Income of Other Persons, Included in Assessee’s Total Income – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Income of Other Persons, Included in Assessee’s Total Income – CA Final DT Question Bank
State the situations under which the clubbing provisions of income-tax operate as to the incomes of husband and wife. [CA Final May 2010] [4 Marks]
As per section 64(1), in computing the total income of any individual, there shall be included all such income arising directly or indirectly to the spouse 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 substantial interest;
- income from any asset transferred to the spouse by the individual otherwise than for adequate consideration or in connection with an agreement to live apart.
As per section 27 (i), an individual who transfers, otherwise than for adequate consideration, any house property, to his or her spouse, not being a transfer in connection with an agreement to live apart, is deemed to be the owner of the house property so transferred. Accordingly, in such a case, the income from house property would be taxable in the hands of the Individual.
Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution in the firm as on 01-04-2020 was ₹ 5 lakhs, out of which ₹ 3 lakhs was contributed out of her own sources and ₹ 2 lakhs was contributed out of gift from her husband. As further capital was needed by the firm, she further invested ₹ 2 lakhs on 01.05.2020 out of the funds gifted by her husband. The firm paid interest on capital of ₹ 80,000 and share of profit of ₹ 60,000 for the financial year 2020-21. Advise Mr. F as to the applicability of section 64(1)(iv) and the manner thereof in respect of the above j referred transactions. [CA Final Nov. 2010] [5 Marks]
Section 64(1)(iv) provides for the clubbing of all such income as arises, directly or indirectly, to the spouse of an individual from assets (other than house property) transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.
Further, as per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv), where the assets transferred are invested by the spouse as capital contribution as a partner in a firm, proportionate interest on capital will be clubbed with the income of the transferor.
Such proportion has to be computed by taking into account the value of the aforesaid investment as on the first day of the previous year to the total investment by way of capital contribution as a partner in the firm as on that day.
Now in view of the above provision, interest received by the spouse Mrs. E from the firm shall be included in total income of Mr. F to the extent of ₹ 32,000 i.e., ₹ 80,000 × ₹ 2,00,000/₹ 5,00,000. (assumed that rate of interest on capital contributed by Mrs. E does not exceed 12% p.a.). Any amount further invested in the-business of the firm during the mid of the year by the spouse out of the money gifted by her husband shall be ignored for the proportion of the income to be clubbed for the year.
Share of profit amounting to ₹ 60,000 is exempt u/s 10(2A). The provisions of section 64 will not apply, if the income from the transferred asset itself is exempt from tax.
Mr. Ashish has gifted a house property valued at ₹ 50 lakhs to his wife, Mrs. Asha, who in turn has gifted the same to Mrs. Swati, their daughter-in-law. The house was let out at ₹ 25,000 per month throughout the year. Compute the total income of Mr. Ashish and Mrs. Swati. Will your answer be different if the said property was gifted to his son, husband of Mrs. Swati? [CA Final May 2013] [4 Marks]
As per section 27, where any house property is transferred by an individual to his spouse otherwise than for adequate consideration or not being a transfer in connection with an agreement to live apart, the individual shall be deemed to be the owner of the house property so transferred.
Further, as per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or indirectly, to her otherwise than for adequate consideration would be included in the total income of such individual.
In light of above provision, Mr. Ashish would be the deemed owner of the house property transferred to his wife Mrs. Asha without consideration. Income from let-out property of ₹ 2,10,000 [i.e., ₹ 3,00,000, being the actual rent calculated at ₹ 25,000 per month less ₹ 90,000, (deduction u/s 24 @ 30%)] arising to Mrs. Swati, being Mr. Ashish’s son’s wife, shall be clubbed in the income of Mr. Ashish. Such income would not be taxable in the hands of Mrs. Swati.
In case the property was gifted to Mr. Ashish’s son, the clubbing provisions u/s 64 would not apply, since the son is not a minor child. Therefore, the income of ₹ 2,10,000 from letting out of property gifted to the son would be taxable in the hands of the son.
Note: Section 56(2)(x) would not be attracted in the above case, since the receipt of property was from a “relative” of such individual. Therefore, the stamp duty value of house property would not be chargeable to tax in the hands of the recipient of immovable property, even though the house property was received by her or him without consideration.
The first part of the question can also be answered by applying the provisions of section 64(1)(vi) directly to include the income of ₹ 2,10,000 arising to Mrs. Swati in the hands of Mr. Ashish, since section 64(1)(vi) provides for clubbing of income arising to son’s wife even from indirect transfer of assets to her by her husband’s parent, without consideration. Gift of house property by Mr. Ashish to Mrs. Swati, via Mrs. Asha, can be viewed as an indirect transfer by Mr. Ashish to Mrs. Swati.
Raju gifted amount of ₹ 5,00,000 to the wife of his brother which was used by her for the purchase of a house and simultaneously, on the same day, Raju’s brother gifted shares owned by him in a foreign company worth ₹ 5,00,000 to the minor son of Raju. What will be the impact of i such transfers in the hands of both the transferors and the transferees? [CA Final May 2014, Nov 2013, May 2011] [4 Marks]
In the given case, Raju gave a gift of ₹ 5,00,000 to his brother’s wife for the purchase of a house by her and simultaneously, his brother gave a gift of shares owned by him in a foreign company worth ₹ 5,00,000 to I the minor son of Raju. These transfers are in the nature of cross transfers.
In the case of CIT vs. Keshavji Morarji (1967), the Supreme Court held that if two transactions are inter-connected and are part of the same transaction in such a way that it can be said that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would be attracted.
Accordingly, the income arising to the wife of Raju’s brother from the house property would be included in the total income of his brother and the dividend from shares transferred to Raju’s minor son would be included in the total income of Raju because both Raju and his brother are the indirect transferors of the income yielding assets to their minor child and spouse, respectively, with an intention to reduce their burden of taxation.
However, as per section 56(2)(x), since husband’s brother and father’s brother fall within the definition of “relative”, the sum of money and property, respectively, received from them would be exempt in the hands of the concerned transferee.
Examine the correctness of the claim made by the assessee in the below mentioned case.
Mr. Johny has business income of ₹ 4,28,000 and salary income of ₹ 1,30,000 for the financial year 2020-21. His minor son has agricultural income of ₹ 1,00,000 for the same year. The Assessing Officer clubbed the agricultural income of minor son for determining the income tax liability of Mr. Johny. Mr. Johny contends that the agricultural income is exempt u/s 10(1) and not covered by section 2(24) and hence, should not be clubbed even for adopting higher income-tax rate. [CA Final May 2015] [4 Marks]
The facts of the case are similar to Suresh Chand Talera v. Union of India (2006) (M.P.) in which the High Court observed that even though agricultural income has not been specifically included in section 2(24), it does not mean that agricultural income is not an “income”, because the definition of income given u/s 2(24) is inclusive and not exhaustive.
Further Section 10(1) of the Act provides that in computing the income of the previous year of a person, “agricultural income” shall not be included. Thus, Section 10(1) makes it clear that agricultural income is income but by express provision therein, agricultural income has been excluded from the total income of the assessee for the purpose of levy of income-tax.
Section 4(1), which is the charging section, provides that while the total income of person is to be determined, the rate at which income-tax will 1 be paid on such income will be stipulated in the relevant Finance Act. The Annual Finance Act provides [under Chapter II section 2] that the net agricultural income shall be taken into account in the manner provided therein for the purpose of determining the rates of income-tax applicable to the income of the assessee.
Therefore, in view of the above provisions, the High Court held that agricultural income of the minor son of the assessee has to be clubbed in the income of the assessee for the purpose of determining the rate of income-tax applicable to the assessee.
Applying the above rationale of High Court ruling, the contention of Mr. Johny is incorrect. The agricultural income of his minor son, has to be included in the income of Mr. Johny for rate purposes, since the words “income as arises or accrues to his minor child” used in section 64(1A) includes agricultural income also.
Mr. Ravi has gifted his only house property to his wife, Mrs. Ravi, and his minor married daughter, Mrs. Divya. The Assessing Officer has served a notice of demand on Mr. Ravi for payment of tax for the income derived from the said house property. Examine the validity of the Assessing Officer’s action. [CA Final May 2016] [2 Marks]
As per sec. 21 (i), if an individual transfers any house property to his or her spouse (except with an agreement to live apart) or to a minor child (except to minor married daughter), otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the property so transferred.
But here, in this case, the assessee Mr. Ravi has gifted his house property to his wife Mrs. Ravi and his minor married daughter Mrs. Divya. So Mr. Ravi will be taxable only to the extent of Mrs. Ravi share in the house property as he is the deemed owner as per sec. 21 (i). And for the share of minor married daughter, Mr. Ravi shall not be the deemed owner and therefore, he shall not be taxable in respect of share of minor married daughter in the house property.
Further as per sec. 64(1 A), all income which accrues or arises to a minor shall be clubbed in the income of that of his parent whose total income excluding the income clubbed under this sub-section) is greater except when the minor is suffering from any disability u/s 80U or when the income accrues or arises to a minor child is by way of manual work done by him or by application of his/her skill, talent or specialized knowledge and experience.
Therefore, the income of minor married daughter shall also be clubbed in the hands of Mr. Ravi by assuming that his income is higher than the income of Mrs. Ravi (excluding such income). But he shall be eligible for exemption upto ₹ 1,500 as per sec. 10(32) in respect of minor child income clubbed in his hands.
So the contention of the A.O. is valid in this case.
Parmatma settled 1/4th share of his property under a trust for the education and maintenance of his minor daughter, Moni. Under the terms of the trust deed, the income accruing to the trust, after meeting the expenses of maintenance and education of Moni, was to be accumulated and paid over to her on her attaining majority. The Assessing Officer assessed the income arising from 1/4th share of the property, settled for the benefit of Moni, in the hands of Parmatma. Examine the correctness of the assessment. [CA Final May 2016, Nov. 2013, May 2009] [5 Marks]
As per section 64(1A), the income of a minor child shall be clubbed in the total income of that parent, whose total income before such inclusion is higher.
Now the Supreme Court in the case of CIT v. M.R. Doshi (1995), held that clubbing of income is applicable only where the income accrues to the minor during his minority and it is enjoyed by the minor during the i period of minority. Thus, where a trust is created for the benefit of a minor child and the income from the trust was to be accumulated until the child attained majority, the clubbing provisions would not get attracted, since 1 no benefit accrues to the minor child during the period of his minority.
However, in the given question, the minor daughter Moni is eligible for the benefits during her minority, since income from the trust is being used for meeting her education and maintenance expenses. Only the remaining income is to be accumulated and paid over to her on her attaining majority. Therefore, since benefit under the terms of the trust deed is accruing, even though to a limited extent, the above decision of Supreme Court cannot be applied, in full, in this case.
Only so much of income as is used for meeting the education and maintenance expenses of Moni during the current year should be clubbed in the hands of Parmatma after providing for an exemption of ₹ 1,500 under section 10(32) ; assuming that Parmatma’s total income is greater than his spouse’s total income. The income accumulated and to be paid to her op her attaining majority shall not be clubbed.
Thus the contention of the Assessing Officer is partly correct.
In 2014, Brijesh borrowed ₹ 15 lakhs at 15% interest per annum from Ashok for his business purpose. This loan has not been repaid so far by Brijesh. His average bank balance in current account was around ₹ 7 lakhs on which the bank was not paying him any interest. On 1st June, 2020 Brijesh’s wife, Tina borrowed from him ₹ 7.50 lakhs repayable on demand at 7.5% interest per annum. She lent this money and received interest @ 18% per annum. In course of assessment of Brijesh, the A.O. disallowed 50% of this interest paid to Ashok on the ground that the loan to the extent of 50% has been diverted for non-business purpose i.e. for lending to wife. Further, interest earned by Tina by advancing ₹ 7.50 lakhs was included in the hands of Brijesh by invoking section 64(1 )(iv). Examine the correctness of the action of the Assessing Officer. [CA Final Nov 2017] [4 Marks]
There are two issues involved in the case which are dealt with as follow:
1. Advancing a loan is not a transfer of asset, so no clubbing shall be done for the interest earned on further advancing of loan, hence section 64(1)(iv) shall not be attracted. Hence, interest income earned by Tina @18% from the amount borrowed from the Brijesh shall not be clubbed.
2. As 50% of interest expense is not incurred wholly and exclusively for the purpose of business or profession, the contention of A.O. to disallow 50% of the interest paid to Ashok on the ground that the loan to the extent of 50% has been diverted for non-business purpose i.e. for lending to wife is correct in law as per sec. 37(1).