Save Yourself From Clubbing Provisions for The Gifts Made In Cash: There are certain taxpayers who have substantial taxable income and are shifting some portion of their income to other persons to reduce tax liability. This is done by either shifting assets or a part of revenue. In order to handle such situations, the clubbing provisions were introduced by IT Department to make the correct persons liable to pay taxes. It means that if an individual does not pay taxes, such clubbing provisions will be applied, and the tax amount will be recovered from the individual who is the owner or who is carrying such an asset.
- What Is Clubbing?
- Several Clubbing Provisions
- How To Save Yourself From Clubbing Provisions For The Gifts Made In Cash?
- Relevant Case Laws
Clubbing is the inclusion of another person’s income into the assessee’s total income for the computation of taxes.
There are some instances under the Income Tax Act where another person’s income is required to be included in another person’s income. This is known as ‘Clubbing of Income’.
For example, suppose a husband transfers a part of his income to his wife’s name to reduce his personal tax burden. In such cases, clubbing provision will be applied, and such transferred income shall be added back into the husband’s payment for computing taxable income.
The main reason for introducing clubbing provision is to curb the unfair practice of tax evasions. However, if all the mentioned conditions are satisfied, then clubbing shall be done irrespective of the intention of not evading taxes.
According to Section 64 of the Income Tax Act, 1961, it provides the provisions of clubbing. As per Section 64, while computing the total income of any individual, inclusion of all such incomes as arises indirectly or directly –
- Section 64(1)(ii)– To the wife of such an individual by way of salary, fees, commission, or any other form of remuneration, whether in cash or in-kind, from a concern in which such individual has a substantial interest. However, clubbing provision shall not be applicable concerning any income arising to the spouse where the spouse possesses technical or professional qualifications. The income earned is solely attributable to the application of his or her experience and technical or professional knowledge.
- Section 64(1) (IV)– When assets are transferred to the spouse of such individual directly or indirectly otherwise than for adequate consideration or in connection with an agreement to live apart. However, when an individual transfer any house property to his or her minor child/spouse otherwise than for adequate consideration, the transferor, in that case, is deemed to be the owner of the house property so transferred as per Section 27(I) and the total income shall be taxable in the hands of the transferor under Section 27(I) not covered under Section 64(1) (IV).
- Section 64(1) (VI)– When assets are transferred to the son’s wife, of such individual, directly or indirectly on or after June 1, 1973, to the son’s wife by such individual otherwise than for adequate consideration.
- Section 64(1) (VII)– When assets are transferred to any person or association of persons indirectly or directly otherwise than for adequate consideration to the association of persons or person by such individual, to the extent to which the income from such assets is for the deferred or immediate benefit of his or her spouse.
- Section 64(1) (VIII)– When assets are transferred to any person or association of persons directly or indirectly on or after June 1, 1973, otherwise than for adequate consideration, to the association of persons or person by such individual, to the extent to which the income from such assets is for the deferred or immediate benefit of his son’s wife.
- Section 64(1) (A)– To the individual’s minor child, or not being a minor child but suffering from any disability as specified in Section 80U. However, provisions of clubbing shall not apply in respect of such income as accrues or arise to the minor child on account of any:
- Manual work done by him; or
- Activity that involves the application of his skill, specialized knowledge or talent and experience.
- Section 64(2) – In the case of an individual being a member of an undivided Hindu family, any property having been the separate property of the individual has, at any time after December 31, 1969, been converted by the individual person into property through the act of impressing such discrete property with the character of property belonging to the family or including it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being in the future referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, for computation of the total income of the individual under this Act for any assessment year starting on or after April 1, 1971,
- The individual shall be considered to have transferred the converted property, through the family, to the members of the family for being held by them jointly;
- The income derived from such converted property or any part thereof shall be considered to arise to the individual and not to the family;
- where such converted property has been the subject matter of a partition (whether total or partial) amongst the members of the family, the income derived from such converted property as is received by the spouse on a division shall be deemed to arise to the wife from assets transferred indirectly by the individual to the wife and the provisions of sub-section (1) shall be applied accordingly.
But provided that the income referred to in clause (b) or clause (c), if included in the individual’s total revenue, shall be excluded from the family’s total income or, as the case may be, the spouse of the individual.
Note: – Property includes any interest in the property, the proceeds of the sale, movable or immovable, and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property. Also, for the purpose of Section 64, the income also includes loss.
There are various ways to save yourself from the above provisions of clubbing and can do proper tax planning for saving taxes. Adequate consideration shall be given while transferring assets.
The provisions of clubbing shall be applied only if the assets were transferred without giving adequate consideration. If an individual transfers any assets with adequate consideration, such transaction shall not come under the preview or provisions of clubbing.
Example: A husband made a cash gift of ₹500,000 to his spouse via cheque. A fixed deposit is made by the spouse with the said amount in her saving bank account at an 8% interest rate. The interest thus earned on this fixed deposit shall be taxable in the hands of the husband as per Section 64(1) (IV).
Example: A husband made a cash gift of ₹500,000 to his spouse via cheque. A total investment of ₹10 00,000 (out of which ₹500,000 was transferred as a cash gift) is made by the spouse and incurred a loss of ₹200,000 in that year. The propionate loss of ₹100,000 shall be clubbed with the husband.
Note: – As per Explanation 3 of Section 64, for the purposes of Section64 (1) (IV) and Section64 (1) (VI), where an individual directly or indirectly makes the transfer of assets to his spouse or son’s wife are invested by the transferee—
- in any business, such expenditure being not in the nature of the contribution of capital as a partner in a firm or, as the case may be, for being admitted to the benefits of partnership in a firm, that part of the income arising out of business to the transferee in any preceding year, which bears the same proportion to the payment of the transferee from the company as the value of the assets aforesaid as on the first day of the preceding year bears to the total expenditure by the transferee as on the said day in the business
- in the nature of the offering of capital as a partner in a firm, that part of the interest receivable by the transferee from the firm in any preceding year, which bears the same proportion to the interest receivable by the transferee from the firm as the value of financing aforesaid as on the first day of the preceding year bears to the total investment by way of capital contribution as a partner in the firm as on the said day shall be included in the total income of the individual in that previous year.
Example: A husband purchased jewellery worth ₹10 00,000 from his wife for consideration of ₹12 00,000. Such proceeds are used by the wife for making a fixed deposit into the bank account at an interest rate of 8% per year. In such case, only ₹16,000 (proportionate interest on the excess payment of ₹200,000) shall be clubbed in the hands of the husband. The remaining interest earned shall be considered as the wife’s income as it is received on the transfer of an asset with adequate consideration and shall not be considered under the provisions of clubbing.
In other words, if the spouse transfers an asset such as jewellery, precious stone, bullion, archaeological collections, paintings, drawings, sculptures, debentures, share, etc., on the fair market value, then the provision of clubbing shall not be applicable. The fair market value of such assets shall be calculated in the similar manner as followed for computation of capital gain.
Transfer Assets In Other Relation
The provisions of clubbing shall be applicable only if the transfer is made to: –
- Minor Child (Daughter or son)
- Son’s wife
So, suppose the asset transfer is made to other relations such as parents, son or daughter (above 18 years of age) or grandchildren etc. In that case, it will not fall under the provisions of clubbing even if the transfer of such asset is without consideration.
Note:– Income can only be clubbed when there is conclusive proof for the deferred or immediate benefit of their spouse or son’s wife for the transfer of such assets.
Example: Suppose a father made a cash gift of ₹10 00,000 to his major son via cheque. A fixed deposit is made by his son with the said amount in his savings bank account at an 8% rate of interest. The interest earned on this fixed deposit shall not be clubbed in the father’s hands, and such income shall be taxable in the son’s hands. At the time of accrued income and transfer of assets, the relationship of spouse or son’s wife shall exist.
The provisions of clubbing shall be applicable when the relationship of husband and wife or son’s wife shall exist at the time of accrual of income and the transfer of assets. So, when the relationship doesn’t exist at the time of transfer of accrual income or assets, then such income shall not be clubbed in the hands of the individuals.
Example: Suppose a fiancé (engaged partner) made a cash gift of ₹10 00,000 to his engaged life partner via cheque and made a fixed deposit with the said amount in her saving bank account at an interest rate of 8%. Interest thus earned on such fixed deposit shall not be clubbed as the relationship of husband and wife does not exist while the transfer of such assets took place.
- Any amount of income generated on the loan funds received from the spouse shall not be clubbed and shall be taxable only in the hands of the partner to whom such amount of income has been accrued. The only prudence is to repay the loan along with the nominal rate of interest. It is advisable to maintain proper documentary evidence for the loan and the repayments.
- Income generated on the indirect or direct transfer of asset to spouse or son’s wife shall fall under clubbing provisions. However, if any successive income is earned on the direct income generated from such asset transfer, it shall not be clubbed.
Example: Suppose the husband transferred ₹300,000 to his wife’s account and made a fixed deposit at an interest rate of 8% in her name, then the interest of ₹24,000 earned shall be clubbed in the husband’s income. However, any income earned by investing this amount of ₹24,000 shall not be clubbed in the husband’s hands.
Example: Suppose the husband transferred ₹100,000 to his wife’s account, and she deposited such a sum of money in her PPF account. The amount of interest earned from PPF shall be clubbed in the hands of her husband but shall not be taxable as it is exempted u/s 10.
- Where the individual person transfers cash to his/her spouse or minor child and the transferee acquires a house property out of such money; then the transferor shall not be treated as deemed owner of the house property. Such transactions will, however, attract the provisions of clubbing.
- Commissioner of Income Tax versus Smt. Pelleti Sridevamma (Supreme Court): When the cash gift is made to a minor son has been converted into a house property, and such house property is sold after a long period of time, then the capital gain earned on such transfer of house property shall also be clubbed in the hands of the parents.
- Commissioner of Income Tax versus Nawab Hussain Jah: If the cash gift made to the wife is invested in shares and after that, the shares are sold and the sales proceeding earned is converted into house property, then the income from such house property shall also be clubbed in the hands of the husband.