UNIT 3

Aggregation Of Income

Inclusion of other’s Incomes in the income of the assessee is called Clubbing of Income
and the income which is so included is called Deemed Income.
Clubbing of income means Income of other person included in assessees total income, for
example: Income of husband which is shown to be the income of his wife is clubbed in the
income of Husband and is taxable in the hands of the husband. Under the Income Tax Act a
person has to pay taxes on his income.
It is as per the provisions contained in Sections 60 to 64 of the Income Tax Act.

1. TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SECTION. 60)

When a person retaining the ownership of an asset but transfers the income from the asset to
any of his relatives by an agreement or any other way. – As per Section 60 of Income Tax
Act, such income will be taxable in the hands of the transferor.
Assume that person “A” owns 10000, 50% debentures of XYZ private limited of Rs. 500
each. But he is transferring the interest income to his family member “B” without transferring
the ownership of Debentures. In this case, although interest will be received by a family
member, it is taxable in the hands of “A”.

2. Revocable transfer of asset (SECTION 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.

If an asset is transferred under a revocable transfer, income from such asset is taxable in the
hands of the transferor.

For example, if a person “M” transfers his house to one of his friend N. And, M has right to
revoke the transfer during the lifetime of N, then the income arising from the house property
will be taxable in the hands of M.

3. INCOME OF SPOUSE

A) REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL

INTEREST [SECTION 64 (1) (ii)]

A person’s income is to be clubbed with spouse’s income if any payment is received from the
spouse through the following methods:

• 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.
 For example, if Mithun has a substantial interest in a Company and his wife Anila is working
in the company and she is not in any technical or professional qualification. – In this case, the
salary income of Anila will be taxable in the hands of her husband Mithun.

The key criteria is the technical or professional qualification of the spouse. Hence, clubbing
of income would not be applicable, if the spouse possesses technical or professional
qualification and income of the spouse is related with such technical or professional
knowledge.

(B)INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SECTION 64(1) (IV)]

If an asset is transferred by a Person to his spouse directly or indirectly, any income from
such asset will be considered as income of the transferor. However, the transfer must not be
in connection with an agreement of divorce settlement or with adequate consideration.

For example, if a flat is transferred by Arun to his wife Divya. Rental income on the flat will
be considered as income of Arun. However, clubbing of income provisions will not be
applicable if the transfer of the asset is made through an agreement of divorce or settlement
or to live apart.

• Illustration - 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.

4. INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)]

Clubbing of income is applicable if a person transferred an asset without adequate

consideration to son’s wife or daughter-in-law. Any income from such an asset would be
considered as income of the transferor

5. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT

OF SPOUSE [SEC. 64 (1) VII)]

6. INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT

OF SON’S WIFE [SEC. 64 (1) (VIII)]

7. INCOME OF MINOR CHILD (SEC. 64 (1A)

Any income of the minor child is to clubbed with the parent whose income is higher.

The parent with whom the income is clubbed will be allowed an income tax deduction of
Rs.1500 per minor child. Under section 80U of Income Tax Act, clubbing is not to be done
when income arises from manual work or application of his skill or specialized knowledge
and experience of the minor child suffering from any disability.
OTHER RELATED POINTS
• 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.
• 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.
• 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.

SET- OFF AND CARRY FORWARD OF LOSSES

INTRODUCTION
Income-tax is a composite tax on the total income of a person earned during a period of one
previous year. There might be cases where an assessee has different sources of income under
the same head of income. Similarly, he may have income under different heads of income. It
might also happen that the net result from a particular source/head may be a loss. This loss
can be set off against other sources/head in a particular manner.
For example, where a person carries on two businesses and one business gives him a loss and
the other a profit, then the income under the head ‘Profits and gains of business or profession’
will be the net income i.e. after the adjustment of the loss. Similarly, if there is a loss under
one head of income, it should normally be adjusted against the income from another head of
income while computing the Gross Total Income, of course subject to certain restrictions.
These provisions for set off or carry forward and set off of loss are contained in sections 70 to
80 of Income-tax Act.

Procedure:

• Step1 Inter-source adjustment under the same head of income

• Step 2 Inter head adjustment in the same assessment year. Step 2 is only applied if it
is not possible to set off a particular loss under Step1.
• Step3 Carry forward of a loss this step is only applicable if a loss is not set off under
Step 1 and 2.

Set off of losses means adjusting the losses against the profit/income of that particular year.
Losses that are not set off against income in the same year, can be carried forward to the
subsequent years for set off against income of those years. A set-off could be :
a. An intra-head set-off
b. An inter-head set-off
Intra-head Set Off: SET-OFF WITHIN THE SAME HEAD-SEC.70

Also called INTER SOURCE ADJUSTMENT.

An assessee may have two or more sources of income under one particular head. For example
a person might have two businesses A and B which are two sources of income under the
same head business and profession. Similarly a person might be having two part time
employments. He will receive salary from both the employers; each salary received is a
source of income. But both are taxable under the head ‘Income from Salary.’

The losses from one source of income can be set off against income from another source
under the same head of income.
For eg: Loss from Business A can be set off against profit from Business B where Business A
is one source and Business B is another source and the common head of income is
“Business”.

For example, if the assessee has two houses and the net income from one house is Rs. 84,000
while from the other house there is a loss of Rs. 60,000 the loss shall be adjusted against the
income (as both fall under the same head i.e. ‘Income from house property) and after set off,
the income under the head ‘income from house property’ shall be Rs. 24,000.This is Inter
source adjustment.
However, there are certain exceptions to this general rule of inter source adjustment.

Exceptions to an intra-head set off:

1. Loss from speculation business:
Any loss arising from a speculation business carried on by an assessee shall be set off only
against income of any another speculation business run by the assessee. It cannot be set off
from a non-speculative business income. However, a loss from a non-speculative business
can be set off against income from speculation business but vice versa is not possible.
2. Loss from crossword puzzles, lotteries, etc.
No loss can be set off against any income from lottery, crossword puzzles, horse races,
gambling, etc.
However, the loss incurred by an assessee, in the activity of owning and maintaining race
horses, shall only be set off against the income from such an activity. It cannot be set off
against the income from any other sources.
3. Long term capital loss
Long term capital loss can be set off only against long-term capital gain.
However, short-term capital loss can be set off from any capital gain (long-term or short-
term)
4. Loss from an exempted source
Loss from an exempted source cannot be set off against taxable Income- If income from a
particular source is exempt from tax, then loss from such source cannot be set off against any
other income which is chargeable to tax. E.g., Agricultural income is exempt from tax, hence,
if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against
any other taxable income.cannot be set off against taxable Income- If income from a
particular source is exempt from tax, then loss from such source cannot be set off against any
other income which is chargeable to tax. E.g., Agricultural income is exempt from tax, hence,
if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against
any other taxable income.
5. Losses from a specified business
 Losses from a specified business will be set off only against profit of specified businesses.
But the losses from any other businesses or profession can be set off against profits from
the specified businesses.

Inter-head Set Off: SET-OFF OF LOSSES OF ONE HEAD AGAINST OTHER

HEADS (INTER HEAD ADJUSTMENT)-SECTION 71
Any loss from one source of income is firstly set off against any gain from another source
within the same head. Any remaining loss can then be set off against Income from any other
Head. This is known as Inter-Head adjustment.
Eg.
 Loss from house property can be set off against salary income
 Loss from House property can be set off against income under any head
 Business loss other than speculative business can be set off against any head of
income except income from salary.

However, there are exceptions to this rule also as discussed below.

 No loss of whatsoever nature can be set off against winnings from lotteries, crossword
puzzles, card games etc.
 Loss from a speculation business;
 Loss from the activity of owning and maintaining race horses;
 Long-term capital loss- only from LTCC
 Loss from business or profession cannot be set-off against income under the head
salaries.
 Loss from specified business

Loss under the head ‘capital gains’

 Any short-term capital loss can be set off against short-term capital gain or long-term
capital gain.
 Any long-term capital loss can be set off only against long-term capital gain.

CARRY FORWARD AND SET OFF OF LOSSES

If the losses could not be set off under the same head or under different heads in the same
assessment year, such losses are allowed to be carried forward to be claimed as set off from
the income of the subsequent assessment years.

 All losses are not allowed to be carried forward.

 Another very important aspect is that in case of carry forward, losses can be only set
off under the same head of income only. Inter head adjustment is not allowed.

Only the following losses are allowed to be carried forward and set off in the subsequent
years.
a) House property loss
b) Business loss
c) Speculation loss
d) Capital loss
e) Loss on account of owning and maintaining race horses.
Hence any loss under the head “income from other sources” is not allowed to be carried
forward. (Except race horses)

1. LOSS FROM HOUSE PROPERTY (SECTION 71B)

A loss under the head house property will be allowed to be carried forward for 8 assessment
years to claim it as a set off in the subsequent years under the head ‘Income from house
property’. Therefore, if the loss of house property of the previous year 2003-2004 which
could not be set off because of absence or inadequacy of the income of previous year 2003-
2004, it may be carried forward for 8 assessment years succeeding assessment year 2004-
2005 to be set off from income under the head house property.

2. BUSINESS LOSSES (SECTION 72)

Where the loss under the head ‘profits and gains of business or profession’ other than loss
from speculation business, could not be set off in the same assessment year, it is known as
unabsorbed loss. It can be carried forward to the following assessment years, subject to
following conditions:
I) Business losses can be adjusted only against business income: Business income may be
from the same business in which the loss was incurred, or may be any other business.
II) Business in respect of which a loss is incurred may or may not be continued.
III) Losses can be set off only by the assessee who has incurred loss with a few exceptions
like when a partnership firm is converted into a company, amalgamation of companies, etc.
IV) Each year’s loss is a separate loss and no loss shall be carried forward for more than eight
assessment years immediately succeeding the assessment year for which the loss was first
computed. Therefore, a loss of previous year 2017-2018, i.e. assessment year 2018-2019 can
be carried forward till assessment year 2026-27
V)the rules of sec 72 are not applicable to carry forwards of Unabsorbed depreciation
allowance, capital expenditure on scientific research and family planning
expenditure[Sec32(2)]. These can be carried forward indefinitely.

CARRY FORWARD OF SPECULATION LOSS (SECTION 73)

The loss of a speculation business of any assessment year is allowed to be set off only against
the profits and gains of another speculation business in the same assessment year.
If a speculation loss could not be set off from the income of another speculation business in
the same assessment year, it is allowed to be carried forward for 4 assessment years
immediately succeeding the assessment year for which the loss was first computed.
Also, it can only be set off against the income of only a speculation business.

LOSS UNDER THE HEAD CAPITAL GAIN

Loss on short term capital asset
Any loss on short-term capital asset is allowed to be carried forward to be set-off in
subsequent years against capital gains (short-term as well as long-term). The period of carry
forward is 8 years.
Loss on Long-term capital asset
Any loss from long-term capital assets can also be carried forward to be set-off in subsequent
years but against only long-term capital gains. The period of carry forward is 8 years.

LOSS ON OWNING AND MAINTAINING RACE HORSES [SECTION 74 A (3)]

Any loss suffered by the assessee in respect of maintaining of race horses can be set-off
against the income from the activity of owning and maintaining race horses in subsequent
years .The period for carry forward of such a loss is only four years immediately succeeding
the assessment year in which the loss was computed for the first time.

EFFECT OF CHANGE IN CONSTITUTION OF A FIRM [SECTION 78]

Where any change in the constitution of a firm has occurred, the firm is not entitled to carry-
forward the share of loss of the retired or deceased partners.

CARRY FORWARD OF LOSSES OF A CLOSELY HELD COMPANY [SECTION 79]

Where a change in shareholding of such company takes place in the previous year, it loses its
right to carry forward and set-off its losses of earlier years.