CLUBBING OF INCOME – SEC 60 TO 65

OBJECT OF CLUBBING

• It is a general principle of every taxing statute that income of a person is

chargeable to tax only in the hands of that 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 income generating assets

or by augmenting the revenue earning capacity of certain family members.

• To curb this, Ss 60 – 65 have been enacted

S. 60 – Clubbing where income is transferred

• When income alone is transferred without transfer of the asset giving rise
to such income, it is deemed to be the income of the transferor.

• It does not matter whether such transfer is revocable or irrevocable.

• In Dalmia Cement Ltd., v. CIT, the assessee, owner of a factory entered

into an agreement to sell the same but the actual transfer took place after two
years. The sale agreement carried a clause that the profits between the period of
date of sale agreement and actual sale would be for the benefit of the transferee.
The IT Department sought to invoke the clubbing provisions against the
transferor. The SC held that the very existence of the agreement to transfer
imposes an overriding title of the factory to the assessee. So, the clubbing
provisions cannot be invoked against the transferor.

S. 61 – Clubbing of income in case of revocable transfer of assets

All income arising to any person by virtue of a revocable transfer of assets shall
be included in the total income of the transferor and taxed accordingly.

S. 62 – Exceptions where clubbing does not operate even in case of revocable

transfer

• If the transfer is by way of trust or otherwise and is not revocable during

the lifetime of the beneficiary or the transferee

• If the transfer was made before 1/4/61 and such transfer is not revocable
for a period exceeding 6 years.

*In both cases, the transferor should not derive direct or indirect benefit from
such income

S. 63 – Definition of transfer and revocable transfer

• A transfer is deemed to be revocable if it contains any provision for the

retransfer 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 the asset

• Transfer includes any settlement, trust, covenant, agreement or

arrangement

S. 64 – Income arising to spouse, son’s wife, minor child and HUF to be

clubbed

Income of spouse and son’s wife – S. 64(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
 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

• However, where the remuneration is solely attributable to the application

of technical or professional qualification, knowledge and experience of the
spouse, it cannot be clubbed

• Where both spouses have substantial interest in a concern and both receive
income from it, it will be clubbed with the spouse whose total income, excluding
such income, is greater.

• Once clubbed in the hands of either spouse, it cannot be changed in

subsequent years unless the Assessing Officer is satisfied, after giving that spouse
an opportunity to be heard, that it is necessary to do so.

An individual is deemed to have substantial interest in a concern:

➢ If it is a company, he by himself or along with his relatives, beneficially holds

equity shares carrying not less than 20% of voting power
➢ In any other case, is entitled (by himself or with his relatives) to 20% of
profits
➢ Relative means u/s 2(41) husband, wife, brother or sister or any lineal
ascendant or descendant of the individual.

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.

Any 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 income from such assets is for the immediate or deferred benefit of the
spouse or son’s wife – to be clubbed.
Where assets transferred to a spouse or son’s wife are invested by the transferee,

➢ In any business, not being capital contribution in a firm, proportionate

income arising to the transferee attributable to such investment is clubbed
➢ In the nature of capital contribution to a fir, any interest receivable by the
transferee attributable to such investment is clubbed.

Where the asset is converted into another form by the transferee, income from the
converted asset is clubbed

CIT Vs Smt Pelleti Sridevamma: Mr A gifts Mrs A 50 lakhs. She invests this
in an FD with interest income Rs 25,000. This is clubbed in the hands of Mr A

• The marital relationship 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.
• In case of transfer of house property, S. 27 – deemed owner shall apply,
not S. 64

S. 64(1A) – Income of minor child

• In computing the total income of any individual, there shall be included all
such income as arises or accrues to his minor child
• Not if the income accrues on account of any manual work done by him or
activity involving application of his skill, talent or specialised knowledge
and experience
• If the minor child suffers a disability u/s 80U, no clubbing
• Where clubbing fails, income is taxable in the hands of the minor child.
Parent or guardian can prepare the return and file it on behalf of the minor.
All deductions and exemptions available to an adult individual, including
basic exemption of Rs 2,50,000 apply
 • While the parents’ marriage subsists, the income of the minor child is
clubbed with the parent whose total income (excluding this) is greater.
Once clubbed, it cannot be changed unless the Assessing officer is
satisfied.
• If the marriage does not subsist, it will be clubbed with the parent who
maintains the child in the previous year.
• In the hands of the clubbed parent, any income of the minor child to the
extent clubbed or Rs 1.500 per child is exempt, whichever is less – S.
10(32)
• Child includes adopted child and step child – S. 2(15B)
• Clubbing does not happen when the child attains majority.

S. 64(2) – HUF

• Where a member of an 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, the income arising therefrom is
taxable as the income of the transferor member
• If such converted property is subsequently partitioned, the income from
such converted property as is received by the spouse of the transferor will
be taxable by clubbing
• Section 64(2) as held in Shammi Kapoor v. ITO, is applicable only when
the member of an HUF converts his property into the property of the HUF
or throws it into the common stock of the HUF without any adequate
consideration.
• Clubbing provisions applies only to gifts, not loans
• Tulsidas Kilachand Vs CIT – Natural love and affection is good
consideration under contract law but not enough under IT law.
• For the purpose of clubbing it is not necessary that the assessee’s own
income has to exceed the basic exemption limit.
 • Losses can also be clubbed

SEC. 65 – person in whose name it is clubbed is liable to pay the taxes. When the
assets are held jointly by more than one person, they are jointly and severally
liable to pay taxes.