CONCEPT OF CLUBBING OF

INCOME

PROJECT SUBMITTED TO

Dr. Rana Navneet Roy

(Assistant Professor of Taxation Laws)

PROJECT SUBMITTED BY

Sankalp Parihar
Semester- V, Section- A
Roll no.- 142

DATE OF SUBMISSION
30/10/2021

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR (C.G)
 ABSTRACT

This project contains a detailed analysis of the concept of ‘Clubbing of Income. The provisions
relating to this principle are given in part V of the ‘Income Tax Act, 1963’ in sections ranging
from 60 to 64. These sections are divided into various scenarios in which the income of an
individual will be clubbed with another. Below are the conditions and sections which comes
under this head-
1. Income transferred but asset is not transferred- Section 60
2. Asset is transferred though the transfer is revocable- section 61
3. Assessment w.r.t. remuneration of spouse- Section 64(1)(ii)
4. Assessment from assets transferred to spouse- Section 64(1)(iv)
5. Assessment from asset transferred to son’s wife- Section 64(1)(vi)
6. Transfer of asset for benefit of spouse- Section 64(1)(vii)
7. Transfer of asset for benefit of son’s wife- Section 64(1)(viii)
8. Income of minor child- Section 64(1A)
9. Transfer to HUF and Subsequent partition- Section 64(2)

These are the conditions which have been discussed in detail in the project. The project also
contains exceptions to certain part of sections such as one relating to income of minor not being
clubbed. The project is made in a way to guide a layman to understand the provision of section
60-64 and thus the language of the acts has been simplified. Further, as and when necessary
the acts have been written down with proper citations.
 Contents

INTRODUCTION ........................................................................................................................... 4

ANALYSIS ...................................................................................................................................... 5

Transfer of Income Without Transfer of Asset. .............................................................................. 5

Revocable Transfer of Assets. ........................................................................................................ 6

Assessment of Individual with Respect to Remuneration of Spouse ............................................... 6

Assessment of Income from Assets Transferred to Spouse ............................................................. 7

Assessment of Income from Asset Transferred to Daughter-in-Law ............................................... 8

Assessment of Individual in Respect to Transfer of Asset to a third-party for Benefit of Spouse. .... 8

Transfer of Asset to a third-party for Benefit of Daughter-in-law ................................................... 9

Assessment with respect to Income of Minor Child ........................................................................ 9

Exceptions to Section 64(1A)..................................................................................................... 9

Conversion of Acquired property to Joint Family Property and Subsequent Partition of that
Property....................................................................................................................................... 10

CONCLUSION.............................................................................................................................. 11

REFERENCES .............................................................................................................................. 12
 INTRODUCTION

The concept of ‘Clubbing of Income’ in a sense is an arbitrary idea towards levying taxes on
the public. Generally, tax is imposed on a person in respect to the income earned by him in the
previous assessment year. However, the concept of ‘clubbing of income’ installs the idea
wherein the income of other entities is also included/clubbed in the total taxable income of the
taxpayer. In these scenarios, the taxpayer is liable to pay the tax arising out of his own income
as well as the clubbed amount. Therefore, the idea of including the earnings of two individuals
for the purpose of taxing it is regarded as clubbing of income.

As mentioned in section 60 to section 64 of the ‘Income Tax Act, 1962’, “in respect of income
which legally belongs to some other person”, the provisions are included to remedy the
situation where, a taxpayer tries to reduce his tax bill by transferring his assets in other person’s
name such as a kin or a taxpayer arranges his sources of income in a way that the tax liability
of said income falls upon someone else but the benefit of that income is directly or indirectly
is enjoyed by the taxpayer himself”1. For counteracting the abovementioned examples and
limiting the evasion of taxes by individuals, the provisions under section 60-64 have been
incorporated and thus it gave rise to the concept of clubbing of income.
In order to better understand this concept, this project is divided into nine scenarios in
conjunction to the act thus providing a better view of the situations in which clubbing of income
is necessary. These scenarios will be discussed in detail in the later part of the project.
The abovementioned divisions are as follows:

1. Transfer of income without transfer of asset.

2. Revocable transfer of assets.
3. Assessing an individual in respect of remuneration of his spouse
4. Income from assets transferred to spouse.
5. Income from assets transferred to daughter-in-law.
6. Transfer of asset to a third-party for benefit of spouse.
7. Transfer of asset to a third-party for benefit of daughter-in-law.
8. Income of the Assesses’ minor child.
9. Conversion of Acquired property to Joint Family Property and Subsequent Partition
of that Property

1
Vinod K. Singhania, Monica Singhania, Students’ Guide to Income Tax, 390 [Taxmann Publications, 64th
edition, 2021]
 ANALYSIS

After reviewing the resources available and reading them there are nine condition which have
been shortlisted in which clubbing of income is done in order to collect taxes from individuals
trying to avoid it. The conditions were mentioned on the introductory page and further is the
detailed analysis with respect to the provisions of the ‘Income Tax Act’. There are certain
exceptions to the condition which are also mentioned below.

Transfer of Income Without Transfer of Asset.

In this situation, an individual transferers his income arising out of an asset to a third party
without transferring the ownership of the assets. In such cases, the income which is transferred
is regarded as the income of the transferor himself. In these cases, section 60 is applicable.
Section 60 states that “All income arising to any person by virtue of a transfer whether
revocable or not and whether effected before or after the commencement of this Act shall,
where there is no transfer of the assets from which the income arises, be chargeable to income-
tax as the income of the transferor and shall be included in his total income.”2

In hindsight, for section 60 to be applicable in the situation, five basic conditions must be
fulfilled. The conditions are:

i. The transferor is the owner of the asset.

ii. The ownership of the asset is not transferred by the transferor rather only the income
arising out of the mentioned asset is transferred to the other party.
iii. The income arising out of the said asset is transferred to a different party under a
trust, settlement, agreement or arrangement.
iv. The transfer of the said asset may or may not be revocable.
v. The section will be applicable as the transfer is made effected at any time whether
be it before, on or after the commencement of the ‘Income tax act, 1961’.

If the abovementioned conditions are fulfilled, section 60 will be applicable and the transferred
amount will be added to the total income of the transferor and further the taxable income will

2
The Income-tax Act, 1961, Section 60, No. 43, Acts of Parliament, 1961. (India)
be calculated.

Revocable Transfer of Assets.

Revocable transfer- “A transfer is revocable if transferee can retransfer the asset/income of the
asset to transferor or/and transferor can reassume power over the asset / income of asset”3
Section 63 of the ‘Income Tax Act, 1961’ contains the definition of transfer and ‘revocable
transfer’.

In this condition, by the virtue of section 61, in a deal where an asset is transferred to another
and the transfer is an “revocable transfer”, income arising out of the said asset will be taxable
with the total income of the taxpayer. In conclusion, to club the income in case of revocable
transfer of assets, income out of the asset is to be taxable in the hands of transferor and the
income is taxable even if power to revoke the asset is exercised or not.

Assessment of Individual with Respect to Remuneration of Spouse

This scenario can be explained with the help of Section 64(1)(ii). This section requires four
conditions to be fulfilled to club the income of an individual and his spouse. The conditions
are:
1. The taxpayer must be an individual,
2. The taxpayer must have a substantial interest in a ‘concern’,
3. Spouse of the taxpayer must be employed by/in the abovementioned concern,
4. Employment of the spouse is not justified i.e.; the spouse is employed without the
technical knowledge that the job warrants.
In these conditions, the word ‘Concern’ is the key as the condition requires the taxpayer to
have interest in that concern and in order to club the income the spouse of the taxpayer had to
be employed in the same concern. ‘Concern here denotes both business concern and
professional concern and also both proprietary and non-proprietary concerns’4. Further in
order to determine ‘substantial interest of the taxpayer in the concern’, it is to be seen that,
“in case of a company, substantial interest is seen when the taxpayer hold, alone or together

3
Revocable and Irrevocable Transfer - Different types of Clubbing (teachoo.com) Accessed on 18/10/2021;
17:31 IST
4
Vinod K. Singhania, Monica Singhania, Students’ Guide to Income Tax, 391(Para122.3-2) [Taxmann
Publications, 64th edition, 2021]
with his relatives, 20 percent or more equity shares in the company, and in cases concerning
other than a company, the taxpayer is entitled to 20 percent or more share in profit of the said
concern.

Assessment of Income from Assets Transferred to Spouse

This condition comes under the virtue of Section 63(1)(iv) of ‘Income Tax Act’. According to
this section, six conditions are to be met to club the income of an individual and his spouse to
assess it under one head. The conditions needed to be fulfilled are-

1. An asset transferred by an individual. If the person is not the spouse of the individual
to whom the asset is transferred to, then this provision will not be applied on said
transaction.
2. The transfer of an asset is mandatory to invoke this provision. Such asset should be any
asset other than ‘house property’. When and if a house property is transferred to the
spouse, the transferor must be ‘deemed’ as the owner of the property, under section 27
of the act, for the purpose of clubbing of income.
3. The marital relation between the persons is a requirement for this provision to work.
This provision requires a subsisting marital relationship at the time of transfer of the
asset as well as when the income is accrued thus negating the possibility of clubbing of
income of a transferred asset before marriage to come under this act.
4. A transfer can be direct or indirect in nature to attract the provision of this act. For an
instance, if two or more transfers are made between the individuals and they are
interrelated, the clubbing of income will be done for appropriating the tax liability of
the individual.
5. Section 64(1) demands that the asset be transferred without and adequate consideration.
This means that condition of natural love and affection will not be counted as
consideration under this act. If the asset is transferred without consideration, measured
in terms of money, the provisions will apply to the transfer. An exception to this
condition is a transfer of asset with the agreement of living apart.
6. The nature of the asset is inconsequential in this section. For example, if an assessee
transfers cash to his wife and she deposit that cash in a mutual fund, the interest obtained
from that fund will be added to the total income of the transferor.
Assessment of Income from Asset Transferred to Daughter-in-Law

This condition can be explained through the provisions contained in section 64(1)(vi).
The conditions provided under this provision to club the income of transferor and beneficiary
are-
1. The taxpayer should be an individual.
2. The transfer of asset from assessee to the beneficiary is ought to be made after May 31,
1973 to attract the provisions of this section.
3. As mentioned above, the asset is to be transferred to the taxpayers’ son’s wife.
4. The transfer of asset under this section can be direct or indirect in nature.
5. The transfer of asset under section 64(1)(vi) requires a consideration which has a
monetary value in the eyes of law.
6. The nature of the asset is not important to attract the provisions of the ‘Income Tax Act,
1961’.

Assessment of Individual in Respect to Transfer of Asset to a third-party for

Benefit of Spouse.

Section 64(1)(vii) states that, “in computing the total income of any individual, there shall be
included all such income as arises directly or indirectly from transfer of assets to any person or
association of persons from assets transferred directly or indirectly otherwise than for adequate
consideration to the person or association of persons by such individual, to the extent to which
the income from such assets is for the immediate or deferred benefit of his or her spouse”5.

Simply put, this section requires six conditions to club the income of the assessee to the income
arising out of the transfer of asset. The requisites are-
1. Taxpayer being an individual
2. There has been a transfer of an asset
3. The transfer may be direct or indirect
4. The asset is transferred to a person or to association of persons such as a trust
5. The transfer is made for immediate benefit of his spouse
6. The transfer is made without an adequate consideration i.e.; one that is not valid in the
eyes of law.

5
Income Tax Act, 1961 (bareactslive.com) Accessed on 21-10-2021; 16:04 IST
Transfer of Asset to a third-party for Benefit of Daughter-in-law
The provisions for clubbing income of assessee and beneficiary under this condition is given
in 64(1)(viii) of ‘Income Tax Act, 1961’. The following are the requisite conditions that are to
be fulfilled to attract the provisions of abovementioned act-
1. Taxpayer be an individual,
2. Transfer is made after May 1, 1973,
3. Transfer is made towards a third-party or association of persons,
4. The transfer can be made directly or indirectly,
5. The transfer of asset is made for immediate benefit of the Son’s wife,
6. There is no adequate consideration attached with the transfer.

Assessment with respect to Income of Minor Child

As per the provisions defined under section 64(1A), any income which arises in domain of a
minor child is to be counted towards the income of his parents for the purpose of taxation. With
respect to the question that with whom the income will be clubbed, the act says that whichever
parent has the higher income will bear the responsibility of the clubbed income. Exception- If
a minor’s income was clubbed with his father in the previous year and in the consecutive year
his mother earned more than his father, the clubbing will still be done towards the fathers’
income but, if the assessing officer deems it appropriate, he can change scenario and release an
order for the income to be clubbed with the higher earning individual.

In the situation where the minor is not born out of a wedlock then the parent who maintained
the child in the previous assessment year will bear the provision of clubbing of income. Also,
in case the minor is an orphan, his income will not be clubbed with anyone as the rule only
applies toward the immediate relation of a parent and child.

Exceptions to Section 64(1A)

1. If the minor child is disabled and the nature of disability is defined in Section 80U of
the act his/her income will not attract the provisions of the abovementioned section.
2. If the minor has accrued the income doing any manual work then the provision of
64(1A) will not apply to him
3. If the minor child has made an income applying his technical skills, special talent or
experience and knowledge of any field, his income will not be clubbed with his parents
‘income
Conversion of Acquired property to Joint Family Property and Subsequent
Partition of that Property
This scenario is covered under section 64(2).

1. Individual belonging to a Joint Hindu Family converts, the property he has acquired
himself, to that of the family or puts the property into the joint stock account of the
family.
2. The transfer of the self-acquired property is made without adequate consideration.

The liability of the transferor is measured in two ways I.e.; Income arising out of the property
before the property is subsequently transferred between the family members will be clubbed
with the total assessable income of the transfer and; Income arising after the subsequent transfer
of the property and the income from the share of the spouse of the transferor, if any, will be
clubbed with the income of the transferor.
Example- X a male, transfers his self-acquired property in the family name and further the
property is divided amongst X, his wife Y and his brother Z. The tax liability of X would be
his total income + income out of the subsequent 1/3rd of the property under his control + income
out of 1/3rd of the property in the name of Y.
 CONCLUSION

The act of ‘clubbing of income’ is a deviation from the general rule of taxation as a tax is
implemented on an individual with respect to the income, he has made in the previous
assessment year. The concept of ‘clubbing income’ was introduced to counter the act of people
who made ways to ditch paying taxes by using the loopholes in the taxation system. There are
nine scenarios discussed in the above analysis which indicates towards the same and thus the
scenarios have provisions to counter their acts. The provision of clubbing income was mention
in ‘Part V, Section 60 to Section 64, of the Income Tax Act, 1961’. There is a general condition
in which the asset is being transferred to another party to remove it from being accessed in the
taxpayers’ income in turn making the income of taxpayer a bit low. The transfer of asset can
be made directly in the name of the beneficiary or in the name of a trust or to another person
for the benefit of the beneficiary thus the acts contain the provision for direct or indirect
transfers to come under the purview for the income to be clubbed. Furthermore there are many
conditions which have their own provisions and exception one being exemption of a minors
income from being clubbed under 64(1A) if he has done manual work or, if he is disable or, if
he had applied any technical knowledge to acquire that income. The act also contains
provisions to counter the acts of transferring a property in the agreement of an irrevocable
transfer thus making it seem like the property is transferred to the other party.
 REFERENCES

1. Vinod K. Singhania, Monica Singhania, Students’ Guide to Income Tax, 390 [Taxmann
Publications, 64th edition, 2021]
2. The Income-tax Act, 1961, Section 60, No. 43, Acts of Parliament, 1961. (India)
3. Vinod K. Singhania, Monica Singhania, Students’ Guide to Income Tax,
391(Para122.3-2) [Taxmann Publications, 64th edition, 2021]
4. Revocable and Irrevocable Transfer - Different types of Clubbing (teachoo.com)
Accessed on 18/10/2021; 17:31 IST
5. Income Tax Act, 1961 (bareactslive.com) Accessed on 21-10-2021; 16:04 IST