INCOME TAX

Ishmeet Kaur Sodhi

BCP/19/173
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QUESTION: An assessee is not only liable for his own income for tax
purposes but his liability may extend to some other incomes as well.
Comment on this statement.

(A) Income of other persons included in the assessee’s total

income

(1.1) Transfer of income where there is no transfer of

assets [Section 60]

Where there is a transfer of income by a person to another person

without the transfer of the asset from which the income arises,
such income shall be included in the total income of the
transferor, whether such transfer is revocable or not and whether
this transfer is affected before or after the commencement of
Income Tax, 1961.

(1.2) Revocable transfer of assets [Section 61]

Where there is a revocable transfer of an asset by a person to

another person, any income arising/derived from such assets
shall be included in the total income of the transferor.

Transfer of sections 60, 61, and 62 include any settlement, trust,

covenant, agreement or arrangement.

1.2(a) When a transfer is revocable [Section 63]: As per Section

63, a transfer for the purpose of section 60, 61 and 62 shall be
deemed to be revocable if;

(a) It contains any provision for re-transfer, directly or indirectly

of the whole or any part of the income or assets to the
transferor during the lifetime of the beneficiary or the
transferee as the case maybe, or
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(b) It gives the transferor a right to resume power directly over

the whole or any part of the income or assets during the
lifetime of the beneficiary or the transferee as the case
maybe.

1.2(b) Section 61 not applicable, if the transfer is irrevocable

for a specified period [Section 62]: As per section 62(1), the
provision of revocable transfer, discussed in section 61, shall not
apply in certain circumstances, which are;

(a) In the case of transfer by way of trust, the transfer is not

revocable during the lifetime of the beneficiary
(b) In the case of any other transfer, the transfer is not revocable
during the lifetime of the beneficiary
(c) In case the transfer is made before 1.4.1961, the transfer is
not revocable for the period exceeding 6 years.

The above exceptions are applicable provided the transferor

derives no direct or indirect benefit from such income. In the
above cases, the income shall be taxed in the hands of the
transferee.

(B) Income of other person included only in the individual’s

total income
(1.3) Income of an individual to income of spouse, minor child,
etc. [Section 64]
1.3(a) Remuneration of spouse from a concern in which the
other spouse has substantial interest [Section 64(1) (ii)]:
In computing the total income of an individual, there shall be
included all sums as arise directly or indirectly to the spouse, of
such individual by way of salary, commission, fees or any other form
of remuneration, whether in cash or in kind from a concern in which
such individual has a substantial interest.
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Therefore, any remuneration derived by a spouse from a concern in

which the other spouse has a substantial interest, shall be clubbed
in the hands of the spouse who has a substantial interest in that
concern. Any other income not specified above, is outside this
section and will not be clubbed even if it accrues to the spouse from
a concern in which the individual has a substantial interest.
No clubbing if remuneration is due to technical or professional
qualifications: the provisions of this clause shall not apply to any
income arising to the spouse:
(a) On account of technical or professional qualifications
possessed by the spouse, and
(b) The income is solely attributable to the application of his/her
technical or professional knowledge or experience.
When both husband and wife have substantial interest and
both are getting remuneration from the concern: if the
husband and wife both have substantial interest in the concern
then the remuneration of both shall be clubbed in the hands of
that spouse whose total income, before including such
remuneration, is greater. In this case, the clubbing will be done
for the first time in the previous year in which the following three
conditions are satisfied:
(a) Both the husband and wife have a substantial interest in the
concern.
(b) Both husband and wife get remuneration from such a
concern.
(c) The relationship of husband and wife subsists at the time of
accrual of such income.
Where such income is one include in the hands of either spouse,
any such income arising in any succeeding year shall not be
included in the total income of other spouse unless the assessing
Officer is satisfied, after giving that spouse an opportunity of
being heard, that is necessary so to do.
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Meaning of substantial interest

An individual shall be deemed to have a substantial interest in the
concern:
i. If the concern is a company: he alone or with his relatives at
any time during the previous year owns beneficially, shares,
(not being shares entitled to a fixed rate of dividend whether
with or without a further right up participate in profits)
carrying not less than 20% of the voting power. Thus shares
here would mean equity shares. Relative means the husband,
wife, brother or sister or any lineal ascendant or descendant
of the individual.

ii. In any other case: if he alone or along with his relatives is

entitled to at least 20% of the profits of such concern then
anytime during the previous year.

The main criterion is to be applied for the purpose of substantial

interest in a company is the beneficial ownership and not the legal
ownership. Therefore, the registered holder of even 51% of the
equity shares would not be considered to have substantial
interest if he has no beneficial interest in the shares. On the other
hand, if a person is beneficially entitled to 20% or more of the
equity share capital of the company, he would be considered to
have substantial interest even if he is not registered as a holder
of any shares.
1.3(b) income from assets transferred to spouse [Section 64(1)
(iv)]: in computing the total income of an individual, all such
income as arises directly or indirectly, subject to the provisions of
section 27(i) (i.e., deemed owner), to the spouse of such
individual from assets (other than house property) transferred
directly or indirectly to the spouse of such individual otherwise
than for adequate consideration or in connection with an
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agreement to live apart shall be included. As per this provision, if

an individual transfers any asset other than house property to
his/her spouse, the income from such an asset shall be included
in the total income of the transferor. This provision is not
applicable to house property because in that case the transferor
is deemed to be the owner of the house property and the annual
value of the property is taxed in the hands of the transferor as
per section 27.
The income from transferred assets shall not be clubbed in
the following cases:
i. If the transfer is for adequate consideration;

ii. The transfer is under an agreement to live apart;

iii. If the relationship of husband and wife does not exist, either
at the time of transfer of such asset or at the time of accrual
of the income.
1.3(c) income from assets transferred to son’s wife [Section
64(1) (vi)]:
Any income which arises from assets transferred directly or
indirectly by an individual to his son’s wife after 1.6.1973,
otherwise than for adequate consideration shall be included in the
income of the transferor.
1.3(d) Income from assets transferred to any person for the
benefit of the spouse of the transfer [Section 64(1) (vii)]:
Where an individual transfers any assets to any person or
association of persons, otherwise than for adequate
consideration, the income from such assets shall be included in
the income of the transferor to the extent to which the income is
for the immediate or deferred benefit of his/her spouse. In other
words, where an asset is transferred to some other person,
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without adequate consideration for the benefit of the spouse of

the individual as well as for some other persons, income on such
an asset to the extent of benefit which accrues to the spouse,
shall be included in the total income of the individual.
1.3(e) Income from assets transferred to any person for the
benefit of son’s wife [Section 64(1) (viii)]:
As discussed in 3(c), where an individual transfers any assets after
June 1973 to any person or association of persons, otherwise than
for adequate consideration the income from such assets shall be
included in the income of the transferor to the extent in which the
income is for the immediate or deferred benefit of his or her son’s
wife.
(1.4) Clubbing of income of a minor [Section 64 (1A)]:
In computing the total income of an individual, there shall be
included all such income as arises or accrues to his minor.
Therefore, the income of a minor is to be included in the hands
of either of his parents.
(1.5) Income from self-acquired property converted to joint
family property [Section 64 (2)]:
Where an individual, who is a member of the Hindu Undivided
Family;
(a) Converts his separate property as the property of the HUF, or
(b) Throws the property into the common stock of the family, or
(c) Otherwise transfers his individual property to the family.
Otherwise than for adequate consideration then the income from
such property shall continue to be included in the total income of
the individual.
(1.6) Under which head of income will the clubbed income
be assessed:
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As per the provisions discussed above, income of another person

is to be included in the total income of the individual. However,
such an income will first be computed in the hands of the
recipient as if it was his income and such recipient will compute
this income under the relevant head after claiming
exemption/allowances/deductions permissible under the
relevant head in which it falls. Such income computed, under the
relevant head will be included in the total income of the individual
under the same head of income.
(1.7) Liability of person, i.e., the transferee of income of
another person, i.e., transferor [Section 65]:
Although the income from any asset transferred to certain
specified persons mentioned in the above sections of Clubbing of
Income, is includible in the total income of the transferor, yet
section 65 provides that notice of demand in respect of tax on
such income may also be served upon the person to whom such
asset has been transferred. On service of such notice, the
transferee shall be liable to pay that portion of the tax levied on
the transferor which is attributable to the income so included.