Deemed income and clubbing of income is one of the provisions which are included in the act as anti-tax avoidance measures. Provisions for inclusion in assessee’s income, income of some other person, who is not at arm’s length, are a kind of such provisions. Such provisions arrest tax leakage likely to result from certain transactions with relatives or diversion of title without losing control over the same, etc.
Rules and act surrounding deemed income and clubbing of income
TRANSFER OF ASSETS [ Sec. 60]
Where any person transfers income without transferring the ownership of the asset, such income is taxable in the hands of the transferor. Such transfer may be revocable or irrevocable. The provision applies irrespective of the time when the transfer has been made i.e. it may be before or after the commencement of the Income-tax Act.
REVOCABLE TRANSFER OF ASSETS [Sec. 61]
Any income arising to any person by virtue of revocable transfer of assets is chargeable to tax as the income of transferor. For this purpose, transfer may include any settlement or agreement.
The transfer is said 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 a right to reassume power over the whole or any part of the income or assets. If any settlement contains a clause for forfeiture of rights of beneficiaries under certain circumstances, the settlement will be regarded as revocable – CIT v. Bhubaneshwar Kuer 53 ITR 195 (SC).
This section is, however, not applicable in the following cases-
(i) Where the income arises to any person by virtue of a transfer by any of the trust, which is not revocable, during the lifetime of the beneficiary and, in case of any transfer, which is not revocable, during lifetime of the transferee.
(ii) Where the income arises to any person by virtue of a transfer made before 1.4.1986, which is not revocable for a period of six years or more. However, income will be chargeable to tax as the income of the transferor as and when the power to revoke the transfer comes into play.
IRREVOCABLE TRANSFER OF ASSETS FOR SPECIFIED PERIOD [Sec.62]
(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer—
(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee ; or
(ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding six years
Provided that the transferor derives no direct or indirect benefit from such income in either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.
TRANSFER AND REVOCABLE TRANSFER DEFINED [Sec.63]
For the purposes of sections 60, 61 and 62 and of this section,—
(a) a transfer shall be deemed to be revocable if—
(i) 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
(ii) it, in any way, 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
REMUNERATION OF SPOUSE [Sec. 64(1)(ii)]
An individual assessee is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has substantial interest.
However, remuneration which is solely attributable to technical or professional knowledge and experience of the spouse, will not be clubbed.
Where both the spouses have a substantial interest in the concern and both are in receipt of the remuneration for such concern, such remuneration will be included in the total income of the husband or wife whose total income excluding such remuneration is greater.
The individual is deemed to have substantial interest, if the beneficiary holds equity share carrying not less than20% voting power in the case of a company or is entitled to not less than 20% of the profits, in any other concern, not being a company at time during the Previous Year.
INCOME FROM ASSETS TO SPOUSE [Sec. 64(1)(iv)]
Where an asset (other than House Property) is transferred by an individual to his or her spouse directly or indirectly otherwise than for adequate consideration or in connection with an agreement to live apart any income from such asset will be deemed to be the income of transferor.
However, this section is not applicable in the following cases—
(a) if assets are transferred before marriage.
(b) if assets are transferred for adequate consideration.
(c) if assets are transferred in connection with an agreement to live apart.
(d) if on the date of accrual of income, the transferee is not spouse of the transferor.
(e) if property is transferred by the Karta of HUF, gifting co-parcenary property to his wife.
(f) the property is acquired by the spouse out of the pin money (i.e., an allowance given to the wife by her husband for her dress and usual household expenses).
INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE OR MINOR CHILD [Sec. 64(1)(vi)]
If an individual directly or indirectly transfers the assets after 1.6.73 without adequate consideration to son’s wife or son’s minor child (including son’s minor step child or son’s minor adopted child), income arising from such assets will be included in the total income of the transferor from the Assessment Year 1976-77 onwards.
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE OR MINOR CHILD[Sec. 64(1)(vii)]
Where an asset is transferred by individual, directly or indirectly, without adequate consideration to a person or persons for the immediate or deferred benefits of his or her spouse, income arising from the transferred assets will be included in the total income of the transferor to the extent of such benefit. If no income is accrued out of the property transferred by an individual, then nothing will be included in the income of the individual.
INCOME FROM ASSET TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [Sec. 64 (1)(viii)]
Where an asset is transferred by an individual, directly or indirectly, or after 1.6.73 without adequate consideration to a person or an association of persons for the immediate or deferred benefits of son’s wife, income arising directly or indirectly from transferred asset will be included in the total income of the transferor to the extent of such benefit with effect from the Assessment Year 1985-86.
INCOME OF MINOR CHILD [Sec. 64(1A)]
In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child. However, income of the following types will not be included in the total income of the individual where income arises or accrues to the minor child on account of any—
(a) manual work done by him; or
(b) activity involving application of his skill, talent or specialized knowledge and experience.
Person in whose hands to be clubbed :
(i) 1st year : that parent whose income is higher. Subsequent years; the same parent – unless the AO is satisfied that it should be clubbed with the other parent.
(ii) where marriage does not subsist, in the hands of the custodian parent.
However, a deduction — Upto `. 1,500 per minor [Sec. 10(32)] shall be allowed against such income which is clubbed in the hands of the parent.
CONVERSION OF SELF-ACQUIRED PROPERTY INTO JOINT FAMILY AND SUBSEQUENT PARTITION [Sec. 64(2)]
Where a member of a HUF has converted his self-acquired property into joint family property after 21.12.1969,
income arising from the converted property will be dealt with as follows :-
(i) For the Assessment Year 1976-77 onwards, the entire income from the converted property is taxable as the income of the transferor.
(ii) If the converted property is subsequently partitioned amongst the members of the family, the income derived from such converted property, as is receivable by the spouse and minor child of the transferor will be taxable in his hands.
INCOME FROM THE ACCRETION TO ASSETS
In the above mentioned cases the income arising to the transferee from the property transferred, is taxable in the hands of the transferor. However, income arising to the transferee from such property is not includible in the total income of the transferor.
Thus, if Mr. A transfers `. 60,000 to his wife without any adequate consideration and Mrs.A deposits the money in a bank, the interest received from the bank on such deposits is taxable in the hands of Mr.A. If however, Mrs. A purchases shares in a company from the accumulated interest, the dividend received by Mrs.A, will be taxable in her hands and will not be clubbed with the income of Mr. A.
CLUBBING OF NEGATIVE INCOME [EXPLANATION TO Sec. 64]
The income of a specified person is liable to be included in the total income of the individual in the circumstances mentioned earlier. For the purposes of including income of the specified person in the income of the individual, the word “income” includes a loss.
RECOVERY OF TAX U/S. 60 TO 64 [Sec. 65]
As per incomes belonging to ss. 60 to 64 to other persons are included in the total income of the assessee in such cases, by virtue of sec. 65, the actual recipient of income is liable, on the service of notice of demand, to pay the tax assessed in respect of income included in the income of other person (where the Income Tax Officer so desires).