Clubbing of Income, Sec. 60 to Sec. 65, Income Tax Law and Practice Notes, B.Com 3rd Sem CBCS Pattern

Clubbing of Income
Sec. 60 to Sec. 65
Income Tax Law and Practice Notes
B.Com 3rd Sem CBCS Pattern

Meaning of Clubbing of Income

Normally, a person is liable to pay taxes on his income only. But there are certain provisions in Income Tax Act, 1961 in which income of one person is included in the income of other person. This is called clubbing of income. Clubbing of income is simply aggregation of Income of other person in assessee’s total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband. Income of a minor child is taxable in the hands of his parents.

Why clubbing of Income is done?

Under the Income Tax Act a person has to pay taxes on his income. A person cannot transfer his income or an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he does so the income shown to be earned by any other person is included in the assessee’s total income and the assessee has to pay tax on it. For example: A purchased a house property in the name of his wife B. A let out this house property. The rental income earned by A in name of his wife B is taxable in the hands of A.

Provisions of the Income Tax Act’ 1961 relating to Clubbing of Income (Sec 60 to 65)

A. Income of other persons which are included in assessee’s total income

Following income must be included in the total income of the transferor:

1. Transfer of income without transfer of asset (Section 60): If an assessee transfer’s part of income to another person without transferring the asset producing such income, such an income will be added with the total income of the transferor.

2. Revocable transfer of assets (Section 61): All incomes arise from the transfer of revocable assets must be included in the total income of transferor not in total income of transferee. Transfer is said to be revocable:

a)    If it contains provision for re-transfer of whole or any part of the income to the transferor.

b)   It gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets.

However, as per section 62(1), the provisions of revocable transfer, discussed above, shall not apply in following circumstances:

a)    Transfer by way of trust

b)   In case of any other transfer, the transfer is not revocable during the life time of the transferee;

c)    If transfer is made before 1-4-1961, the transfer is not revocable for a period exceeding 6 years.

B. Income of an individual (Transferor) to include income of spouse, minor child, etc. Section 64

1. Section 64(1) (ii): Remuneration of spouse from a concern in which the other spouse has substantial interest.

Ø Clubbed in the hands of the spouse who has a substantial interest in that concern.

Ø No clubbing if remuneration is due to technical or professional qualifications of spouse.

Ø If husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern: remuneration of both shall be clubbed + whose income before remuneration is greater.

Meaning of substantial interest:

Ø For company: At least 20% equity shares are held by individual along with his relatives.

Ø For any other case: At least 20% of the profits of such concern held by individual along with his relatives.

Here, Relative means the husband, wife, brother or sister or any lineal ascendant or descendant of the individual.

2. Section 64(1) (iv): Income from assets other than House Property transferred to spouse included in Total income of Transferor. But not Included if,

Ø if the transfer is for adequate consideration;

Ø the transfer is under an agreement to live apart;

Ø if the relationship of husband and wife does not exist, either at the time of transfer of such asset or at the time of accrual of the income.

3. Section 64(1) (vi): Income from assets transferred to son's wife, otherwise than for adequate consideration, shall be included in the income of the transferor.

4. Section 64(1) (vii): Income from assets transferred to any person for the benefit of the spouse of the transferor is included to the extent of benefit

5. Section 64(1) (viii): Income from assets transferred to any person for the benefit of son's wife is included to the extent of benefit

C. Clubbing of Income of a Minor Child [Sec 64 (1A)]:

Income of a minor Child (Including Step or Adopted) in excess of Rs. 1,500 p.a.(After all deduction)  is clubbed  with the total income of parent whose income is higher and continuously clubbed with his income unless the AO is satisfied to change. Following points must be taken into consideration while clubbing the income of a minor:

1)    If parents are living separately: club with the income of guardian

2)    If incomes of parents are identical: club with income of any of the parents which is beneficial.

3)    If parents are not alive, a separate return is to be filed, Cannot be clubbed with guardian’s income

4)    But income of minor cannot be clubbed if:

a)    Child suffering from any disability

b)   Income arises on account of any manual work done by him

c)    Income arises on account of skills, talent or specialized knowledge and experience of minor

D. Income from self-acquired property converted to joint family property (HUF) otherwise than for adequate consideration [Sec 64(2)]:

Where an individual converts his self-acquired property into the common property of HUF of which he is a member, then the income from such property shall continue to be included in the total income of the individual.

In case of partition and the converted property has been the subject matter of a partition amongst the members of the family, Income derived from such converted property as is received by the spouse or minor on partition, shall be clubbed in the hands of the transferor.

Some other point which must be taken into consideration while clubbing of income:

a) Benami transactions: In case of benami transaction, the income so earned must be taxable in the hands of the real person not in the hands of benaminer.

b) Clubbing of negative income: Income of the other section as mentioned under Sec 60 to 64 together with loss shall also be clubbed with the total income of the transferor.

c) According to Sec 65, the notice of demand for recovery of tax can also be secured on the person to whom income or asset has been transferred thought income is clubbed with other person income.