

8. Section 64 (2) - Conversion of self acquired property into HUF property

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Below table covers the provisions related to clubbing of income -

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
60 Transfer of Income without transfer of Assets. Transferor who transfers the income. Clubbing applicable Irrespective of: –

1. Whether such transfer is revocable or not.

2. Whether the transfer is effected before or after the commencement of IT Act.

Important Points

1. Income for the purpose of Section 64 includes losses.    [P. Doriswamy Chetty (SC)] [Expl. (2) to Section 64]

2. Section 60 does not apply if corpus itself is transferred.[Grandhi Narayana Rao (AP)]

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
61 Revocable transfer of Assets. Transferor who transfers the Assets.

Clubbing not applicable if: -

1. Trust/transfer irrevocable during the lifetime of beneficiaries /transferee or

2. Transfer made prior to 1-4-1961 and not revocable for a period of 6 years. Provided the transferor derives no direct or indirect benefit from such income in either case.

Important Points

Transfer held as revocable -

1. If there is provision to re-transfer directly or indirectly whole/part of income/asset to transferor;

2. If there is a right to reassume power, directly or indirectly, the transfer is held revocable and actual exercise is not necessary. [S. Raghbir Singh (SC)]

3. Where no absolute right is given to transferee and asset can revert to transferor in prescribed circumstances, transfer is held revocable. [Jyotendrasinhji vs. S. I.Tripathi (SC)]

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
64(1)(ii) Salary, Commission, Fees or remuneration paid to spouse from a concern in which an individual has a substantial* interest. Spouse whose total income (excluding income to be clubbed) is greater.

Clubbing not applicable if: -

Spouse possesses technical or professional qualification and remuneration is solely attributable to application of that knowledge /qualification.

Important Points

1. The relationship of husband and wife must subsist at the time of accrual of the income. [Philip John Plasket Thomas 49 ITR 97 (SC)]

2. Income other than salary, commission, fees or remune-ration is not clubbed under this clause.

3. Substantial interest means atleast 20% of votings rights or atleast 20% share in profits.

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
64(1)(iv) Income from assets transferred directly or indirectly to the spouse without adequate consideration. Individual transferring the asset. Clubbing not applicable if:-1. Trust/transfer irrevocable during the lifetime of beneficiaries /transferee or

2. Transfer made prior to 1-4-1961 and not revocable for a period of 6 years. Provided the transferor derives no direct or indirect benefit from

Important Points

1. Income earned out of Income arising from transferred assets not liable for clubbed. [M.S.S. Rajan (Mad)]

2. Cash gifted to spouse and he/she invests to earn interest. [Mohini Thaper vs. CIT (SC)]

3. Capital gain on sale of property which was received without consideration from spouse [Sevential M. Sheth vs. CIT (SC)]

4. Transaction must be real. [O.N. Mohindroo (Delhi)]

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
64(1)(vi) Income from the assets transferred to son’s wife. Individual transferring the Asset. Condition: -The transfer should be without adequate consideration.

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
64(1)(vii),(viii) Transfer of assets by an individual to a person or AOP for the immediate or deferred benefit of his: (vii) – Spouse. (viii) – Son’s wife. Individual transferring the Asset. Condition: 1. The transfer should be without adequate consideration.

Important Points

1. Transferor need not necessarily have taxable income of his own. [P. Murugesan (Mad)]

2. Wife means legally wedded wife. [Executors of the will of T.V. Krishna Iyer(Ker)]

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
64(1A) Income of a minor child [Child includes step child, adopted child and minor married daughter]. 1. If the marriage subsists, in the hands of the parent whose total income is greater; or;2. If the marriage does not subsist, in the hands of the person who maintains the minor child.

3. Income once included in the total income of either of parents, it shall continue to be included in the hands of some parent in the subsequent year unless AO is satisfied that it is necessary to do so (after giving that parent opportunity of being heard).

Clubbing not applicable for:—

1. Income of a minor child suffering any disability specified u/s. 80U.

2. Income on account of manual work done by the minor child.

3. Income on account of any activity involving application of skills, talent or specialized knowledge and experience.

Important Points

1. Income out of property transferred for no consideration to a minor married daughter, shall not be clubbed in the parents’ hands. [Section 27]

2. The parent in whose hands the minor’s income is clubbed is entitled to an exemption up to Rs. 1,500 per child. [Section 10(32)].

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SECTION NATURE OF TRANSACTION CLUBBED IN THE HANDS OF CONDITIONS/EXCEPTIONS
64(2) Income of HUF from property converted by the individual into HUF property. Income is included in the hands of individual & not in the hands of HUF. Clubbing applicable even if: –

The converted property is subsequently partitioned; income derived by the spouse from such converted property will be taxable in the hands of individual.

Important Points

Fiction under this section must be extended to computation of income also. [M.K. Kuppuraj (Mad)]

 

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