Q. Why is there need of clubbing?
A. Sometimes to reduce the tax burden the taxpayer transfers the asset to another person. In this case, to protect the interest of revenue, the income derived by that asset will be clubbed in the income of transferor. This is called clubbing of income.
Q.Which sections are covering clubbing provision?
A.Section 60 to section 65 of income tax act covers the provisions of clubbing.
Q.If I transfer the rent without transferring house to my wife, will it be clubbed with my income?
A. Yes, According to section 60,
When income is transferred without transfer of asset, it is deemed to income of transferor.
Q. When I transfer some asset by revocable transfer, will clubbing provision apply for income from that asset?
A. Yes, as per section 61,
When some person transferred asset to another person which can be revoked (cancelled), any income arising from the asset will be clubbed with the income of transferor.
If Raj Kumar transfers his office to his wife by agreement mentioning that the asset can be re transferred any time to Raj Kumar, the income arisen from the rent of office is deemed income of Raj Kumar.
Definition of transfer and revocable transfer:
- Transfer is deemed to be revocable if it contains any provision for the re transfer of the whole or any part of the income or assets to the transferor or it gives the transferor a right to re assume power over the whole or any part of the income or the asset.
- Transfer includes any settlement, trust, covenant , arrangement.
Q. I can save my tax by transferring asset to my family, isn’t it?
A. No, Section 64 will apply for Income arising to spouse, son’s wife, minor child and HUF when asset is transferred to them without adequate consideration.
Q. What section 64 says?
A. Section 64(1)-Income arising to spouse
Income of individual shall be clubbed with income of spouse in following circumstances:
- Where asset is transferred to spouse without adequate consideration and the transfer is not connected with living apart.
- Where the individual has substantial interest in some concern and the spouse is getting remuneration, fees from that concern.
Q. What is meaning of substantial interest?
A. Meaning of substantial interest:
- When concern is company, the individual or his relative(husband, wife, brother, sister, any lineal ascendant or descendant of individual as per relative definition 2(41)) holds 20% or more voting power through equity shares in company.
- In any other case, if an individual or his relative is entitled to 20% or more profit of the concern.
Q.What to do when both husband and wife have substantial interest in the concern and both are receiving salary from the said concern?
A.In that case, the income will be clubbed with the income of husband or wife whose income is greater excluding said income. Once it is clubbed in husband or wife’s income, in succeeding year, the income can’t be clubbed in other person unless the assessing officer is satisfied.
Q. If my wife is CA and working in my CA firm, will clubbing provision apply?
A . No, As she has professional qualification. When remuneration attributable to application of technical or professional qualification, knowledge or experience of the person, such remuneration can’t be clubbed.
Q. I have heard that clubbing provision is applicable for income arising to son’s wife?
A. Yes, Following income will be clubbed with the income of the transferor
- Any income arising from the asset which has been transferred without adequate consideration to son’s wife.
- Any income arising from the asset transferred to the extent to which the income from such asset is for the immediate or deferred benefit of the individual’ spouse or son’s wife.
Q.How to calculate clubbing income when transferred asset is invested in business?
A. See the following example.
When son’s wife or spouse has invested asset transferred,
- in business, as investment, income arising to that investment shall be clubbed. Suppose Mr. Pranay has transferred money worth Rs. 5,00,000 to his wife and his wife has invested this money in share of reliance ltd. Now she receives dividend worth Rs. 30,000 during the year, in this case, Rs. 30,000 will be clubbed with Mr. Pranay’s income.
- In a firm as a capital contribution, profit attributable to that capital shall be clubbed with transferor ‘s income. Example. If Mr. Pranay has transferred money worth Rs. 5,00,000 to his wife and she invested the money in a firm as capital as on 1/4/2013. Total capital of firm on that date was Rs. 15,00,000. During the year, firm has profit of Rs. 15,000 and profit attributable to wife of Pranay is Rs. 5000 (5,00,000/15,00,000*15000) .Now as per clubbing provision , Rs. 5,000 shall be clubbed with income of Pranay.
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