Clubbing of income is a concept in Indian tax law where the income of one person is included in the taxable income of another, usually due to certain relationships or transfers. For example, the income of a minor child is typically clubbed with the income of the parent whose earnings are higher.

Clubbing provisions also apply in cases where income is transferred without the asset being transferred, where a revocable transfer of an asset is made, or when assets are gifted to a spouse or son's wife without adequate consideration. Specific sections, such as Section 60 to 64, outline the various scenarios where clubbing of income occurs, including exceptions like transfers made for adequate consideration or during a mutual agreement to live apart.

Additionally, income earned by a minor through personal skills or work is not clubbed with the parent's income, although any accretion from that income may be. The law ensures that income cannot be easily shifted to lower tax brackets through transfers or gifts, maintaining the integrity of the tax system.
 
Meaning
Normally, a person is taxed in respect of income earned by him only. However, in certain special cases income of other person is included (i.e. clubbed) in the taxable income of the taxpayer and in such a case he will be liable to pay tax in respect of his income (if any) as well as income of other person too. The situation in which income of other person is included in the income of the taxpayer is called as clubbing of income. E.g., Income of minor child is clubbed with the income of his/her parent. Section 60 to 64 contains various provisions relating to clubbing of income.

Provisions Of Clubbing Of Income:

The following provisions of the Income Tax Act, 1961 explain the clubbing of income:

• Transfer of income without transfer of asset (Section 60)
• Revocable transfer of asset (Section 61)
• Clubbing of income of spouse [Section 64(1)(ii), 64(1)(iv), 64(1)(vii)]
• Clubbing of income in case of son's wife [Section 64(1)(vi), 64(1)(viii)]
• Clubbing of income of minor child [Section 64(1A)]
• Clubbing of income & HUF [Section 64(2)]

Transfer Of Income Without Transfer Of Asset:

Section 60: All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income. When a person transfers the income without transferring the ownership of the asset from which such income is earned, then, such income will be taxable in the hands of the transferor.

The most popular example that we see is the rental income when the owner of the property asks his tenant to make the rental payments in his/her parent's/wife's or children's name.
 Example: Uday owns a house in Jaunpur and is earning a rental income of Rs 30,000 p.m. on this. But, in order to save tax, he asked his tenant to make rental payments in his wife's bank account. In this case, though the income is received in the wife's account, it will be taxed to Uday as he transferred the income source without transferring the legal ownership of the house.

Revocable Transfer Of Asset:

Section 61: All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income. When a person transfers an asset to another person, keeping a clause in the transaction empowers the transferor to take back the ownership anytime in the future.

Such a situation is called Revocable Transfer. As per provisions of clubbing of income, when a "revocable transfer" of an asset is made, then any income from that asset shall be taxable in the hands of the transferor. Example: Saurabh transferred his house property to Sanjay. There is a condition in the agreement that the asset will transfer back to Saurabh after 2 years. Now, as per clubbing of income, any income arising to Sanjay from such house during 2 years will be included in Saurabh's income only.

Clubbing Of Income Of Spouse:

Clubbing of income of spouse is given in the Section 64(1)(ii), 64(1)(iv), 64(1)(vii). The easiest way to save tax is practiced by transferring income in the name of your spouse. There are very special provisions to regulate such transfers. All the different scenarios are discussed below:

1. Your spouse works in a concern/entity in which you have a substantial interest. There are two aspects:
   • Spouse has professional/technical qualifications: Provision of clubbing will not apply. Income taxable in spouse's hands only.
   • No professional qualifications: Income will be clubbed and taxable in your hands.
2. Both you and your spouse receive remuneration from a concern and both have substantial interest: Remuneration will be clubbed in the hands of the spouse whose income (excluding such remuneration) is higher. If both earn due to professional competence, clubbing does not apply.
3. If you have transferred any asset to your wife without adequate consideration:
   • Income from such assets will be taxable in your hands.
   • Clubbing does not apply if:
     • Transferred for adequate consideration,
     • As a condition of divorce, or
     • Transferred before marriage.
4. Nature of gift changed by transferee: Example: Mr. Nishad gifted his wife Rs 6,00,000. She invests in FD and earns interest. Interest will be taxable in Mr. Nishad's hands as per Section 64(1)(iv).
5. Asset transferred to a third person or AOP without adequate consideration, and benefit ultimately goes to your spouse – clubbing provisions will apply.
    

Clubbing Of Income In Case Of Son's Wife:

Clubbing of income in case of son's wife is given in Section 64(1)(vi), 64(1)(viii). Section 64(1)(vi): Any income arising to the son's wife from assets transferred directly or indirectly on or after June 1, 1973, by such individual without adequate consideration shall be clubbed in the hands of the transferor.

Section 64(1)(viii)

To any person or association of persons from assets transferred directly or indirectly on or after the 1st day of June, 1973, otherwise than for adequate consideration, to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his son's wife. Clubbing of income provisions also applies in case of any transfer of income made to Son's wife. The situation is discussed below:

• The asset has been transferred to Son's wife without any proper consideration. In this case, any income generated from that asset will become taxable in your hands.
  • For example, you have 10,000 10% Debentures of Rs 100 each, which you have transferred to your daughter-in-law without any consideration. Now, interest income of Rs 1,00,000 will be included and taxable in your hands.
• The asset has been transferred to some other person or AOP to ultimately defer its benefits to your daughter-in-law:
  • In such a case, when these transactions are carried out without any proper consideration just to route the income tax liability to other hands, it is closely monitored by the Income Tax Department and is added back to your income as per the clubbing of income provisions.
     

Clubbing of Income of Minor Child: Section 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 [not being a minor child suffering from any disability of the nature specified in section 80U] Provided that nothing contained in this sub-section shall apply in respect of such income as arises or accrues to the minor child on account of any:

• Manual work done by him; or
• Activity involving application of his skill, talent or specialised knowledge and experience.

Explanation: For the purposes of this sub-section, the income of the minor child shall be included,—

• Where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub-section) is greater; or
• Where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year.
• And where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.

Note: Any income earned by a minor child is clubbed in the hands of either of his/her parents, whose income (excluding minor child income) is greater.

• For example, in a Fixed Deposit taken in the name of a minor child, the interest earned will be clubbed with the income of the highest-earning parent.
• However, as per Income Tax provisions, there are certain situations in which the clubbing of income provisions will not apply:
  • When a minor child is suffering from any disability, as mentioned in Section 80U; or
  • When income is earned by a minor child through manual work; or
  • Income earned by the minor child through his skill, talent, knowledge, etc.
    For example, a minor child wins money on TV shows like Indian Idol Junior, Voice India Kids, etc.

 

Clubbing of Income & HUF

Section 64(2):

Where, in the case of an individual being a member of a Hindu Undivided Family (HUF), any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been:

• Converted by the individual into property belonging to the family through the act of impressing such separate property with the character of family property, or
• Thrown into the common stock of the family, or
• Transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration

(The property so converted or transferred being hereinafter referred to as the "converted property"), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computation of the total income of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1971—

1. The individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;
2. The income derived from the converted property or any part thereof shall be deemed to arise to the individual and not to the family;
3. Where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the income derived from such converted property as is received by the spouse on partition shall be deemed to arise to the spouse from assets transferred indirectly by the individual to the spouse, and the provisions of sub-section (1) shall, so far as may be, apply accordingly.

Proviso: The income referred to in clause (b) or (c) shall, on being included in the total income of the individual, be excluded from the total income of the family or, as the case may be, the spouse of the individual. The existence of the Hindu Undivided Family has been for ages. Income Tax provisions also recognize HUF as an assessee. In simple terms, a HUF is also liable to file an income tax return. Hence, it's obvious that clubbing of income provisions are also attracted in the case of HUF.

• If any of your personal assets have been transferred to the HUF without any adequate consideration, all income from such assets shall be taxed in your hands.
• In case of the split of HUF in the future, the distributed property in your spouse's hands will be clubbed with your income.

Example: You have a house from which you earn a rental income of Rs 5,00,000 p.a. When you transfer this house to HUF without consideration or inadequate consideration, then the income of Rs 5,00,000 will be taxed in your hands only.

Conversion of Self-acquired Property into Joint Ownership:

When an individual's self-acquired property is transformed into joint family property without adequate consideration, the income generated by the joint family from that property becomes part of the total income attributable to the joint family. If an individual who is a member of the HUF:

• Converts their separate property into HUF property,
• Integrates the property into the common stock of the family, or
• Transfers their individual property to the family,

and does so without receiving adequate consideration, the income derived from such property will be included in the total income of that individual. This ensures that any income arising from the conversion or transfer of self-acquired property into joint family property is accounted for in the relevant tax assessments.

Conclusion
The concept of clubbing of income under the Income Tax Act, 1961, is a crucial provision that aims to ensure equitable taxation by preventing tax avoidance through income shifting between individuals, especially in cases involving family members. The study highlights how various provisions under Sections 60 to 64 of the Act seek to address the issue of income shifting, outlining specific scenarios where income of one individual is clubbed with that of another.

A key takeaway from the comparative study is that while the provisions are designed to prevent tax evasion, their application can sometimes lead to ambiguities, particularly in cases involving gifts, transfers, or income earned by spouses and minor children. The study compares the treatment of clubbing under different sections, noting that while Section 64(1)(iv) deals with income transferred to a spouse or minor child, it provides certain exceptions, such as the exclusion of income from assets transferred to a spouse who is earning an independent income.

Furthermore, the analysis of the evolution of clubbing provisions over the years reveals a growing emphasis on fairness and avoidance of tax avoidance through family arrangements. However, the provisions have faced criticism for being overly broad in some instances, leading to unintentional consequences like double taxation or penalizing taxpayers who engage in legitimate family financial planning.

In conclusion, while the clubbing provisions serve a legitimate purpose in curbing tax evasion and promoting tax compliance, there is scope for further refinement to strike a balance between minimizing avoidance and ensuring fairness in taxation. Clearer definitions, exceptions, and updated rules could help taxpayers and tax authorities alike navigate the complexities of income clubbing, ensuring that the system remains both equitable and efficient.


Written By: Raj Choudhary of Iswar Saran Degree College, University of Allahabad