A PROJECT ON

Clubbing of income

SUBMITTED TO

Prof. Kahkashan Y. Danyal

BY:

Name: Butool Zehra

Roll No: 09

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B.A. LLB.(Hons.), 6th semester.

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 ACKNOWLEDGEMENT

Gratitude is the attitude of life. I would like to thank all people who helped me prepare this
assignment. Firstly, I would like to express my gratitude to our Professor, Dr. Kahkashan Y
Danyal, for making the subject so easy and understandable to us. Next, I would thank all my
friends and classmates who were a constant help and last but not least I would thank all the
staff and stationary shop bhaiyya for giving me the printout in time. Thank you one and all.

Thank you

Butool Zehra

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Introduction
In India, Income tax is levied on a slab system. These are considered to be progressive rates of
tax and as the income goes up, the rates also go up. At present, the income tax rates start from a
minimum of 10 % and it goes up to 30%.However, there is a tendency among the tax payers to
reduce their tax liability especially those falling under higher tax brackets, by transferring their
assets in favor of their family members or by arranging their sources of income in such a way
that tax incidence fall on others, whereas the benefit of the income is derived by them. In order
to curb such practices of tax avoidance, necessary provisions have been incorporated in sections
60 to 64 of the Income Tax Act 1961.

Hence a person is liable to pay tax on his own income as well as income belonging to others on
fulfillment of certain conditions.

Inclusion of other’s incomes in the income of the assessee is called clubbing of income and the
income which is so included is called deemed income. Besides, one very important aspect of
these clubbing of income provisions is that they are applicable only for individuals and no other
type of assessee like firm, Company etc.

AN OVERVIEW OF CLUBBING OF INCOME

The Following are the circumstances where the income of the other person is included in the
income of the assessee.

Transfer of income without the transfer the transfer of asset (Sec 60).

Revocable transfer of assets (sec 61)

Irrevocable transfer of assets for a specified period (sec 62)

Transfer and revocable transfer defined. (Sec 63)

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

Remuneration of a spouse from a concern in which the other spouse has substantial interest.
[Sec 64(1)(ii)]

Income from assets transferred to the spouse. [64(1)(iv)]

Income from assets transferred to son’s wife [ 64(1)(vi)]

Income from assets transferred to a person for the benefit of Spouse of the transferor[64(1)(vii)]

Income from assets transferred to a person for the benefit of son’s wife of the transferor
[64(1)(viii)]

Clubbing of income of a minor child [64(1A)]

Income from self acquired property converted to joint family property.

Liability of person in respect of income included in the income of another person.

Generally an assessee is taxed in respect of his own income. But sometimes in some exceptional
circumstances this basic principle is deviated and the assessee may be taxed in respect of
income which legally belongs to somebody else. Earlier the taxpayers 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, whereas
benefits of income is derived by them . So to counteract such practices of tax avoidance,
necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act Hence,
a person is liable to pay tax on his own income as well as income belonging to others on
fulfillment of certain conditions. Inclusion of other’s Incomes in the income of the assessee is
called Clubbing of Income and the income which is so included is called Deemed Income. It is
as per the provisions contained in Sections 60 to 64 of the Income Tax Act.

TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SECTION.

60)
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Section 60 is applicable if the following conditions are satisfied:

The taxpayer owns an asset

The ownership of asset is not transferred by him.

The income from the asset is transferred to any person under a settlement, or agreement.

If the above conditions are satisfied, the income from the asset would be taxable in the hands of
the transferor

Illustration : Amitabh Bachan owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual)
interest being Rs. 100,000. On April 1, 2005, he transfers interest income to Sharukh Khan, his
friend without transferring the ownership of these debentures. Although during 2005-06,
interest of Rs. 100,000 is received by Sharukh Khan, it is taxable in the hands of Amitabh
Bachan as per Section 60

REVOCABLE TRANSFER OF ASSETS (SECTION 61)

‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or income
from such an asset, either whole or in parts at any time in future, during the lifetime of
transferee. It also includes a transfer which gives a right to re-assume power of the income from
asset or asset during the lifetime of transferee.

If the following conditions are satisfied section 61 will become applicable.

An asset is transferred under a “revocable transfer”,

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The transfer for this purpose includes any settlement, or agreement

Then any income from such an asset is taxable in the hands of the transferor and not the
transferee (owner).

Note:-In the case of irrevocable transfer of asset , the income from such assets will be deemed
to be the income of the transferee (To whom the asset has been transferred), provided that the
transfer is not for the benefit of the spouse of the transferor.

INCOME OF SPOUSE

The following incomes of the spouse of an individual shall be included in the total income of
the individual:

A REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL

INTEREST [SECTION 64 (1) (ii)]

Concern – Concern could be any form of business or professional concern. It could be a sole
proprietor, partnership, company, etc.

Substantial interest - An individual is deemed to have substantial interest, if he /she

(individually or along with his relatives) beneficially holds equity shares carrying not less than
20 per cent voting power in the case of a company or is entitled to not less than 20 percent of
the profits in the case of a concern other than a company at any time during the previous year.

If the following conditions are fulfilled this section becomes applicable.

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If spouse of an individual gets any salary, commission, fees etc (remuneration) from a concern

The individual has a substantial interest in such a concern

The remuneration paid to the spouse is not due to technical or professional knowledge of the
spouse.

Then such salary, commission, fees, etc shall be considered as income of the individual and not
of the spouse.

Illustration - X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without
any technical or professional qualification to justify the remuneration. In this case, salary
income of Mrs. X shall be taxable in the hands of X.

When both husband and wife have substantial interest

Where both the husband and wife have a substantial interest in a concern and both are in receipt
of the remuneration from such concern both the remunerations will be included in the total
income of husband or wife whose total income,excluding such remuneration, is greater.

INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SECTION 64(1)

(IV)]

Income from assets transferred to spouse becomes taxable under provisions of section 64 (1)
(iv) as per following conditions:-

The taxpayer is an individual

He/she has transferred an asset (other than a house property)

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The asset is transferred to his/her spouse

The asset is transferred without adequate consideration. Moreover there is no agreement to live
apart.

If the above conditions are satisfied, any income from such asset shall be deemed to be the
income of the taxpayer who has transferred the asset.

Illustration - X transfers 500 debentures of IFCI to his wife without adequate consideration.
Interest income on these debentures will be included in the income of X.

When Section 64(i) (iv) is not applicable On this basis of the aforesaid discussion and judicial
pronouncements, section 64 is not applicable in the following cases:

1. If assets are transferred before marriage.

2. If assets are transferred for adequate consideration.
3. If assets are transferred in connection with an agreement to live apart.
4. If on the date of accrual of income, transferee is not spouse of the transferor.
5. If property is acquired by the spouse out of pin money (i.e. an allowance given to the
wife by her husband for her dress and usual household expenses).

In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the
hands of the transferor

INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1)

(VI)]

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Income from assets transferred to son’s wife attract the provisions of section 64 (1) (vi) as per
conditions below:-

The taxpayer is an individual.

He/she has transferred an asset after May 31, 1973.

The asset is transferred to son’s wife.

The asset is transferred without adequate consideration.

In the case of such individuals, the income from the asset is included in the income of the
taxpayer who has transferred the asset.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE

BENEFIT OF SPOUSE [SEC. 64 (1) VII)]

Income from assets transferred to a person for the benefit of spouse attract the provisions of
section 64 (1) (vii) on clubbing of income. If:

The taxpayer is an individual.

He/she has transferred an asset to a person or an association of persons.

Asset is transferred for the benefit of spouse.

The transfer of asset is without adequate consideration.

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In case of such individuals income from such an asset is taxable in the hands of the taxpayer
who has transferred the asset.

INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE

BENEFIT OF SON’S WIFE [SEC. 64 (1) (VIII)]

Income from assets transferred to a person for the benefit of son’s wife attract the provisions of
section 64 (1) (vii) on clubbing of income. If,

The taxpayer is an individual.

He/she has transferred an asset after May 31, 1973.

The asset is transferred to any person or an association of persons.

The asset is transferred for the benefit of son’s wife.

The asset is transferred without adequate consideration.

In case of such individual, the income from the asset is included in the income of the person
who has transferred the asset.

INCOME OF MINOR CHILD (SEC. 64 (1A)

All income which arises or accrues to the minor child shall be clubbed in the income of his
parent (Sec. 64(1A), whose total income (excluding Minor’s income) is greater. However, in
case parents are separated, the income of minor will be included in the income of that parent
who maintains the minor child in the relevant previous year.

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Exemption to parent [Sec10 (32)]

An individual shall be entitled to exemption of Rs. 1,500 per annum(p.a.) in respect of each
minor child if the income of such minor as included under section 64 (1A) exceeds that amount.
However if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption
shall be restricted to the income so included in the total income of the individual.

When Section 64(1A) is not applicable

In case of income of minor child from following sources, the income of minor child is not
clubbed with the income of his parent.

Income of minor child on account of any manual work.

Income of minor child on account of any activity involving application of his skill, talent or
specialized knowledge and experience.

Income of minor child (from all sources) suffering from any disability of the nature specified
under section 80U .

Sec 64(2) Transfer to HUF in which individual is a member: If an individual transfers property
to HUF without consideration or adequate consideration, then income earned from it by HUF
will be clubbed in the hands of individual. 10 .Sec 65-Assessing Officer Discretion in certain
cases: The AO has the power to exempt the assessee from clubbing provisions if looking to the
circumstances of case if he thinks fit to exempt as such. But the exemption made3 to assessee
gives AO a right to realize the tax from any party connected to transaction related to clubbing
For Instance - If Mr. A gifts her wife 90% of his property including cash , she uses the same for
carrying a business but after sometime her wife made a fraud and run away somewhere with all
his property then in such a case Mr. A may get exemption from clubbing provision if AO

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thinks it fit to exempt as such. However, AO can search her wife and make her liable to pay tax
even she is not liable due to clubbing provisions.

Finance Bill 2017 could end tribunal autonomy and institute tax harassment as
the norm

The passage of the Finance Bill 2017 creates history on various counts.

Firstly, an ominous broad spectrum legislation encompassing diverse subjects way beyond the
limited scope of Article 110 of the Constitution was masqueraded as a Money Bill.

Secondly, hiding under cover of the special procedure reserved for passage of Money Bills, the
government pushed the Bill by brute majority in the Lok Sabha ignoring the collective wisdom
of the Rajya Sabha reflected in its several substantive amendments.

Thirdly, the Bill introduces draconian provisions giving unfettered power to taxmen to search
and seize without any real accountability.

Fourthly, the Bill allows taxmen to clutch at much more than is required in name of tax
compliance

Conclusion:
Taxes in India are levied by the Central Government and the state governments. Some minor
taxes are also levied by the local authorities such as the Municipality.

The authority to levy a tax is derived from the Constitution of India which allocates the power
to levy various taxes between the Central and the State. An important restriction on this power
is Article 265 of the Constitution which states that "No tax shall be levied or collected except by
the authority of law". Therefore, each tax levied or collected has to be backed by an
accompanying law, passed either by the Parliament or the State Legislature.

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Income Tax Department functions under the Department of Revenue in Ministry of Finance. It
is responsible for administering following direct taxation acts passed by Parliament.

 Income Tax Act, 1961

 Various Finance Acts (Passed Every Year in Budget Session)

Income Tax Department is also responsible for enforcing Double Taxation Avoidance
Agreements and deals with various aspects of international taxation such as Transfer Pricing.
Finance Bill 2012 seeks to grant Income Tax Department powers to combat aggressive Tax
avoidance by enforcing General Anti Avoidance Rules.

The passage of the Finance Bill 2017 creates history on various counts. Firstly, an ominous
broad spectrum legislation encompassing diverse subjects way beyond the limited scope of
Article 110 of the Constitution was masqueraded as a Money Bill. Secondly, hiding under cover
of the special procedure reserved for passage of Money Bills, the government pushed the Bill
by brute majority in the Lok Sabha ignoring the collective wisdom of the Rajya Sabha reflected
in its several substantive amendments.

Thirdly, the Bill introduces draconian provisions giving unfettered power to taxmen to search
and seize without any real accountability. Fourthly, the Bill allows taxmen to clutch at much
more than is required in name of tax compliance.

The new Section 132 also allows tax officers to attach provisionally any property belonging to
the assessee, in addition to humongous existing confiscatory powers. Immediate attachment of
bank accounts with protracted multilayered proceedings serpentinely going on will sound the
death knell for most assessees. Mark Twain’s famous quip as to the difference between a
taxidermist and a tax collector being “the taxidermist takes only the skin” seems now to be
legislatively enforced.

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