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PROJECT WORK

CLUBBING AND AGGREGATION OF INCOME

SUBMITTED TO: SUBMITTED BY:

MRS. PRATIMA SONI UJJVAL SIHAG, VIDISHA

ASSISTANT PROFESSOR L/1523 L/1525

SCHOOL OF LAW SCHOOL OF LAW

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ACKNOWLEDGMENT

I take this opportunity to express our humble gratitude and personal regards to Mrs. Pratima Soni
for inspiring and guiding us during the course of this Project work and also for her co-operation
and guidance from time to time during the course of this Project work on the topic.
I have prepared this Project not only for marks but also to increase my knowledge.

Place: Neemrana - Ujjval Sihag


Date of Submission: November, 13, 2018 - Vidisha

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TABLE OF CONTENTS

1. Clubbing of Income for Transfer Of Income Without Transfer Of Asset (Sec. 60)
2. Clubbing of Income for Revocable Transfer Of Assets (Sec 61)
3. Clubbing of Income Of Spouse SEC. 64(1) (ii)
4. Clubbing of Income From Assets Transferred To Son’s Wife [SEC. 64 (1) (VI)]
5. Clubbing of Income From Assets Transferred To A Person For The Benefit Of
Spouse [SEC. 64(1) (VII)]
6. Clubbing of Income From Assets Transferred To A Person For The Benefit Of
Son,S Wife [Sec. 64 (1) (VIII)]
7. Clubbing of Income Of Minor Child (SEC. 64 (1A)
8. Clubbing of Income Of HUF{SEC. 64 (2)}
9. Other Points for Clubbing of Income under Income Tax Act, 1961
10. Can negative income be clubbed?
11. Head of income under which an income belonging to somebody else would be
clubbed?
12. Case analysis
13. Conclusion

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Introduction

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 others Incomes in the income of the assessee is called Clubbing of Incomeand 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.

Objective –Main Objectives are as follows:-

 Circumstances when income of some other person is included in the income of Assessee
 Provisions when these sections will be applicable
 Under what head and in whose income it will be included.
Under the following circumstances, the income of other person is included in the income of the
assessee. We will be discussing each one of them in the pages to follow.

A. Clubbing of Income for Transfer Of Income Without Transfer Of Asset (Sec. 60)

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

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Illustration 10.1: Amitabh Bachan owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual)
interest being Rs. 100,000. On April 1, 2018 he transfers interest income to Shahrukh Khan, his
friend without transferring the ownership of these debentures. Although during 2018-19, interest
of Rs. 100,000 is received by Shahrukh Khan, it is taxable in the hands of Amitabh Bachan as
per Section 60.

B. Clubbing of Income for Revocable Transfer Of Assets (Sec 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”,


 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).

Exceptions to section: 61

 Where the income arises to any person by virtue of transfer by way of trust which is not
revocable during the life time of the beneficiary,and in case of any other transfer which is not
revocable during the life time of the transferee.
 Where the income arises to any person by virtue of transfer made before 01.04.1961, which is
not revocable for the period of 6 years or more

C. Clubbing of Income Of Spouse SEC. 64(1) (ii)

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

(i) Remuneration from A Concern In Which Spouse Has Substantial Interest [Sec 64 (1)
(ii)]

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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.

 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.

(ii) Income From Assets Transferred To Spouse [SEC. 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 (directly/indirectly) 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.

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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 10.3 – 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:

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

D. Clubbing of Income From Assets Transferred To Son’s Wife [SEC. 64 (1) (VI)]

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 (directly/indirectly) 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.

E. Clubbing of Income From Assets Transferred To A Person For The Benefit Of Spouse
[SEC. 64(1) (VII)]

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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(directly/indirectly) an asset to a person or an association of persons. Asset
is transferred for the benefit (immediate/deferred) of spouse.
 The transfer of asset is without adequate consideration.
In case of such individuals income from such an asset is taxable in the hands of the taxpayer who
has transferred the asset.

F. Clubbing of 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 (directly/indirectly) an asset after May 31, 1973.
 The asset is transferred (directly/indirectly) to any person or an association of persons. The asset
is transferred for the benefit (immediate/deferred) 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.

G. Clubbing of 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.

Exemption to parent [Sec 10(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.

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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 specified u/s 80U
Please also read: https://taxguru.in/income-tax/clubbing-provisions-income-minor.html

H. Clubbing of Income Of HUF{SEC. 64 (2)}

Where, in the case of an individual being a member of a Hindu undivided family, at any time
after the 31st day of December, 1969, has converted his self-acquired property into property
belonging to the family through the act of impressing such separate property with the character
of property belonging to the family or throwing it into the common stock of the family or been
transferred by the individual, directly or indirectly, to the family otherwise than for adequate
consideration (the property so converted or transferred being hereinafter referred to as the
converted property), the income arising from such converted/transferred property shall be dealt
with in the following manner:

1. The entire income from converted/transferred property shall be taxable in the hands of the
individual (transferor)

2. If the converted/transferred property is subsequently partitioned amongst the members of the


family, the income derived from such converted/transferred property as is received by the spouse
of the transferor will be taxable in the hands of the transferor

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Other Points for Clubbing of Income under Income Tax Act, 1961

Can negative income be clubbed?

If clubbing provisions are applicable and income from such a source is negative it will still be
clubbed in the income of assessee.

Head of income under which an income belonging to somebody else would be clubbed?

The other person,s income is taxable under the head under which it would have been taxable if it
is the income of the asses see himself.

For example Mr. X gifts Mrs. X Rs 2 lakhs from which she starts a business. Now as per
clubbing provisions whatever is the profit from this business it will be taxable in the hands of
Mr. X. Since it is an income taxable under the head ‘Profits & gains of Business &
profession, that is why it will be taxable under the same head and income will be calculated as if
it is the business of Mr. X.

Aggregation of income and related provisions:

Chapter VI (Sections 66-80) of Income Tax Act, 1961 deals with provisions related Aggregation
of income and set off or carry forward of loss. Section 71 of Income Tax Act 1961-2017
provides for Set off of loss from one head against income from another.

(1) Where in respect of any assessment year the net result of the computation under any head of
income, other than “Capital gains”, is a loss and the assessee has no income under the head
“Capital gains”, he shall, subject to the provisions of this Chapter, be entitled to have the amount
of such loss set off against his income, if any, assessable for that assessment year under any other
head.

(2) Where in respect of any assessment year, the net result of the computation under any head of
income, other than “Capital gains”, is a loss and the assessee has income assessable under the
head “Capital gains”, such loss may, subject to the provisions of this Chapter, be set off against

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his income, if any, assessable for that assessment year under any head of income including the
head “Capital gains” (whether relating to short-term capital assets or any other capital assets).

(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect
of any assessment year, the net result of the computation under the head “Profits and gains of
business or profession” is a loss and the assessee has income assessable under the head
“Salaries”, the assessee shall not be entitled to have such loss set off against such income.

(3) Where in respect of any assessment year, the net result of the computation under the head
“Capital gains” is a loss and the assessee has income assessable under any other head of income,
the assessee shall not be entitled to have such loss set off against income under the other head.

Following sub-section (3A) shall be inserted after sub-section (3) of section 71 by the Finance
Act, 2017, w.e.f. 1-4-2018:

(3A) Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect
of any assessment year, the net result of the computation under the head “Income from house
property” is a loss and the assessee has income assessable under any other head of income, the
assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two
lakh rupees, against income under the other head.

(4) Where the net result of the computation under the head “Income from house property” is a
loss, in respect of the assessment years commencing on the 1st day of April, 1995 and the 1st day
of April, 1996, such loss shall be first set off under sub-sections (1) and (2) and thereafter the
loss referred to in section 71A shall be set off in the relevant assessment year in accordance with
the provisions of that section.

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CASE ANALYSIS

BACKGROUND AND FACTS

 The Indian Tax Laws (ITL) provide for clubbing certain incomes of a minor child with
the income of the parent.
 Under the erstwhile scheme of taxation of income from partnership firm, share of profit
was taxable in the hands of the partners. At that time, the clubbing provisions, inter alia,
provided that income of a minor from his or her admission to benefits of a partnership
firm was to be clubbed with income of the parent. For this purpose, where a minor was a
beneficiary under a trust, income arising to the trust from its membership in a partnership
firm, to the extent it was for the benefit of the minor, also attracted the clubbing
provisions.
 In the present case, the brother-in-law of the Taxpayer created two trusts for the benefit
of two minor children of the Taxpayer. The trusts became partners in a partnership firm.
 During the current year, the trusts earned income on account of distribution of profit by
the firm. The trust deeds provided that any income earned by the trusts shall be received
by or spent for the benefit of the minors only on their attaining majority. In case any
minor died before attaining majority, his or her share would vest into the surviving minor.
 Since the trusts were created for the benefit of the minors, the Tax Authority clubbed
such income with that of the Taxpayer parent.
 On appeal, the First Appellate Authority ruled in the Taxpayer’s favor and held that since
the minors had no right to receive income till attaining majority, the clubbing provisions
were not attracted. The Income Tax Appellate Tribunal and the High Court decided the
appeal against the Taxpayer. Aggrieved, the Taxpayer appealed further to the SC.

ISSUE BEFORE THE SC

Whether the clubbing provisions were applicable to income arising to the trust created for the
benefit of the minors in the absence of their entitlement to receive such income until attainment
of majority.

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SC’S RULING

 The SC held that the clubbing provisions were attracted only when income resulted to
minors during their minority. In the present case, due to operation of trust deed
covenants, the minor did not receive any benefit during the year. Benefit, if at all, would
accrue when the minor attained majority.
 Furthermore, the SC held that due to a specific stipulation in the trust deeds, receipt of
income was contingent upon eventualities of attaining majority and/or premature death of
the other minor. No income accrued to the minor during the year.
 The SC referred to its earlier ruling in the case of CIT v. M.R. Doshi,1 wherein the SC
was concerned with the provisions which required clubbing of income from assets
transferred for inadequate consideration, to the extent that such income was for the
immediate or deferred benefit of the minor. In that case, in almost identical
circumstances, the SC held that no immediate or deferred benefit arose to the minor
during tenure of minority. The SC held that the clubbing provisions were not attracted
since the benefit was deferred beyond the period of minority and payment was to be
made by the trust only after the minor attained majority.
 The SC also referred to the reasoning in the Bombay High Court ruling in the case of
Yogindraprasad N. Mafatlal v. CIT,2 which was subsequently affirmed by the SC in M.R.
Doshi case. In that case, the Bombay High Court, inter alia, held that for the clubbing
provisions to apply, the benefit, if any, receivable by the minors must be certain and
vested. It cannot be a mere possibility or made dependent upon fulfilment of a
contingency.
 The SC rejected the Tax Authority’s reliance on the provision which required clubbing of
income arising to the trust from its membership in a partnership firm, to the extent that it
was for the benefit of the minor. The SC held that the specific provision was introduced
only to ensure that income is clubbed in the hands of the parent even when a trust created
for the benefit of a minor receives income from a partnership firm. The provision did not

1
[(1995)(211 ITR 1)(SC)]
2
([(1977)(109 ITR 602)(Bom HC)]

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go further to state that clubbing would be required also when income earned by the trust
cannot be utilized for the benefit of the minors during their minority. The SC held that, in
the first instance, income has to benefit the minors and only then can it be clubbed in the
hands of the parent.
 In the process, the SC observed that the Tax Authority is not left without any remedy to
assess income on account of the clubbing provision being inoperative. The Tax Authority
is open to tax income in the hands of the children as and when they receive it upon
attaining majority. Alternatively, the Tax Authority could have assessed income on a
year-on-year basis in the hands of the trustees themselves, in terms of the option available
under the ITL.

COMMENTS

Compared to the provisions of the ITL examined by the SC, as per the present scheme of
taxation of partnership firms under the ITL, the share of profits received by the partner is exempt
from tax. Consequently, the specific provision requiring clubbing of the share of profit earned by
a minor from admission to partnership in a firm has been deleted. Although the specific
provision with which the SC was concerned no longer exists in the statute, the principle laid
down by the SC, to the effect that income must first accrue to the minor, holds good in the
context of the present clubbing provisions. The limited question before the SC was whether the
clubbing provisions, which envisage taxability of income earned by a minor, can operate to cover
income which can accrue to a child only after he or she has attained majority. This SC decision
may be considered applicable to the specific facts. In the course of judgment, without expressing
any opinion, the SC observed that the subject income may be taxed in the hands of the child
when he or she receives income upon attaining majority or could have been taxed in the hands of
the trustee of the trust as a representative assessee. In the absence of further guidance in the
ruling, the impact of these observations will need a proper review in the facts of the case.

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Conclusion:-

Sometimes an individual is taxed in respect of others income. The income legally belongs to
somebody else but it is clubbed with the income of some other person in some special
circumstances. These provisions are contained in sections 60 to 64.

Section 60 & 61 contains provisions when income from an asset is transferred without
transferring the asset or transferring an asset but the transfer is revocable. In both the situations
income from such assets is treated as income of the transferor.

Any remuneration received by the spouse from a concern in which individual has substantial
interest is taxable in the hands of individual. Similarly income from any asset transferred to
spouse will continue to be taxable in the hands of former. Income from any asset transferred for
the benefit of spouse is taxable in the hands of transferor. Similarly income from any asset
transferred to son,s wife or for the benefit of son,s wife again becomes taxable in the hands of
transferor. The other person,s income is taxable under the head under which it would have been
taxable if it is the income of the assessee himself.

REFRENCES:-

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https://taxguru.in/income-tax/clubbing-of-income-under-the-income-tax-act-1961.html

http://www.simpletaxindia.net/2012/07/clubbing-of-income-individual-section.html

https://indiantaxguide.wordpress.com/category/clubbing-of-income/

https://www.aubsp.com/section-71-set-off-loss-against-income-from-another-head/

https://www.taxmanagementindia.com

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