4 Clubbing of Income

CHAPTER

Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income. However,
there are certain cases where an assessee has to pay tax in respect of income of another person.
The provisions for the same are contained in sections 60 to 64 of the Act. These provisions have
been enacted to counteract the tendency on the part of the tax-payers to dispose of their property or
transfer their income in such a way that their tax liability can be avoided or reduced.
Transfer of income without transferring the asset [Section 60]
If any person transfers the income from any asset without transferring the asset itself, such income is
to be included in the total income of the transferor.
Eg. Mr. A has two house and each house is let out for ` 10 lakh p.a. He has transferred income of one
of the house to his wife Mrs. A. In this case, clubbing provision shall be applicable and income shall be
taxable in the hands of Mr. A.
Transfer of asset through revocable transfer [Section 61]
If any person has transferred any asset through revocable transfer, income from that asset shall be
clubbed in the income of transferor.
Meaning of revocable transfer [Section 63]
Transfer is deemed to be revocable if—
(a) 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
(b) it gives, in any way to the transferor, a right to reassume power, directly or indirectly, over the
whole or any part of the income or the assets.
Mr. Ram has transferred one house to Mr. Shyam with the condition that the house can be taken back
by him at any time. In this case, clubbing provision shall be applicable on any income derived by Mr.
Shyam from such house.
Exception where clubbing provisions are not attracted even in case of revocable transfer [Section 62]
Section 61 will not apply to any income arising to any person if there is –
(a) A transfer by way of trust which is not revocable during the life time of the beneficiary; and
(b) Any other transfer, which is not revocable during the life time of the transferee.
In the above cases, the income from the transferred asset is not includible in the total income of the
transferor, provided the transferor derives no direct or indirect benefit from such income.
If the transferor receives direct or indirect benefit from such income, such income is to be included in
his total income even though the transfer may not be revocable during the life time of the beneficiary
or transferee, as the case may be.
As and when the power to revoke the transfer arises, the income arising by virtue of such transfer will
be included in the total income of the transferor.
Example
Mr. Ram has transferred one asset to Mr. Shyam with the condition that the asset shall be retained by
Mr. Shyam as long as he is alive and after that the asset shall be taken back by Mr. Ram. In this case,
clubbing provision shall not apply.

TRANSFER OF ASSETS TO SPOUSE [SECTION 64(1)(IV)]

1. If any person has transferred any asset, other than a house property to his or her spouse directly
or indirectly without adequate consideration, in such cases, income of the asset shall be clubbed
in the income of transferor.
However, If the asset is transferred under an agreement to live apart, clubbing provision shall not apply.
Note:
 If there is inadequate consideration, clubbing provisions shall be applicable only with regard
to the income relating to that part of the consideration which is considered to be inadequate.
 If an individual transfers a house property to his spouse, without adequate consideration or
otherwise than in connection with an agreement to live apart, the transferor shall be deemed
to be the owner of the house property and its annual value will be taxed in his hands.
 In order to apply clubbing provision relationship of husband and wife must exist on the date
of transfer of the asset and also on the date of accrual of income.
 If any person has transferred the asset to the spouse and there is accretion to the asset,
income from such accretion shall not be clubbed.
 Eg. Mr. R Gifted ` 10 Lakh to wife, which she has given as a loan to Mr. J @ 12% interest per
annum. During the the year she received interest of ` 1,20,000 which she invested in shares
of X Ltd. In this case dividend received from X Ltd. Shall not be clubbed in hand of Mr. R as it
is accretion of income.
Illustration 1: Mr. A transferred 2,000 debentures of ` 100 each of W Ltd. to Mrs. A on 13.05.2023
without consideration. The company paid interest of ` 130,000 in September, 2023 which was
given as a loan by Mrs.Ram to K in October, 2023. K paid interest of ` 13,000 upto March, 2024.
How would both the interest income be charged to tax in assessment year 2024–25?
2. Where the asset transferred directly or indirectly by an individual to the spouse has been invested
by the transferee in any business, the income arising out of the business to the transferee in any
previous year shall be clubbed in the income of transferor but for this purpose capital as on first
day of relevant previous year shall be taken into consideration.
Illustration 2: A proprietary business was started by Smt. X in the year 2019. As on 01.04.2022
her capital in business was ` 4,00,000. Her husband gifted ` 3,00,000, on 01.04.2022, which Smt.
X invested in her business on the same date. Smt. X earned profits from her proprietary business
for the Financial year 2022–23 ` 2,00,000 Financial year 2023–24 ` 2,40,000 Financial year
2024–25 ` 2,80,000. Amount of profit was further invested in the business. Compute Amount to
be clubbed in the income of Husband of Smt. X in each of the year.
3. If any person has transferred the asset to the spouse and the spouse has invested it in some
partnership firm as capital contribution or otherwise, in this case interest received from the
partnership firm shall be clubbed in the income of the transferor and capital as on first day of
relevant previous year shall be taken into consideration.
Clubbing of Income 223
 If any salary has been received from partnership firm, it will not be clubbed.
If any share has been received from the profits of partnership firm, such shares shall be exempt
under section 10(2A).
4. If there is indirect transfer, clubbing provisions shall be applicable in that case also e.g. Mr. Ram
gifted certain cash/asset to his major son and son gifted the same asset to mother, in this case it
will be considered transfer and income shall be clubbed in the income of Mr. Ram.
5. If any person has given loan to the spouse, income from such loan shall not be clubbed.
Transfer of assets for the benefit of spouse [Section 64(1)(vii)]
All income arising directly or indirectly to any person or association of persons, from the assets
transferred, directly or indirectly, to such person or association of persons by an individual without
adequate consideration is includible in the income of the individual to the extent such income is used
by the transferee for the immediate or deferred benefit of the transferor’s spouse.
Transfer of the asset to the son’s wife [Section 64(1)(vi)]
If any person has transferred the asset to the son’s wife, in this case, clubbing provision shall apply in
the similar manner as in the case of transfer of the assets to the spouse.
Transfer of assets to any other person for the benefit of wife or son’s wife [Section 64(1)(viii)]
If any person has transferred the asset to any other person, clubbing provision shall not be applicable,
but if the transferor has any right to receive any benefit from the asset or the benefit shall be received
by the spouse of the transferor or by the son’s wife of the transferor, in that case, clubbing provision
shall be applicable.
Example
Mrs. Kasturi transferred her immovable property to ABC Co. Ltd. subject to a condition that out of
the rental income, a sum of ` 36,000 per annum shall be utilized for the benefit of her son’s wife.
Mrs. Kasturi claims that the amount of ` 36,000 (utilized by her son’s wife) should not be included
in her total income as she no longer owned the property.
Examine with reasons whether the contention of Mrs. Kasturi is valid in law.
Solution
The clubbing provisions under section 64(1)(viii) are attracted in case of transfer of any asset,
directly or indirectly, otherwise than for adequate consideration, to any person to the extent to
which the income from such asset is for the immediate or deferred benefit of son’s wife. Such
income shall be included in computing the total income of the transferor-individual.
Therefore, income of ` 36,000 meant for the benefit of daughter-in-law is chargeable to tax in the
hands of transferor i.e., Mrs. Kasturi in this case.
The contention of Mrs. Kasturi is, hence, not valid in law.
Salary/commission/fee etc. from a concern in which the spouse has substantial interest
[Section 64(1)(ii)]
‰ In computing the total income of any individual, there shall be included all such income as arises
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.
224 Taxation (Income Tax)
 Note:
 A person is said to be having substantial interest in a concern if he along with his relatives
holds atleast 20% of equity shares in a company or has at least 20% share in profits of the
concern at any time during the previous year.
 Section 2(41). Relative in relation to an individual means the husband, wife, brother or sister
or any lineal ascendant (mother, father, grandmother, grandfather) or descendant (son,
daughter, grandson, grand daughter) of that individual.
‰ Remuneration is included in the hands of that individual who has substantial interest. But where
both husband and wife have a substantial interest in the concern and both are in receipt of the
remuneration from such concern, remuneration shall be included in the total income of husband
or wife whose total income, excluding such remuneration, is greater.
‰ In case where the spouse possesses technical or professional qualifications and the income is solely
attributable to the application of his or her technical or professional knowledge and experience,
then such income shall not be clubbed.
Example
Mr. A holds shares carrying 25% voting power in X (P) Ltd. Mrs. A is working as a computer
software programmer in X (P) Ltd. at a salary of ` 30,000 p.m. She is, however, not qualified for
the job. The other income of Mr. A & Mrs. A are ` 7,00,000 & ` 4,00,000, respectively. Compute
the gross total income of Mr. A and Mrs. A, assuming that they do not opt for section 115BAC.
Solution
Mr. A holds shares carrying 25% voting power in X (P) Ltd i.e., a substantial interest in the
company. His wife is working in the same company without any professional qualifications for
the same. Thus, by virtue of the clubbing provisions of the Act, the salary received by Mrs. A from
X (P) Ltd. will be clubbed in the hands of Mr. A.
Computation of Gross total income of Mr. A
Particulars ` `

Salary received by Mrs. A (` 30,000 × 12) 3,60,000

Less: Standard deduction under section 16(ia) 50,000 3,10,000

Other Income 7,00,000

Gross total income 10,10,000

The gross total income of Mrs. A is ` 4,00,000.

Example
Mr. B holds shares carrying 30% voting power in Y (P) Ltd. Mrs. B is working as accountant in Y (P)
Ltd. getting income under the head salary (computed) of ` 3,44,000 without any qualification in
accountancy. Mr. B also receives ` 30,000 as interest on securities. Mrs. B owns a house property
which she has let out. Rent received from tenants is ` 6,000 p.m. Compute the gross total income
of Mr. B and Mrs. B.
Solution
Since Mrs. B is not professionally qualified for the job, the clubbing provisions shall be applicable.

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 Computation of Gross total income of Mr. B

Particulars `

Income under the head salary of Mrs. B (Computed) 3,44,000

Income from other sources

– Interest on securities 30,000

3,74,000

Computation of Gross total income of Mrs. B

Particulars ` `
Income from Salary Nil
[clubbed in the hands of Mr. B]
Income from house property
Gross Annual Value [` 6,000 × 12] 72,000
Less: Municipal taxes paid -
Net Annual Value (NAV) 72,000
Less: Deductions under section 24
– 30% of NAV i.e., 30% of ` 72,000 21,600
– Interest on loan - 50,400
Gross total income 50,400

Asset held by Minor Child Section 64(1A)

‰ In computing the total income of any parent, it shall include all such income which accrues to his
minor child and shall be clubbed in the hands of that parent whose total income (excluding the
income to be clubbed) is greater.
‰ Where the marriage of the parent does not subsist, the income of the minor child shall be included
in the hands of that parent who maintains the minor child in the relevant previous year.
‰ 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 AO is satisfied that it is necessary to do so.
‰ As per Section 10(32), If income of minor child is so included, that parent shall be entitled to an
exemption of maximum of ` 1,500 in respect of each minor child.
‰ If parents of the minor child is not alive then the income of minor child cannot be clubbed and
guardian of the minor child shall file the return of such income on behalf of the minor child.
‰ If any minor child has income from manual labour or through activity involving application of his
skill, talent or specialized knowledge and experience, such income shall not be clubbed but if such
income has been invested further, any new income shall be clubbed in the income of mother or
father.

226 Taxation (Income Tax)

‰ Also no clubbing of income shall be done if the minor child suffering from a disability mentioned
under section 80U.
‰ Child includes step child, adopted child and minor married daughter.
Conversion of self acquired property into common property of HUF
If any member of HUF has gifted any asset to the HUF, income from such asset shall be clubbed in the
income of such member but if partition has been taken place, in that case clubbing provision shall
not be applicable however income from that part of asset which has been received by the spouse and
minor child of such person, shall be clubbed in the income of such member.
Illustration 3: Mr. Ram is an employee of X Ltd. and he has 25% shares of that company. His salary
is ` 50,000 p.m. MR. Ram is working as a computer software programmer in X Ltd. at a salary of `
30,000 p.m. She is, however, not qualified for the job. Compute the gross total income of Mr. Ram and
MR. Ram, assuming that they do not have any other income.
Illustration 4: Will your answer be different if MR. A was qualified for the job?
Illustration 5: Mr. Ram is an employee of Y Ltd. and has substantial interest in the company. His salary
is ` 20,000 p.m. MR. Ram is also working in Y Ltd. at a salary of ` 12,000 p.m. without any qualifications.
Mr. Ram also receives ` 30,000 as interest on securities. MR. Ram owns a house property which she
has let out. Rent received from tenants is ` 6000 p.m. Compute the gross total income of Mr. Ram and
MR. Ram.
Illustration 6: Mr. Ram has three minor children – two twin daughters and one son. Income of the
twin daughters is ` 2,000 p.a. each and that of the son is ` 1,200 p.a. Compute the income, in respect
of minor children, to be clubbed in the hands of Mr. Ram.
Illustration 7: Mr. Ram, a mentally retarded minor, has a total income of ` 1,20,000. The total income
of his father Mr. Shyam and of his mother MR. Shyam for the relevant assessment year is ` 2,40,000
and ` 1,80,000 respectively. Discuss the treatment to be accorded to the total income of Mr. Ram for
the relevant assessment year
Illustration 8: Mr. Ram gifts ` 1 lakh to his wife MR. Ram on April 1, 2023 which she invests in a firm
on interest rate of 14% per annum. On January 1, 2024, MR. Ram withdraws the money and gift it
to her son’s wife. She claims that interest which has accrued to the daughter-in-law, from January 1,
2024 to March 31, 2024 on investment made by her is not assessable in her hands but in the hands
of Mr. Ram. Is this correct? What would be the position, if MR. Ram has gifted the money to minor
grandson, instead of the daughter-inlaw?
Illustration 9: Mr. Ram, entered into the following transactions during the previous year 2023–24:
(a) Mr. Ram had a fixed deposit of ` 4,00,000 with Bank of India. He instructed the bank to credit the
interest on the deposit @ 9% from 01.04.2023 to 31.03.2024 to the savings bank account of Ms.
Y, his niece, to help her in her higher education.
(b) Mr. Ram holds 51% share in a partnership firm. MR. Ram (wife of Mr. Ram) received a remuneration
of ` 90,000 from the firm for writing its books of accounts. MR. Ram, being a fashion designer,
does not possess any qualification or training in the accountancy field.
(c) Mr. Ram gifted a flat to Mrs. Ram on April 1, 2021. During the previous year 2023–24, she received
rent of ` 18,500 p.m. from letting out of the flat.
(d) Mr. Ram gifted ` 4,00,000 to his minor son who invested the same in a business and he derived
income of ` 80,000 from the investment.
(e) Mr. Ram’s minor daughter derived an income of ` 25,000 from participation in music shows.

Clubbing of Income 227

During the year, Mr. Ram got a monthly pension of ` 18,000. He had no other income. Mrs. Ram received
salary of ` 25,000 per month from a part time job as a fashion designer. Discuss the tax implications
of each transaction and compute the total income of Mr. R and MR. Ram.

CROSS TRANSFERS
In the case of cross transfers also (e.g., A making gift of ` 50,000 to the wife of his brother B for
the purchase of a house by her and a simultaneous gift by B to A’s minor son of shares in a foreign
company worth ` 50,000 owned by him), the income from the assets transferred would be assessed
in the hands of the deemed transferor if the transfers are so intimately connected as to form part of
a single transaction, and each transfer constitutes consideration for the other by being mutual or
otherwise. Thus, in the instant case, the transfers have been made by A and B to persons who are
not their spouse or minor child so as to circumvent the provisions of this section, showing that such
transfers constituted consideration for each other.
The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142,observed that if two
transactions are inter-connected and are parts 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 Mrs. B from the house property
should be included in the total income of B and the dividend from shares transferred to A’s minor son
would be taxable in the hands of A. This is because A and B are the indirect transferors to their minor
child and spouse, respectively, of income-yielding assets, so as to reduce their burden of taxation.
Example
Mr. Vasudevan gifted a sum of ` 6 lakhs to his brother’s wife on 14.06.2023. On 12.07.2023, his
brother gifted a sum of ` 5 lakhs to Mr. Vasudevan’s wife. The gifted amounts were invested as
fixed deposits in banks by Mrs. Vasudevan and wife of Mr. Vasudevan’s brother on 01.08.2021 at
9% interest. Examine the consequences of the above under the provisions of the Income-tax Act,
1961 in the hands of Mr. Vasudevan and his brother.
Solution
In the given case, Mr. Vasudevan gifted a sum of ` 6 lakhs to his brother’s wife on 14.06.2023 and
simultaneously, his brother gifted a sum of ` 5 lakhs to Mr. Vasudevan’s wife on 12.07.2023.
The gifted amounts were invested as fixed deposits in banks by Mrs. Vasudevan and his brother’s
wife. These transfers are in the nature of cross transfers. Accordingly, the income from the assets
transferred would be assessed in the hands of the deemed transferor because the transfers
are so intimately connected to form part of a single transaction and each transfer constitutes
consideration for the other by being mutual or otherwise.
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. It was so held by the Apex Court in CIT vs. Keshavji
Morarji (1967) 66 ITR 142.
Accordingly, the interest income arising to Mrs. Vasudevan in the form of interest on fixed deposits
would be included in the total income of Mr. Vasudevan and interest income arising in the hands
of his brother’s wife would be taxable in the hands of Mr. Vasudevan’s brother as per section
64(1), to the extent of amount of cross transfers i.e., ` 5 lakhs.
This is because both Mr. Vasudevan and his brother are the indirect transferors of the income to
their respective spouses with an intention to reduce their burden of taxation.

228 Taxation (Income Tax)

 However, the interest income earned by his spouse on fixed deposit of ` 5 lakhs alone would be
included in the hands of Mr. Vasudevan’s brother and not the interest income on the entire fixed
deposit of ` 6 lakhs, since the cross transfer is only to the extent of ` 5 lakhs.

INCOME INCLUDES LOSS

As per the Explanation 2 to section 64, ‘income’ would include ‘loss’. Accordingly, where the specified
income to be included in the total income of the individual is a loss, such loss will be taken into account
while computing the total income of the individual. It is significant to note that this Explanation applies
to clubbing provisions under both sections 64(1) and 64(2).

DISTINCTION BETWEEN SECTION 61 AND SECTION 64

It may be noted that the main distinction between the two sections is that section 61 applies only to
a revocable transfer made by any person while section 64 applies to revocable as well as irrevocable
transfers made only by individuals.

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