Clubbing of income, means addition of income of other in the gross total income of a person, while computing his/her taxable income. Generally, it is applicable in family. Income of a spouse, child may be clubbed with income of major earner of the family.
Provisions of Section 64 of the Income Tax Act, 1961, deals with clubbing of income.
In computing total income of such individual, there shall be included all such sums as arise directly or indirectly to the spouse, of such individual by way of salary, commission or in any other form, whether in cash or kind from a concern in which such individual has substantial interest.
Thus, income of a souse in any form from a concern shall be clubbed in the income of other spouse, which have substantial interest in the concern.
No clubbing of income if remuneration received on the basis of any technical or professional qualification; – if spouse has any technical or professional qualification and due to that he/she is earning any income from a concern in which other spouse has substantial interest, then her/his income shall be clubbed. For these two conditions to be fulfilled;
i) Income received on account of technical or professional qualifications possessed by the spouse, and
ii) The income is solely attributable to the application of his/her technical or professional knowledge or experience.
Example: let’s consider Mr. X & Mr. Y are partners of XY Enterprises and sharing profit in the ration 50:50. Mrs. X is also an employee of XY Enterprises and earning Rs. 40,000/- pm as salary. In this case salary of Mrs. X will be clubbed in the income of Mr. X from firm as “Income from Salary’. If Mrs. X has technical or professional qualification (Let’s suppose she is a CA), in this case her income will not be clubbed in income of Mr. X.
Section 64(1)(ii)- Where both husband and wife have substantial interest and both are getting remuneration from the concern:- if both husband and wife have substantial interest in the concern and both getting remuneration from same concern, then income of one shall be clubbed income of those, which has higher income than other, before clubbing income. For this below mentioned conditions to be fulfilled;
i) Both husband and wife have substantial interest in the concern;
ii) Both husband and wife get remuneration from such concern;
iii) The relationship of husband and wife subsists at the time of accrual of income from concern.
Note: where income is once included in hand of either spouse, any such income arising in any succeeding year shall not be included in total income of other spouse, without permission of Income Tax Authorities.
LET’S CONSIDER SOME IMPORTANT POINTS;
CONCERN: it is a word of wide import and takes within its sweep and ambit all organisations or establishments engaged in business or profession, whether owned by a company, partnership or individual or any other entity. It also includes professional establishment also [ Mokashi (Dr.J.M.) Vs. CIT (1994)207ITR252(BOM)].
SUBSTANTIAL INTEREST: an individual shall be deemed to have substantial interest in a concern;
i) If the concern is a company ; he alone or along with his relatives at any time during the previous year owns beneficially, shares (Equity Shares) (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than 20% of the voting power.
ii) In any other case; if he alone or along with his relatives is entitled to 20% of the profits of such concern at any time during the previous year.
Note: in case of a company, the individual must have beneficial ownership of 20% of Equity Shares. If a person holding more than 51% shares of a company, in which he/she is not beneficially interested, then he/she shall not be deemed to have substantial interest in the concern.
TECHNICAL/PROFESSIONAL QUALIFICATIONS:
Two main conditions required to be fulfilled for Section 64(1)(ii) as follows;
i) The spouse possesses technical or professional qualification; and
ii) The income is solely attributable by application of same technical/professional qualifications.
Mokashi (Dr.J.M.) Vs. CIT (1994) 207 ITR 252 (BOM); it is decided that there is no conflict between two requirements of the provision, each deal with a different aspect and both them must be satisfied, though second comes into operation only on fulfilment of the first and not otherwise.
Pratima Shaha (Smt.) Vs. CIT (1999) 239 ITR 570 (Gau): where the spouse was drawing salary as nurse-cum-supervisor from a nursing home in which her husband was a partner , although she was BSc., in Bio-Science but did not posses any professional or basic qualification as nurse from any recognised institute, it was held that in view of the nature of employment of the spouse , a degree, a certificate or diploma in some cases may insisted upon.
Note: The words technical or professional qualification, do not necessarily relate to technical or professional qualification acquired by obtaining a degree, certificate or diploma or in any other form from and recognised institute or university.
Batta Kalyani Vs. CIT (1985) 154 ITR 59 (AP); A harmonious construction of two parts of proviso shows that if a person possesses technical or professional knowledge and experience, the requirements for the application of the proviso is satisfied, although the person concerned may not possesses any qualification issued by recognised institute.
In computing the total income of an individual , all such income as arises directly or indirectly , subject to the provision of section 27(i) , to the spouse of such individual from assets transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live apart shall be included.
Note: above provision is not applicable in case of income from house property transferred to the spouse by the individual. Where a house property has been transferred to the spouse, without adequate consideration and same shall be transferred later by the spouse, the income from that property shall be first assessed in the hand of transferee and then after clubbed in the income of transferor.
Philip John Plasket Thomas Vs. CIT (1963) 49 ITR 97 (SC): if relationship of husband and wife does not exist, either at the time of transfer of such asset or at the time of accrual of income, then income shall not be clubbed. Suppose Mr. A has given a gift to his fiancé (would be wife) then income arising from such gifted property shall not be taxable in hand of Mr. A, even after his marriage, because at the time of gift, the relationship with his fiancé was not as husband and wife.
Tulsidas Kilachand Vs. CIT 42ITR(SC); natural love and affection may be good consideration but that would not be adequate consideration for purpose of Section 64(1).
Ashok Kumar Vs. CIT (1996) 217 ITR 251 (AII): where a gift has been made, prior to solemnisation of the marriage, to would be wife, the provisions of Section 64(1)(iv) cannot be applicable on any income arises form that gifted property.
Thomas (PJP) Vs. CIT (1962) 44 ITR 897 (Kol): wife, in these provisions, means a lawfully wedded wife and child, a legitimate child. Income of a perspective wife or of all illegitimate child is not affected by these provisions.
F.Y. Khambhat Vs. CIT (1986) 159 ITR 203 (Bom): income from assets transferred by a non-resident to his wife is subject to clubbing provisions of Section 64 only if income from such assets accrue and arise in India.
INCLUSION OF INCOME IN CASE OF INADEQUATE CONSIDERATION;
If an individual transferred any of its asset to his/her spouse, then income from such asset shall be clubbed in transferor hand to the extent of inadequacy of consideration. Let’s consider Mr. X has transfer a house property to his wife of Rs. 10,00,000/- but actual consideration was Rs. 15,00,000/-. The house property has fetched a rent of Rs. 1,00,000/- in previous year, now in this case the income of Rs. 1,00,000*5,00,000/1500000= 33,333 shall be included in Mr. X income.
POSITION WHERE PART AMOUNT CONTRIBUTED BY SPOUSE;
Kumar Rao (Dr. N.) CIT (1988) 169ITR128(AP): the wife of assessed has constructed a house and spent a sum of Rs. 96,502 thereon. In that cost of construction, the assessed has contributed a sum of Rs. 34,500. It was held that, on facts, that the income from house property in proportion of 34,500/96502 was included in the income of assessed.
Kothari (CM) Vs. CIT (1963) 49 ITR 107(SC):
It was held that if a chain of transactions involved for transfer of an asset in favor of wife and which has established through facts, any income arising from the said transaction shall fall within provisions of this section.
SOME FACTS TO BE NOTED:
1. If property is acquired or investment is made by wife out of an allowance given by her husband for her personal expenses (called pin money), the clubbing provisions shall not apply;
2. If assets transferred has changed its shape and identification, then income from such changed asset shall be clubbed. Suppose is Mr. X has transferred shares or gifted shares to his spouse and Mrs. X has sold that shares and purchased a house property, then also income from house property shall be clubbed in income of Mr. X. [Palletti Srivendvarma Vs. CIT (1995) 216ITR 826(SC)].
3. There is no transfer on partition of HUF or on release or mere creation of charge;
4. Making genuine loan to spouse is not transfer.
Any income from an asset transferred to son’s wife, without adequate consideration shall be clubbed in income of transferor (after 1 st June, 1973).
Treatment of amount in total income when transferred asset has invested in business; when as asset has been transferred to spouse or son’s wife and transferee has invested;
i) in any other business ( such investment being not in the nature of contribution of capital as a partner in a firm or, as the case may be , for being admitted to the benefits of a partnership firm), that part of income arising out of business to the transferee from business as the value of the assets aforesaid as on the first day of previous year bears to the total income of the individual in that previous year.
Amount to be included in total income can be calculated as under=
Income from business x without any adequate consideration as on the First day of the previous year
Total investment by transferee as on the first day of the previous year
ii) in the nature of contribution of capital as partner in a firm, that part of the interest receivable by the transferee from the firm in any previous year, which bears the same proportion to the interest receivable by the transferee from the firm as the value of investment aforesaid as on the first day of year bears to the total investment by way of capital contribution as a partner of the firm as on the said day, shall be included in the total income of individual in that previous year.
Interest from firm x without any adequate consideration as on the First day of the previous year
Total investment by transferee as on the first day of the previous year
Note: profit from firm shall not be clubbed, since same shall be exempted u/s. 10(2A) of the Income Tax Act, 1961.
If an asset is transferred without consideration to third party for benefit of his spouse, then the income arising from such asset to the extent to which the income is for immediate or deferred benefit of his or her spouse.
Suppose Mr. X has transferred a house property to Mr. Y with a direction that 50% of rental income is to be used for the benefit of his wife Mrs. X and 50% for others, then rental income to the extent of 50% shall be included in the income of Mr. X.
Arvind H. Dalal Vs. CIT (1999) 105 Taxmann 24(Bom): in the case of such transfer, only the portion of income that is set apart for the benefit of spouse is taxable in the hand of settlor.
If an asset is transferred without consideration to third party for benefit of his/her son’s wife (after 1 st June, 1973) then the income arising from such asset to the extent to which the income is for immediate or deferred benefit of his or her son’s wife.
CAPITAL GAIN ON TRANSFERRED ASSETS;
Sevantilal Maneklal Seth Vs. CIT (1968) ITR 503(SC); if an asset is transferred to the spouse, without adequate consideration and spouse has sold that asset, then Capital Gain arising from that sale consideration shall be included in the hand of transferor. However, the Capital Gain first computed in the hand of transferee i.e. the spouse and she will be eligible for exemption under provisions of Section 54,54B, 54EC in respect of capital gain if same has been invested within stipulated period.
SECTION 64(1A); in computing total income of an individual, income of a minor, which accrues or arises from any source, shall be included in income of either of his parent.
The income shall be included in the income of whose parent, whose income (excluding income of minor) is greater.
If marriage of his/her parent dose not subsist, then his/her income shall be included in the income of those parent, which is maintaining the child.
One income of minor has been included in income of either parent, same cannot be changed in any previous year, unless permission of AO received.
A rebate of Rs. 1500/- per child shall be allowed to the parent, in which income, income of the minor shall be included.
CERTAIN INCOMES OF MINOR CHILD TAXABLE IN THE HAND ON MINOR CHILD ONLY;
The following income shall not be clubbed in income of parents of minor child;
i) any income of minor child suffering from any disability of the nature specified in Section 80U like physically disable, totally blindness, etc.
ii) such income, which accrues or arises to the minor child on account of any manual work done by him;
iii) such income, which accrues or arises to the mino1r child on account of any activity involving application of his skills, talent or specialised knowledge and experience.
i) Child in relation to an individual includes steps child and an adopted child of that individual;
ii) Minor married daughter’s income shall be clubbed in the hand of individual.
iii) If both parents of a minor do not alive, then the guardian of minor shall file his return seperately. The minor income shall not be included in the income of a guardian, if guardian is not a parent of minor child;
iv) Where a minor has attained majority during the previous year, then the income till the date he remained minor in the previous year shall be assessed in the hand on his parent;
v) The agricultural income of a minor child shall be taken into consideration, while computing income of his parent;
vi) What is to be included shall be income, within definition of Income Tax Act, before giving deduction under Chapter VIA.
vii) When a trust has created for the benefit of minor and they shall enjoy benefits after attaining majority. Then the benefits, shall not be included in the income of settlor and same shall be assessed in the hand of trustee.
NOTE: SOME MORE FACTS, SHALL BE CONSIDERED IN NEXT ARTICLE.
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