Clubbing of Income Under Income Tax

An assessee may reduce his tax liability by transferring his assets in favor of a person who is related to him. As per [Sec 60] to [Sec 64], income belonging to some other person will be taxed in the hands of the assessee in certain situation for the purpose of avoiding tax evasion. This is called  clubbing of income.

  1. Transfer of income without the transfer of assets: Income arising to nay person by virtue of any transfer of any income, without transferring the assets is deemed to be the income of the transferor and is taxable in his hands. The transfer may be revocable or not. There is no exception to this rule.
  1. Revocable transfer of assets: Any income arising to any person from an asset as a result of revocable transfer of asset shall be deemed to be the income of transferor. As per [Sec62] the income revocable transfer of assets shall not be clubbed with income of transferor when it is effected through the medium of trust is not revocable in the life time of the beneficiary or transferee.
  1. Remuneration of spouse: any remuneration received by the spouse of the individual from a concern in which the individual has substantial interest will be clubbed with the income of the individual. However if the remuneration is solely attributable to the application of technical or professional knowledge and experience of the spouse, then the income will not be clubbed. Where both husband and wife have a substantial interest in the concern and both are in receipt of the remuneration , it will be included in the total income of husband or wife whose total income excluding such remuneration is greater. If such income is included in the total income of either of the spouse, any such income in the subsequent year cannot be included in the total income of the other spouse unless the assessing authority is satisfied after giving a  reasonable opportunity of being heard. An individual is said to have substantial interest in a concern if he individually or along with relatives beneficially holds equity shares carrying not less than 20% voting power in case of a company or is entitled to not less than 20% of the net profit in the case of a company other than a company, at any time during the year.
  1. Income from any assets transferred to spouse: Where an individual transfers an asset other than a house property to his or her spouse directly or indirectly otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset will be deemed to be the income of the transferor. The relationship between the husband and wife should subsist both at the time of transfer and at the time when income is accrued, if the spouse sells that asset for a profit, capital gain arising from to the spouse on sale of the asset is chargeable to tax in the hands of the transferor.
  1. Transfer of assets to son’s wife: If an individual directly or indirectly transfers assets after May31, 1973 without adequate consideration to a son’s wife, income arising from such assets will be included in the total income of the transferor.
  1. Income from assets transferred to a person for the benefit of the spouseAn asset  transferred directly or indirectly by an individual to a person for the immediate or deferred benefit of his or her spouse, without any adequate consideration , the  income arising the transferred assets will be included in the total income of the transferor to the extent of such benefit.
  1. Income from assets transferred to a person for the benefit of the son’s wife: An asset  transferred directly or indirectly by an individual on or before 1st June, 1973, to a person for the immediate or deferred benefit of son’s wife, without any adequate consideration,  the income arising the transferred assets will be included in the total income of the transferor to the extent of such benefit.
  1. Income of a minor child: Income accruing or arising to a minor child shall be included in the total income of those parents who has greater total income before clubbing the minor’s income. If the marriage of the parents not subsist, the income will be included in the total income of that parent who maintains the child in the relevant PY. If the income of a minor child is included in the total income of a parent, that parent is eligible for exemption of Rs.1500 in respect of each minor child or actual amount clubbed whichever is less.

In the following situation income of the minor child shall not be clubbed.

  • Income of physically handicapped minor child
  • Income of a minor child on account of any manual work
  • Income of a minor child from any activity involving application of hi or her skill, talent or specialized knowledge and experience
  1. Converted property : Where an individual who is a member of a HUF converts, his self occupied property without adequate consideration after 31st December 1969 into the property belonging to the family, the income arising from such asset will be included in the income of the individual who transfers such property. For this purpose of clubbing,  income also includes loss. Where there is a loss to a specified person in specified circumstances, the individual will be entitled to set off such loss.

Deemed Income

Deemed income refers to those income, which are not actually the income of the assessee , but are included in the total income for calculation of tax pupose. Certain amounts if they satisfy certain conditions will be considered as deemed income and are included in the income of the assessee for income tax purpose.

1. Cash credit [Sec68]: An amount found credited in the books of assessee will be deemed to be his incoe, provided he cannot give a satisfactory explanation about its source

2. Unexplained investment [Sec69]: Investment recorded but satisfactory explanation cannot be given about its source or investments recorded will not be deemed to be income of the PY in which investment is made.

  1. Unrecorded and unexplained money[Sec69A]: Money or other valuable article found in the ownership of the assessee and if he cannot give a satisfactory explanation about its source, such money or other articles will be deemed to be the income of the assessee for the PY in which he has found to be the owner of these items.
  1. Investments not fully disclosed in the books of accounts[Sec69B]: Income not fully disclosed in the books of account is an item which is taxable as deemed income.
  1. Unexplained expenditure [Sec 69C]: Where an assessee incurred any expenditure in any PY and , he cannot give a satisfactory explanation about its source such expenditure will be deemed to be the income of the assessee for the PY in which such expenditure in incurred.

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