Clubbing of Income Tax Implications

Largely an assessee is taxed in respect of his own income while computation of total income in respect of income tax. But sometimes owing to some circumstances this elementary principle is strayed and the assessee can be taxed in respect of income which legally belongs to other person.

Clubbing of Income Meaning

Inclusion of other’s Incomes in the income of the assessee (person subject to tax) while computation of total income is called Clubbing of Income and the income which is so included is called Deemed Income. The provisions in Sections 60 to 64 of the Indian Income Tax Act govern this topic.

One very important thing to be kept in mind is the clubbing of income provisions applicable only for individuals and no other type of assessee like firm, company, LLP etc.

Clubbing of income under Income Tax hits quite a few areas, we for now will look up to areas which are most critically applicable on us in routine life

Various Circumstances while Computation of Total Income

1. TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET

This is applicable when –

a)     The taxpayer owns an asset

b)     The ownership of asset is not transferred by him.

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

Lets understand this point with an example – Aamir Khan owns Debentures worth Rs 5,000,000 of ABC  Ltd., (annual) interest being Rs. 500,000. On April 1, 2009, he transfers interest  income to Sharukh Khan, his friend without transferring the ownership of these debentures. Although during 2009-10, interest of Rs. 500,000 is received by Sharukh Khan, it is taxable in the hands of Aamir Khan.

2. REVOCABLE TRANSFER OF ASSETS

‘Revocable transfer’ means the transferor of asset undertakes a right to re-acquire asset or income from such an asset either wholly or in parts at any time in future, during the lifetime of transferee. It also comprises 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, the point will become relevant -

• An asset is transferred under a “revocable transfer”,

• 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 i.e the person transferring the asset and not the transferee (owner).

Also, In the case of irrevocable transfer of asset , the income from such assets shall be deemed to be the income of the transferee (to whom the asset has been moved)  on condition that the transfer is not for the profit of the spouse of the transferor.

3. INCOME OF SPOUSE

The ensuing incomes of the spouse of an individual shall be counted in the total income of the individual:

3A. INCOME FROM ASSETS TRANSFERRED TO SPOUSE

Income from assets transferred to spouse becomes taxable as per following conditions:-

• The taxpayer is an individual

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

• 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.

For eg – Akshay Kumar transfers 500 debentures of IFCI to his wife, Twinkle Khanna, without adequate consideration. Interest income on these debentures will be included in the income of Akshay.

 

Now, there’s a twist to this, as to when this provision does not apply –

On this basis of the aforesaid discussion and judicial pronouncements, all this is not applicable in the following cases:

* If assets are transferred before marriage.

* If assets are transferred for adequate consideration.

* If assets are transferred in connection with an agreement to live apart.

* If on the date of accrual of income, transferee is not spouse of the transferor.

* 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 aforementioned five cases, income ascending from the transferred asset cannot be clubbed in the hands of the transferor

You must consider all provision in entirety before using clubbing of income for computation of income and tax planning