Introduction
Generally, income is taxed in the hands of the person who earns it. However, Sections 60 to 64 provide the provisions for clubbing of income in specified cases to curb tax avoidance through indirect transfers or arrangements.
Transfer of Income without transferring the Assets.
If income is transferred without transferring the asset, such income is clubbed with the income of the transferor, irrespective of whether the transfer is revocable or irrevocable, and regardless of when it was made.
Revocable Transfer of Assets
If an asset is transferred with a provision for retransfer or the right to reassume control, the income from such asset is clubbed with the transferor’s income.
Exceptions
Clubbing does not apply if:
(a) The transfer is irrevocable during the lifetime of the transferee, and
(b) Transfer before 01-04-1961 which isn’t revocable for period exceeding 6 years. If the power to revoke arises later, income is clubbed from that point onward.
Clubbing of Income of Specific Relations
(a) Spouse
- Remuneration: Income of spouse from a concern in which the other spouse has a substantial interest is clubbed, unless attributable to technical/professional qualifications.
- Meaning of Substantial Interest: An individual has substantial interest if he/she (alone or with relatives) holds ≥20% voting power in a company or ≥20% profit share in a non-corporate entity at any time during the year.
- Transfer of Asset: If an asset is transferred to a spouse without adequate consideration, income from such asset is clubbed with the transferor. However, income from the accretion of transferred assets or assets transferred under an agreement to live apart is not clubbed.
- Asset invested in Business: If the transferred asset is invested in business, the income is clubbed proportionately.
- Asset transferred for Spouse’s Benefit: Income arising to another person or AOP from assets transferred for the direct/indirect benefit of the spouse is also clubbed.
(b) Son’s Wife
- Transfer of Asset: If an individual transfers an asset to his son’s wife without adequate consideration, the income from it is clubbed with the transferor’s income, provided the father/mother-in-law and daughter-in-law relationship exists both at transfer and at income accrual.
- Asset invested in Business: If the transferred asset is invested in business, the income is clubbed proportionately.
- Asset transferred for benefit of Son’s Wife: Income from an asset transferred without adequate consideration for the benefit of the transferor’s son’s wife is clubbed with the transferor’s income, but only to the extent it benefits her.
(c) Minor Child
Income of a minor is clubbed with the parent having the higher total income, except:
- Income up to Rs. 1,500 (exempt per minor child)
- Income from manual work or application of skill/talent
- Income of a minor with disability underSection 80U
Once income is clubbed with one parent, it remains so unless reassigned by the AO with the opportunity of hearing.
(d) Property Gifted to HUF
Income from personal property converted to HUF property is taxable in the hands of the individual who made the conversion. If property is partitioned and the spouse receives a share, income from such share is clubbed proportionately.
Computation and Tax Treatment
(a) Income is computed in the hands of the recipient under the relevant head before clubbing.
(b) Losses are also subject to clubbing.
(c) Clubbed income retains the character of the original head.
Tax Liability of Transferee
While income is taxed in the hands of the transferor, the transferee may be served a notice of demand and held liable to the extent of tax attributable to the clubbed income.