9.

CHAPTER V - INCOME OF OTHER

PERSONS, INCLUDED IN ASSESSEE'S
TOTAL INCOME
CHAPTER OUTLINE
Sl. No. Synopsis Sec. Ref.
1. Introduction - Clubbing of income
2. Clubbing of income where there is no transfer of assets 60
3. Clubbing of income in case of revocable transfer of assets 61
4. Exceptions where clubbing does not operate even in case of revocable transfer 62
5. Definition of “transfer” and “revocable transfer” 63
Clubbing of income arising to –
6A) Spouse – Sec. 64(1);
6. 6B) Son's wife – Sec. 64(1); 64
6C) Minor child – Sec. 64(1A);
6D) HUF – Sec. 64(2).
1. Introduction - Clubbing of Income
Under the Income-tax Act, income of a person is chargeable to tax only in the case of that person and not in the
case of any other person. In certain cases, with a view to reduce the tax burden, persons having huge taxable
income may shift a portion of their income to persons who do not have taxable income or are taxable at a lower
rate or fall under lower slab rates of taxable income. This may be achieved by transferring or gifting the income
generating assets or by increasing the revenue earning capacity of certain family members.
Legislature has considered it appropriate to enact the provisions of Sections 60 to 65 with a view to check such
measures. In view of these provisions, although the income may be derived by a person, it is sought to be
clubbed in the case of another person and taxed, so as to protect the interest of the revenue. Since, clubbing
provisions uniformly operate both with reference to income as well as loss, sometimes these provisions may be
advantageous to the tax payer. The loss of a person having no taxable income or lower slab of taxable income
may get shifted to a person who has higher slab of taxable income and therefore may save tax to that extent.
2. Clubbing of Income where there is no transfer of assets – Sec. 60
According to Sec. 60, when income alone is transferred without transfer of the asset giving rise to such income,
before or after commencement of this act, it is deemed to be the income of the transferor. It does not matter
whether such transfer is revocable or irrevocable. For example, Mr. X who is carrying on business, declares that
the profit derived from such business shall belong to his brother, Mr. Y, without transferring the business.
Transfer of profits without corresponding transfer of assets invite application of Sec. 60 and accordingly, the
income shall be clubbed in the hands of Mr. X.
3. Clubbing of Income in case of revocable transfer of assets – Sec. 61
Where there is a revocable transfer of an asset by a person to another person, any income arising from such
asset shall be included in the total income of the transferor and taxed accordingly.
4. Exceptions where clubbing does not operate even in case of revocable transfer – Sec. 62
In the following circumstances mentioned u/s. 62, the provisions of Sec. 61 shall not apply:
a) if the transfer is by way of trust or otherwise and is not revocable during the life time of the beneficiary or
transferee; or
b) if the transfer was made before 01.04.1961 and such transfer is not revocable for a period exceeding 6 years.
In both cases, the income arising shall be charged to tax in the hands of the transferee provided the transferor
does not derive direct or indirect benefit from such income.
When the power to revoke the transfer arises, such income shall be included in the transferor’s total income.

347
348 Students’ Hand Book on Taxation
5. Definition of ‘Transfer” and ”Revocable Transfer” – Sec. 63
For the purpose of the above provisions, the terms “Transfer” and “Revocable transfer” are defined u/s. 63 as
under:
a) A transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or
indirectly 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 directly or indirectly over the whole or any part of the income or assets.
b) “Transfer” includes any settlement, trust, covenant, agreement or arrangement.
6. Income arising to Spouse, Son’s Wife, Minor child and HUF to be clubbed – Sec. 64

Income of Spouse - Sec. 64(1)

1. In computing the total income of any individual, there shall be included all such income arising directly or
indirectly to the spouse in the following circumstances:
a) where salary, commission, fees or any other form of remuneration, whether in cash or in kind, from a
concern in which such individual has substantial interest- Sec 64(1)(ii);
b) where asset is transferred to the spouse by that individual otherwise than for adequate consideration or in
connection with an agreement to live apart, the income arising from such asset- Sec 64(1)(iv).
2. However, where the remuneration is solely attributable to the application of technical or professional
qualification, knowledge and experience of the spouse, such remuneration cannot be clubbed.
3. Where both husband and wife have substantial interest in a concern and both are in receipt of income by
way of salary etc., from the said concern, such income will be included in the case of the husband or wife, whose
total income, excluding the income to be clubbed, is greater.
4. Where any such income is once clubbed in the hands of either spouse, any such income arising in any
succeeding year shall not be clubbed in the total income of the other spouse unless the Assessing Officer is
satisfied, after giving that spouse an opportunity to be heard, that it is necessary to do so.
Definitions - Substantial Interest & Relative
(i) An individual shall be deemed to have substantial interest in a concern -
(a) in a case where the concern is a company, he by himself or along with his relatives beneficially holds
equity shares carrying not less than 20% of voting power at any time during the previous year;
(b)in any other case, he by himself or along with his relatives is entitled to 20% of the profits of such
concern at any time during the previous year.
(ii) Relative u/s. 2(41) means the husband, wife, brother or sister or any lineal ascendant or descendant of
the individual.
5. Where an asset transferred by spouse is converted into another form, income derived from such converted
asset shall be clubbed – CIT vs. SMT. Pelleti Sridevamma (1995) 216 ITR 826 (SC). To illustrate, Mr. A, gifts a sum
of Rs. 50,00,000 to Mrs. A on the occasion of wedding anniversary. Mrs. A invested this sum in a fixed deposit,
which derives interest income of Rs. 25,000 p.m. The interest income so derived shall be clubbed in the hands of
Mr. A, despite the fact that it is the income from converted asset.
6. It may be noted that if the house property transferred by an individual otherwise than for adequate
consideration to the spouse or minor child (not being a minor married daughter), the provisions of
Sec. 27 – deemed owner shall apply and Sec. 64 does not apply. In that case, the transferor individual shall be
deemed to be the owner and income shall be accordingly computed under the head “Income from house
property.”
7. The marital relationship (Husband – Wife) should exist both at the time of transfer of asset and at the time
of accrual of income in order to attract clubbing provisions - Philip John Plasket Thomas vs. CIT (1963) 49 ITR 97
(SC).
 Income of other persons included in Assessee’s total income 349
8. While computing the total income of any individual, either directly or indirectly, there shall be included all
such income arising directly or indirectly to any person or association of persons from assets transferred
otherwise than for adequate consideration to the extent to which the income from such assets is for the
immediate or deferred benefit of the individual’s spouse.
9. Income on the asset transferred is clubbed but not the income on accretion to the asset. To illustrate, an
Individual transferred a flat to his wife who derived rental income therefrom. Such rental income was assessed
in the husband's hands. Wife invested such rental income in fixed deposits and derived interest income. Such
interest income cannot be clubbed in the hands of the husband. Hence, income on the asset transferred is
clubbed but not the income on accretion to the asset.
10. Cross Transfers: A chain of transfers in the form of gifts attracts clubbing provision. It is not necessary
that there should be consideration in the technical sense. If there are two transactions and they are
interconnected and part of the same transaction, it shall be considered to be a device for evasion of tax and
therefore, clubbing provisions shall be invoked.
To illustrate, Mr. H gifts a sum of Rs. 10 lakhs to Mrs. I. Mr. I is the friend of Mr. H. Again, through another
transaction, Mr. I gifts a sum of Rs. 10 lakhs to Mrs. H. Though apparently, it appears that no clubbing provision
may be applied on these transactions, based on the decision of Supreme court in CIT vs. Keshavji Morarji (1967)
66 ITR 142 (SC), the cross transfers shall be subjected to clubbing provisions, considering the same as tax
evasive device. Accordingly, income derived by Mrs. H out of income gifted by Mr. I shall be clubbed in the hands
of Mr. H. Similarly, income derived by Mrs. I out of the amount gifted by Mr. H shall be clubbed in the hands of
Mr. I.
Income of son’s wife - Sec. 64(1)
1. In computing the total income of any individual, there shall be included all such income arising directly or
indirectly to the son’s wife from assets transferred by that individual, otherwise than for adequate
consideration.
2. Again, in computing the total income of any individual, either directly or indirectly, there shall be included all
such income arising directly or indirectly to any person or association of persons from assets transferred
otherwise than for adequate consideration to the extent to which the income from such assets is for the
immediate or deferred benefit of the son’s wife.
Common points
Where the assets transferred by an individual to his spouse or son’s wife are invested by the transferee-
a) in any business, (not being as capital contribution in a firm), proportionate income arising to the
transferee attributable to such investment; and
b) in the nature of capital contribution in a firm, any interest receivable by the transferee attributable to
such investment,
shall be included in the total income of the individual.
For this purpose, the proportion shall be with reference to the value of investment aforesaid as on the first
day of the previous year to the total investment in the business by the transferee as on that day.
llustrations
P1. Mr. Raman is a Chartered Accountant in practice. He engages his wife Mrs. Seetha as an employee for audit
works and pays a sum of Rs. 20,000 p.m. towards salary. Mrs. Seetha before marriage has completed her C.A.
articleship training and is presently awaiting result of the final examination. Examine the tax implication in
respect of the above transaction.
Ans: Where the spouse of the assessee has technical or professional qualification and experience, the
remuneration obtained by virtue of the exercise or application of such qualification, experience and skill will not be
subjected to clubbing because of the proviso to Sec. 64(1). Therefore, the income of Mrs. Seetha should not be
clubbed with that of Mr. Raman. However, the Assessing Officer has power u/s. 40A(2) to examine the
reasonableness of the salary paid to a relative and disallow to the extent the salary paid is excessive or
unreasonable.
350 Students’ Hand Book on Taxation
P2. Mrs. Dimple transferred her immovable property for an inadequate consideration to RSA Co. Ltd. subject to
a condition that, a sum of Rs. 5,00,000 per annum out of the rental income shall be utilised for the benefit of her
son’s wife. Mrs. Dimple claims that she will not be held taxable as she no longer owned the property. State
whether the contention of Mrs. Dimple is valid in law.
Ans: In case of transfer of any asset, directly or indirectly, to any person otherwise than for adequate
consideration, the income arising from such asset for the immediate or deferred benefit of the son’s wife shall
attract clubbing provisions u/s. 64(1) Such income shall be included in the computation of total income of the
transferor-individual. Therefore, income of Rs.5,00,000 meant for the benefit of daughter-in-law is chargeable
to tax in the hands of transferor i.e., Mrs. Dimple in this case. The contention of Mrs. Dimple is not valid in law.
P3. A Proprietary concern was started by Smt. Padmavati in the year 2014. As on 01.04.2019 her capital in
business was Rs. 3,00,000. Her husband gifted Rs. 2,00,000 on 10.04.2019, which amount
Smt. Padmavati invested in her business on the same date. Smt. Padmavati earned profits from her proprietary
business for the Financial years 2019-20 Rs. 1,50,000 and financial year 2020-21 Rs. 3,90,000. Compute the
income to be clubbed in the hands of Padmavati’s husband for the AY 2021-22 with reasons.
Ans: Computation of income to be clubbed in the hands of Padmavati’s husband AY 2021-22
Capital contribution out of
Particulars Gift from Total
Own funds
Husband
Capital as on 01.04.2019 3,00,000 Nil 3,00,000
Invested on 10.04.2019 Nil 2,00,000 2,00,000
Total 3,00,000 2,00,000 5,00,000
Add : Profit for the FY 2019-20 apportioned on the basis of
capital employed as on the first day of the previous 1,50,000 Nil 1,50,000
year(01.04.2019)
Capital as on 01.04.2020 4,50,000 2,00,000 6,50,000
Profit for the current financial year 2020-21 apportioned
2,70,000 1,20,000 3,90,000
on the basis of above ratio (i.e. 9:4)
Amount of profit to be clubbed in the hands of Padmavati’s spouse is Rs. 1,20,000 for the AY 2021-22.
Accretion to income on the asset cannot be clubbed. Hence for AY 2021-22, the capital contribution of Mrs.
Padmavati’s husband is taken as Rs. 2,00,000 only.
Exercise
P4. Mr. Naveen started a proprietary business on 01.04.2019 with a capital of Rs. 5,00,000. He incurred a loss
of Rs. 2,00,000 during the year 2019-20. To overcome the financial position, his wife Mrs. Naveen, a software
Engineer, gave a gift of Rs. 5,00,000 on 01.04.2020, which was immediately invested in the business by Mr.
Naveen. He earned a profit of Rs. 4,00,000 during the year 2020-21. Compute the amount to be clubbed in the
hands of Mrs. Naveen for the AY 2021-22. If Mrs. Naveen gave the said amount as loan, what would be the
amount to be clubbed?
Ans: Profit attributable based on capital contributed: Mr. Naveen – Rs. 1.50 lakhs; Mrs. Naveen – Rs. 2.50 lakhs.
Income to be clubbed in the hands of Mrs. Naveen is Rs. 2.50 lakhs. When given as loan, no portion of profit
derived by Mr. Naveen shall be clubbed in the hands of Mrs. Naveen.

Income of minor child - Sec. 64(1A)

1. In computing the total income of any individual, there shall be included all such income as arises or accrues
to his minor child. Therefore, the income of minor child shall be clubbed in the hands of either of his/her
parents.
2. Where the marriage of the parents subsists, the income of the minor child shall be included with the income
of that parent whose total income, excluding the income to be clubbed, is greater. In a case, where the marriage
of the parents does not subsist, the income of the minor child will be included in the income of the parent who
maintains the minor child in the previous year. Once clubbing of minor’s income is done with that of one parent
 Income of other persons included in Assessee’s total income 351
it will not be clubbed with the other parent unless the Assessing Officer is satisfied, after giving the other parent
an opportunity to be heard, that it is necessary to do so.
3. ‘Child’ in relation to an individual, includes a step child and an adopted child of that individual Sec. 2(15B). In
view of this definition, even if the adopted child or step child derives income, such income will have to be clubbed
with that of the parent concerned in accordance with the provisions of Sec. 64(1A).
4. In case of an individual being the parent of a minor child referred to u/s. 64(1A), any income of the minor
child to the extent clubbed or Rs. 1,500 in respect of each such minor child, whichever is less shall be exempt -
Sec. 10(32). Income to a minor by way of winning from lottery etc., exemption u/s. 10(32) cannot be availed by
virtue of restrictions placed u/s.58 (4).
5. Clubbing of income does not arise when the minor attains majority. In computing the total income of any
individual, income arising to any trust from assets transferred otherwise than for adequate consideration to the
extent to which the income from such assets is for the immediate or deferred benefit of the beneficiaries (being
minor child of the assessee) shall not be clubbed, if the trust stipulates that income of such trust is to be used for
the benefit of beneficiaries only after they attain majority– Kapoor Chand Vs. ACIT (2015) 376 ITR 450 (SC).
6. Since Sec. 64(1A) does not exclude minor married daughter, even income arising to minor married daughter
would be clubbed. (However, Sec. 27, which deals with “deemed owner” under the head Income from house
property, excludes minor married daughter for that purpose and thus, the minor married daughter is the owner
for the purpose of Income from house property).
Clubbing shall not apply
(1) The following income of the minor child shall not be clubbed and be taxed in the hands of minor child
alone:
a. Any income of a minor child suffering from any disability of the nature specified u/s 80U, namely blind,
mental, physical disability etc;
b. Such Income which accrues or arises to the minor, on account of any manual work done by him;
c. Such Income which accrues or arises to the minor, on account of any activity involving application of his
skill, talent, or specified knowledge and experience.
(2) Even though income derived by the minor from manual work or from any activity involving skill and
talent cannot be clubbed, there is no provision to avoid clubbing of income earned on investment made out of
such income.
(3) In all the above-mentioned situations, where clubbing fails, the income shall be chargeable to tax in the
hands of the minor child. Parent or guardian can prepare the return of income on behalf of the minor and file
the return of income in the name of the minor. In the eventuality of return of income being prepared in the
name of the minor, all the deductions/exemptions available for an individual shall equally apply for such
minor child, including basic exemption of Rs. 2,50,000.
The following table illustratively explains taxability of the above provisions:
Derived by a minor child
Nature of Income who is
who is NOT disabled
disabled
1) Interest, dividend, rent from investments Income of minor child to be clubbed in
made by parents etc. in the name of minor the hands of parent, whose income is
child. greater.
2) Income derived from manual work of minor Taxable in the hands of minor child
child. alone. No clubbing. Taxable in the
hands of minor
3) Income derived by minor from the activity child alone. No
Taxable in the hands of minor child
involving application of skill, talent etc. For eg. clubbing
alone. No clubbing.
under 15 age chess tournament prize money.
4) Interest on FD derived by minor child. The FD interest income of minor child to be
source for FD is from the surplus derived in 1, clubbed in the hands of parent, whose
2, 3 above. income is greater.
352 Students’ Hand Book on Taxation

Income of HUF - Sec. 64(2)

1. Where a member of a HUF has converted or transferred self-acquired property for inadequate
consideration into joint family property or thrown it into the common stock of the family, income arising
therefrom is taxable as the income of the transferor member.
2. If the converted property is subsequently partitioned among the members of the family, the income derived
from such converted property as is received by the spouse of the transferor will be taxable as the income of the
transferor.
3. If the income from converted property is included in the total income of an individual, it will be excluded
from the total income of the family or, as the case may be, of the spouse of the individual.
“Property” includes any interest in property, movable or immovable, the sale proceeds thereof and
any money/investment for the time being representing the sale proceeds thereof and where the
property is converted into any other property by any method, such other property.

Common points for clubbing

1. Clubbing provision shall be applied only where there is a transaction of gift. In case the money is lent to the
other person (spouse or HUF as the case may be) which creates lender borrower relationship, it is not a
transaction and subject matter of transfer.
2. Natural love and affection may be a good consideration but that would not be adequate consideration for the
purpose of Sec. 64(1). Tulsidas Kilachand vs. CIT (1961) 42 ITR 1 (SC).
3. If the asset transferred is sold by the transferee then capital gain arising on such sale shall be treated as
income arising from asset transferred for the purpose of Sec. 64(1) and therefore requires to be clubbed.
4. Income for clubbing purposes includes loss.
5. Sections 60 to 65 of the Act provides for clubbing of income in the hands of the transferor under different
situations. It needs mention that income, which is subject matter of clubbing shall first be computed in the
hands of the transferee (recipient), as if it is the income of the recipient under the appropriate head of income
after availing all the permissible exemptions, allowances, deductions etc., applicable under the relevant head in
which it falls. Income so computed, under the relevant head shall be included in the total income of the
transferor under the same head of income.
Illustrations
P5. Master Yusuf son of Mr. Zamin, is a physically handicapped minor (suffering from a disability of the nature
specified in Sec. 80U) earning bank interest of Rs. 50,000 and Rs. 60,000 from making bags manually by himself.
Will the income of Master Yusuf be clubbed in the hands of Mr. Zamin?
Ans: No. If the minor child is suffering from any disability of the nature specified in Sec. 80U, the income of such
child shall not be included in the hands of the parent but shall be assessed in the hands of the child. Therefore,
the income shall be assessed in the hands of Master Yusuf separately.
P6. Compute the total income of Mr. & Mrs. A from the following information:
Particulars Rs.
(a) Salary Income (computed) of Mrs. A 2,30,000
(b) Income from profession of Mr. A 3,90,000
(c) Income of minor son B from company deposit 15,000
(d) Income of minor daughter C from special talent 32,000
(e) Interest from bank received by C on deposit made out of her special talent 3,000
(f) Gift received by C from friend of Mrs. A 45,000
Brief working is sufficient. Detailed computation under various heads of income is not required.
 Income of other persons included in Assessee’s total income 353
Ans: Computation of Total Income of Mr. A AY 2021-22
Particulars Rs. Rs.
I. Income from Profession 3,90,000
II. Income from Other Sources
(i) Income of Minor Son B from company deposit (Refer Note 1) 15,000
Less: Exempt u/s. 10(32) (1,500) 13,500
(ii) Interest from bank received by C on deposit made out of her special talent (Refer
3,000
Note 2)
Less: Exempt u/s. 10(32) (1,500) 1,500
Gross Total Income 4,05,000
Less: Deduction under Chapter VI-A NIL
Total income 4,05,000
Computation of Total Income of Mrs. A AY 2021-22
Particulars Rs.
Income under the head Salaries 2,30,000
Gross total income 2,30,000
Less : Deduction under Chapter VI-A Nil
Total Income 2,30,000
Notes: (1) Income of the minor child will be clubbed in the hands of the parent whose total income (excluding
the income of minor) is greater. In the given case, Mr. A’s income of Rs. 3,90,000 is greater than the income of
Mrs. A, which is only Rs. 2,30,000. Hence, the income of minor children will be clubbed in the hands of Mr. A. (2)
Income derived by minor daughter C earned by exercising special talent cannot be clubbed. However, any
income arising from the investment made out of such income shall be clubbed. (3) Any gift received from
unrelated person is chargeable to tax, provided it exceeds the aggregate limit of Rs. 50,000. In this case, since C
has received a gift of Rs. 45,000 only, it is not chargeable to tax u/s. 56(2).
P7. The following details are furnished in respect of Mr. X and his family members. Determine the gross total
income:
Mr. X Mrs. X Minor Child
Particulars
Rs. Rs. Rs.
Income as a child artist in films — — 60,000
Business Income (Own) (40,000) — —
Salary income from X Ltd. in which Mr. X holds 25%
voting power @ 2,500 p.m. — 30,000 —
Share of profit from Firm AB & Co. (40%) 80,000 — (10%) 20,000
Commission from AB & Co. — 20,000 —
Interest income 8,000 5,000 4,000
Notes: (1) Mrs. X possesses B.Com degree and works as accountant of X Ltd. (2) Mrs. X does not render any
services to M/s. AB & Co. (3) Interest income received by Mrs. X is from an investment of Rs. 40,000 gifted by
Mr. X and Rs. 40,000 invested from her own resource.
354 Students’ Hand Book on Taxation
Ans: Computation of gross total income AY 2021-22
Mr. X Mrs. X Minor Child
Particulars
(Rs.) (Rs.) (Rs.)
I. Salaries:
Salary from X Ltd @ Rs. 2,500 p.m (Note 3) — —
II. Profits and gains from business/profession:
Income/(Loss) (Note 2) (40,000) — 60,000
III. Income from other sources:
Interest income Own (Mr. X) 8,000
Add : Spouse -Sec. 64(1) [5000*40,000/80,000] 2,500 10,500 — —
Own interest income (Mrs. X) 2500
Commission Income of spouse u/s 64(1) 20,000
Sub -Total (9500) 2500 60000
Interest income of minor child 4,000
Less : Exempt u/s. 10(32) 1,500 — 2,500 —
Gross Total Income (9,500) 5,000 60,000
Notes: i) Share of profit from firm is exempt from tax u/s. 10(2A). It is assumed that the expenditure attributable to
exempt income have not been claimed as deduction; ii) As per Sec. 64(1A), any income which accrues or arises to a
minor child on account of activity involving application of skill, talent, clubbing shall not be applicable. Accordingly,
a sum of Rs. 60,000 shall be taxable in the hands of minor child itself;
iii) A deduction of Rs.50,000 or the amount of salary whichever is lower is available u/s16(ia)
iv) Income of the minor child will be clubbed in the hands of the parent whose income before such clubbing is
greater. In this case, thus the interest income of minor child is clubbed in the hands of Mrs. X.
P8. Mr. A, a widower, has 3 children of 19 yrs, 15 yrs and 5 yrs respectively. The first child derives
Rs. 1,00,000 income every year. The income details of Mr. A, his second and third child are as follows:
Mr. A Second Child Third child
Particulars
(Rs.) (Rs.) (Rs.)
Business income 50,000 — —
Interest on FD invested out of gifts — 15,000 —
Bank interest 7,000 8,000 1,000
Salary earned on application of skills 48,000 24,000 —
Interest on salary income saved and invested 8,000 2,000 —
Determine the Gross total income.
Ans: Computation of Gross Total Income of Mr.A and second child AY 2021-22
Second Child
Particulars Mr. A( Rs.)
( Rs.)
1) Salary 48,000 24,000
2) Income from business 50,000
3) Income from other sources
Bank interest 7,000
Interest on investment 8,000
4) Income to be clubbed
a) Second child's income
Interest on FD 15,000
Bank interest 8,000
Interest on investment 2,000
25,000
Less : Exempt u/s. 10(32) 1,500 23,500
b) Third child's income
Bank interest 1,000
Less : Exempt u/s. 10(32) – restricted to Rs. 1,000 1,000 Nil _______
Gross Total income 1,36,500 24,000
 Income of other persons included in Assessee’s total income 355
Note: Income of minor child is clubbed even if it is earned on investment made out of salary earned on
application of special skills. First child is a major and thus, income not clubbed.
P9. Ms. Sruthi was born on 07.06.2004. Her betrothal took place on 05.03.2020. On the said day she received cash
gifts of Rs. 1,00,000 each from her father, father’s mother, father’s father, mother, mother’s mother and mother’s
father. All six relatives made similar gifts on the day of marriage i.e, on 01.04.2020. The amount so received is
deposited in a private limited company. For the year ending 31.03.2021, the company has paid her interest @ 8%
i.e., Rs. 96,000. Discuss how this income will be assessed to income tax.
Ans: There are 3 situations which need to be discussed in this question as detailed here below:
i) Gifts received from relatives on the occasion of betrothal;
ii) Gifts received from relatives on the occasion of marriage; and
iii) Interest accrued on deposits made out of above gifts.
With regard to issue no. (i) Sruthi is not subject to tax in respect of amount of gift received from her relatives
(since all the persons mentioned there on fall within the purview of definition of relatives) on the occasion of
her betrothal, as Sec. 56 exempts any money received from relatives. Therefore, Rs.1,00,000 each received by
Sruthi from her relatives on her betrothal day is not taxable.
In respect of issue no. (ii) any amount of gift received on the occasion of the marriage of an individual is again
exempt from the purview of taxability irrespective of from whom it is received. Accordingly, gift received by
Sruthi on the occasion of marriage is not subject to taxability.
With regard to issue no. (iii) as Sruthi is a minor child as on 31.03.2021, Rs. 96,000 being income accrued for the
year ending 31.03.2021, relevant to the AY 2021-22 shall be included in the case of her father or mother whose
total income, excluding this income, is greater – Refer caption “Income of minor child”.
P10. Mr. Hari gifted sum of Rs.5 lakhs to his brother's minor son on 16-04-2020. On 18-04-2020, his brother
gifted debentures worth Rs.6 lakhs to Mrs. Hari. Son of Mr. Hari’s brother invested the amount in fixed deposit
with Bank of India @ 9% p.a. interest and Mrs. Hari received Interest of Rs. 45,000 on debentures received by
her. Discuss the implications under the provisions of Income- tax Act, 1961.
Ans: The transfers as mentioned in the question are in the nature of cross transfers. Accordingly, the income
from the assets transferred would be assessed in the hands of the deemed transferor because the transfers are
so intimately connected to form part of a single transaction and each transfer constitutes consideration for the
other by being mutual or otherwise.
If two transactions are inter-connected and are part of the same transaction in such a way that it can be said
that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would
be attracted.
Taxability in the hands of Mr. Hari’s brother: As per section 64(1A), all income of a minor child is includible
in the hands of the parent, whose total income, before including minor’s income is higher. Accordingly, the
interest income arising to Mr. Hari’s brother’s son from fixed deposits would be included in the total income of
Mr. Hari’s brother, assuming that Mr. Hari’s brother’s total income is higher than his wife’s total income, before
including minor’s income. Mr. Hari’s brother can claim exemption of Rs. 1,500 under section 10(32).
Taxability in the hands of Mr. Hari: Interest on debentures arising in the hands of Mrs. Hari would be taxable
in the hands of Mr. Hari as per section 64(1)(iv).
This is because both Mr. Hari and his brother are the indirect transferors of the income to their spouse and
minor son, respectively, with an intention to reduce their burden of taxation.
In the hands of Mr. Hari, interest received by his spouse on debentures of Rs. 5 lacs alone would be included and
not the entire interest income on the debentures of Rs. 6 lacs, since the cross transfer is only to the extent of Rs.
5 lacs. Hence, only proportional interest (i.e., 5/6th of interest on debentures received) Rs. 37,500 would be
includible in the hands of Mr. Hari.
The provisions of section 56(2)(vii) are not attracted in respect of sum of money transferred or value of
debentures transferred, since in both the cases, the transfer is from a relative.
356 Students’ Hand Book on Taxation
P11. Mr. B is the Karta of a HUF, whose members derive income as given below:
Particulars Rs.
(i) Income from B’s profession 7,45,000
(ii) Mrs. B’s salary as fashion designer(computed) 6,76,000
(iii) Minor son Dhruva (interest on fixed deposits with a bank which were gifted to him
1,00,000
by his uncle)
(iv) Minor daughter Mokshi’s earnings from under 10 years dance competition 95,000
(v) Dhruva’s winnings from lottery (net of TDS) 1,40,000
Discuss the tax implications in the hands of Mr. and Mrs. B.
Ans: Computation of Tax Implication in the hands of Mr. B & Mrs. B AY 2021-22
Particulars Mr. B Mrs. B
Salaries 6,76,000
Income from business and profession 7,45,000 -
Add: Clubbing u/s. 64(1A)(Refer note 1)
-
-interest on fixed deposit 1,00,000
-winning from lottery (grossed up) 2,00,000 -
Less: Exemption u/s. 10(32) (1,500)
Gross Total Income 10,43,500 6,76,000
Tax on Total Income:
Winnings from Lottery-Sec 115BB @30% 60,000 Nil
On other income 81,200 47,700
Add: Health and Education cess at 4% 5,648 1908
Less: TDS on lottery 60,000 Nil
Tax Liability (rounded off) 86,850 49,610
Notes: 1. Income of the minor child shall be clubbed in the hands of the parent whose total income is higher
before such clubbing. In this case, it is clubbed in the hands of Mrs. B.
2. Where the minor child uses her skill, talent and knowledge to earn income, such income will not be clubbed in
the hands of parent. Thus, income of Ms. Mokshi earned from her dancing talent is not clubbed.
3. Winning from lottery has been grossed up to Rs. 2,00,000 (1,40,000/70%) as the amount received is after
deducting 30% TDS u/s 194B.
Exercises
P12. Mr. K gifted Rs. 10 lakhs to his wife, Ms. S on her birthday on 1st January, 2020. Ms. S lent Rs. 5,00,000 out
of the gifted amount to Mr. K on 1st April, 2020 for six months on which she received interest of Rs. 50,000.
The said sum of Rs. 50,000 was invested in shares of a listed company on 15th October, 2020, which were sold
for Rs. 75,000 on 30th December, 2020. Securities transactions tax was paid on such sale. The balance amount
of gift was invested as capital by Ms. S in a business. She suffered loss of Rs. 15,000 in the business in Financial
Year 2020-21. In whose hands the above income and loss shall be included in Assessment Year 2021-22?
Support your answer with brief reasons. [Ans: total income of Mr. K is Rs.35,000 & Ms. S is Rs.25,000]
P14. Mr. Mano has four minor children consisting of three daughters and one son. The annual income of all the
children for the Assessment Year 2021-22 were as follows:
Particulars Amount
First daughter (Including Scholarship received Rs. 5,000) 10,000
Second Daughter 8,500
Third Daughter (Suffering from disability specified u/s 80U) 4,500
Son 40,000
Mr. Mano gifted Rs. 2,00,000 to his minor Son who invested the same in the business and derived income of Rs.
20,000 which is included above. [Ans: Income to be clubbed in the hands of Mr. Mano is Rs.49,000].
 Income of other persons included in Assessee’s total income 357

SUMMARY OF KEY POINTS

1. Where any person diverts his income, it is a mere application of income after it accrues to him and
therefore, tax cannot be avoided on such income.
2. Clubbing of income arising from an asset, which has been transferred to another person by a revocable
transfer, applies irrespective of the relationship.
3. Clubbing of income arising from an asset, transferred by way of irrevocable transfer is attracted only if
such transfer is to the spouse or son's wife or HUF.
4. Income accruing directly or indirectly to the spouse:
a) from a concern in which the assessee has substantial interest; or
b) from an asset transferred by the assessee for inadequate consideration, shall be clubbed.
5. Income arising to the spouse by application of his or her technical or professional knowledge and
experience shall not be clubbed.
6. Income on the asset transferred without adequate consideration is alone clubbed but not the income on
accretion to the asset. But, if the asset so transferred is converted into another form, then income from
converted asset shall also be clubbed.
7. There is no clubbing of income in the case of a minor child who is eligible for deduction u/s. 80U. Similarly,
where a minor child does not have parents, clubbing of income does not arise. The minor child will be
assessable in his own case. Guardian will be regarded as representative assessee.
8. Any income accruing or arising to a minor child is liable to be clubbed with father or mother whose total
income is greater before such clubbing and upto Rs. 1,500 per child per year can be availed as exemption
u/s. 10(32). However in case of income to a minor child by way of winning from lottery etc., exemption
u/s. 10(32) cannot be availed by virtue of Sec. 58(4).
9. Income derived by a minor child out of skill and talent or by way of salary and wages shall not be clubbed.
However, if such income is invested and income is earned thereon, such income shall be clubbed.
10. Clubbing ceases to operate when the minor becomes a major.

Select questions from past examinations

Revocable Transfer
1. In whose hands the income from an asset is chargeable to tax in the case of transfer, which is not revocable
during the life time of the beneficiary/transferee? (May ’10)
Ans: Such income will be taxed in the hands of the beneficiary/transferee. Refer caption “Exceptions where
clubbing does not operate even in case of revocable transfer”.
Clubbing of Minor’s Income
2. Mrs. and Mr. Vinod Amin have two minor children M and N. The following are the receipts in the hands of M
and N during the year ended 31-3-2021:
i. M received a gift of Rs.70,000 from her friend’s father on the occasion of her birthday.
ii. M won a prize money of Rs.3,00,000 in National Quiz competition. This was invested in debentures of a
company, from which interest of Rs.19,000 (gross) accrued during the year.
iii. N won prize in a lottery. The net amount received after deduction of tax at source was Rs.1,05,000.
Mr. Vinod Amin’s income before considering clubbing provisions is higher than that of his wife. Discuss how
these items will be considered for taxation under the provisions of the Income tax Act, 1961. Detailed
computation of income is not required. (Nov’18)
Ans: (i) The entire amount of Rs.70,000 is clubbed in the income of Mr. Vinod Amin, as the gift amount exceeds
the limit of Rs.50,000 as per Sec. 56(2)(x).
(ii) Prize money of Rs.3,00,000 won in National Quiz Competition is not includable in the income of
Mr. Vinod Amin as that amount is earned on account of an activity involving application of skill. But the interest
of Rs.19,000 arising out of investment of Rs.3,00,000 is clubbed in the income of
Mr. Vinod Amin.
358 Students’ Hand Book on Taxation
(iii) Income arising to minor child N from lottery income of Rs.1,50,000 (1,05,000/70%) is clubbed in the
income of Mr. Vinod Amin.
The parent in whose total income, the income of the minor child included, shall be entitled to exemption of such
income, subject to a maximum of Rs.1,500 per child u/s. 10(32).
Therefore, the income of minor child M, to be included in Mr. Vinod Amin’s income is Rs.87,500
( Rs.70,000 + Rs.19,000 - 1,500). The income of minor child N, to be included in Mr. Vinod Amin’s income is
Rs.1,50,000.
3. Mr. Mahadev, a noted bhajan singer of Rajasthan and his wife Mrs. Dariya furnish the following information
relating to the Assessment Year 2021-22.
S.No Particulars Rs.
1 Income of Mr. Mahadev- professional bhajan singer (computed) 5,65,000
2 Salary income of Mrs. Dariya (computed) 3,80,000
3 Loan received by Mrs. Dariya from Ramu & Jay (Pvt) Ltd. (Mrs. Dariya holds 2,50,000
35% shares of the Co. has incurred losses since its inception 2 years back)
4 Income of their minor son Golu winning signing reality show on T.V. 2,50,000
5 Cash gift received by Golu from friend of Mr. Mahadev on winning the show 21,000
6 Interest income received by minor married daughter Gudia from deposit with 40,000
Ramu & Jay Pvt Ltd.
Compute total taxable income of Mr. Mahadev & Mrs. Dariya for the Assessment Year 2021-22.
(Nov’19)
Ans: Computation of Taxable income of Mr. Mahadev for the A.Y. 2021-22.
Particulars Amount
Income under the business/profession
Professional income (computed) (A) 5,65,000
Income under the head other sources
Interest income of daughter Gudia 40,000
Less: exemption u/s 10(32) 1,500
Income under the head other sources (B) 38,500
Gross Total Income (A)+(B) 6,03,500
Less: Deduction u/s 80 Nil
Total Income 6,03,500
Computation of Taxable income of Mrs. Dariya for the A.Y. 2021-22.
Particulars Amount
Income from Salary 3,80,000
Less: Chapter VI-A Deduction Nil
Total Income 3,80,000
Notes:
1. Income of Minor shall be clubbed in the income of parents who have higher income before clubbing the
income of minor. In the given case income of father is greater than mother’s income hence amount shall be
clubbed in the income of Father.
2. Loan amount would not be considered as deemed dividend u/s 2(22)(e) as company does not have
accumulated profits.
3. Income from skill and talent shall not be clubbed in the income of the parents and shall be taxable in the
hands of children itself.
4. As per section 56(2)(x), Gift shall be taxable if amount received during the year exceed 50,000 but in the
given case, cash gift received is less than 50,000 hence nothing shall be clubbed in the hands of the parent.

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