Income of other person included in assessee’s total income

Transfer of income without transfer of assets

Sections 60 is applicable if the following condition are satisfied:

Condition The taxpayer owns an asset.

Condition 2 The ownership of asset is not transferable by him. In other words,

he has retained the ownership of the asset.

Condition 3 The income from the asset is transferred to any person under a
settlement, trust, covenant , agreement or arrangement.
Conditions 4 The above transfer may be revocable or may not be revocable.

Condition 5 The above transfer may be effected at any time (may be before
the commencement, of the income-tax act or otherwise).

If the above conditions are satisfied, the income from the asset would be taxable
in the bands of the transferor.

Revocable transfer of assets [sec. 61]

By virtue of section 61, if an asset is transferred under a “revocable transfer”,

income from such asset is taxable in the hands of the transferor. The transfer for
this purpose includes any settlement , trust covenant, agreement or
arrangement.

What is revocable transfer- In any of the following cases, a transfer is a revocable

transfer ----

situations Example
Situation 1- if in asset is transferred X transfers a house property to a trust
under a trust it is revocable during the for the benefit of A and B. however, X
lifetime of beneficiary. has a right to revoke the trust during
the lifetime of A and/or B. it is a
revocable transfer and income arising
from the house property is taxable in
hands of X,
Situations 2- if an asset is transferred to X transfers a house property to A.
a person and it is revocable during the however. X has a right to revoke the
lifetime of transfree. transfer during the lifetime of A. it is a
revocable transfer and income arising
from the house property is taxable in
the hands of X.
Situations 3- if an asset is transferred X transfers an asset on march 3,1961. It
before April 1.1961 and it is revocable is revocable on or before june b, 1963.
within six years. It is a revocable transfer.
Situation 4- if the transfer domain any X transfers an asset. Under the terms of
provision to retransfer the asset (or transfer, on or after April 1, 1998, he
income thereform) to the transferor has a right to utilize the income of the
directly wholly or partly, asset for his benefit. However, he has
not exercised this right as vet. On or
after April 1, 1998, income of the asset
would he taxable in the hands of x,
even if he has not exercised the
aforesaid right.
Situation 5- if the transferor has any X transfers an asset. Under the terms of
right to reassume power over the transfer, he has a right to use the asset
asset( or income there from)directly or for the personal benefits of his family
indirectly wholly or partly. members whenever he wants. Till date
he has not exercised the right. It is
revocable transfer. The entire income
from the asset would be taxable in the
hands of X.
Revocable – meaning of – the expression “revocable” is not qualified in any
manner. The section does not speak of an absolute or unqualified power of
revocation. If there is an income arising by virtue or a transfer of assets which is
revocable, then that income must be deemed to be the income of the assessee
being revoked. Thus, where in the case of a trust created by father and mother
for the benefit of their children, the trust deed provided that the father could
revoke the deed with the consent or the mother and any two of his three
children, it was held that the trust was revocable-

TRANSFERS HELD TO BE REVOCABLE TRANSFERS- The following are held as

revocable transfers :

1. if there is provision to reassume power, the transfer will be “revocable”,

actual exercise of power is not necessary.
2. Where the assessee can at any time reassume power over the assets or the
income by just cancelling or altering the terms of the deed, trust was
“revocable”.
3. Where no absolute right is given to transfree and asset can revert to
transferor in certain circumstance, transfer is revocable.

TRANSFER HELD TO BE IRREVOCABLE TRANSFER- The following are held as

irrevocable transfers:
Where by a registered deed one G dedicated certain assets in favour of a
temple and, while continuing to manage the assets as savarakar of the
temple, G also borrowed money from the temple, it was held that in the
absence of evidence to show that the aforesaid deed was not genuine, the
deed had to be held as valid and irrevocable one and, therefore, income of
the temple from the assets was not assessable in the hands of G.

The words right to reassume power’ must mean that such a power is
lawfully given under the trust deed itself. Thus, where the assessee created
an irrevocable trust and, as trustee, he had powers to develop and improve
the trust property and, by a supplemental deed, he increased the trustee’s
remuneration, it was held that such powers would not amount to “power
to reassume” control over the trust, so as to treat the trust as revocable,
and to include the trust income in the assessee’s income.

When as individual is assessable in respect of remuneration of spouse

The provisions of section 64(1) (!!) are given below

Conditions - section 64(1)(!!) is applicable if the following condition are

satisfied—

Condition 1 The taxpayer is an individual

Condition 2 He/she has a substantial interest in a concern.
Condition 3 Spouse of the taxpayer (i.e. husband/wife of the taxpayer)
is employed in the above – mentioned concern.
Condition 4 Spouse is employed in the concern without any technical or
professional knowledge or experience.

Consequences if the above conditions are satisfied-

If the aforesaid conditions are satisfied, then salary income of the spouse
will be taxable in the hands of the taxpayer.

WHEN BOTH HUSBAND AND WIFE HAVE SUBSTANTIAL INTEREST- The

provision are given below-

Provision Illustration
1. Both husband and wife have a X (and his relatives) beneficially
substantial interest in a concern holds 20 per cent equity share
capital in A lid.
2. Remuneration is received without They are employed in A ltd. Without
any technical and professional any technical professional
qualification. qualification.
3. Remuneration will be included in Salary income of x and Mrs. X will be
the total income of husband or wife included in the income of X(if
whose total income, excluding such income of x before this clubbing is
 remuneration, is greater. higher than that of Mrs. X),

If once clubbing is done in the hands of x, salary of x and Mrs. X will be

included in the income of X (in the subsequent years), even if income of X is
lower than that of Mrs. X in that year. In such case, the assessing officer can
club the income of X and Mrs. X in the hands of Mrs. X only if the assessing
officer is satisfied that it is necessary to do so. The assessing officer can take
such action only giving Mrs. X an opportunity of being heard.

EXCEPTION: Remuneration which is solely attributable to the application of

technical or professional knowledge and experience of the spouse will not
be clubbed.

When an individual is assessable in respect of income from assets

transferred to spouse: the provision of section 64 (i)(m)are given below-

Conditions- Section 64(i)(iv) is applicable if the following conditions are

satisfied-

Condition 1 The taxpayer is an individual.

Condition 2 He she has transferred an asset (other than a house property)
Condition 3 The asset is transferred to his/her spouse.
Condition 4 The transfer may be direct or indirect.
Condition 5 The asset is transferred otherwise than (a) for adequate
consideration, or (b) in connection with an agreement to live
apart.
Condition 6 The asset may be held by the transferee spouse in the same
form or in a different form.

CONSEQUENCE IF THE ABOVE CONDITIONS ARE SATISFIED- If the above

conditions are satisfied any income from such asset shall be deemed to be
the income of the taxpayer who has transferred the asset.
HOW TO COMPUTE INCOME FROM TRANSFERRED ASSET- The income
from assets transferred must be regarded in the same way as it would be if
the asset has not been transferred.

Exemption, deduction or tax incentives in respect of such income can be

claimed by the transferor.

NON-RESIDENT- likewise, income from assets transferred by a non-resident

individual to his wife is subject to clubbing provision of section 64 only if
income from such asset is accrued and received in India).

Conditions 1- Asset is transferred by an individual – the above noted rule of

clubbing is applicable if the transferor is an individual (i.e., husband or
wife). If the transferor is a person other than an individual than the above
provision are not applicable.

Conditions 2- Asset other than house property should be transferred. If a

house property is transferred and the above noted conditions are satisfied,
then the transferor is “deemed” as an owner of the property under
section27.

Condition 3- Relationship of husband and wife- The relationship of husband

and wife should subsist both at the time of transfer of asset and at the time
when income is accrued. It means that transfer of asset before marriage is
outside the scope of this section. Similarly, if transferor-spouse dies, the
income, though continued to be enjoyed by the transferee, cannot be
included in the income or deceased transferor, heir, administrator or
executor, as a window or widower is not a spouse. The word ‘’spouse’’ does
not include illegal wife.

Condition 4- Transfer- In section 63(b), the Legislature uses the words “any
disposition, trust, covenant, agreement or arrangement ‘’. If the Legislature
were minded to include an arrangement or agreement, not amounting to
transfer, in section 64, it could have used these words. Therefore,the word
“transfer” in section 64 must be treated as having been used in the strict
sense and not in the sense of “including every means by which the property
may be passed from one to another”. Even if there is an indirect transfer,
there must still be transfer of assets. The word, “indirectly” does not
destroy the significance of the word “transfer”.

INDIRECT TRANSFERS – if the two transfers are interconnected and are

parts of the same transaction in such a way that it can be said that the
circuitous method has been adopted as a device to evade implications of
this section, the case will fall within the section. For instance, if X gifts or
cross transfers Rs. 10,000 to Mrs. A and A gifts property worth Rs. 10,000 to
Mrs. X, the transaction would be indirect transfer by X to Mrs. X and by A to
Mrs. A. What is material is not the unreality of the cross-transaction, nor
whether the appearance of reality is attempted to be maintained but
whether the transfer are parts of the same transaction adopted with a view
to evade the implications oft he section.

Condition 5 – Consideration – Natural loved and affection may be good

consideration but that would not be adequate consideration For the
purpose of section 64(1).

PAYMENT OF CONSIDERATION IN PART – As long as the consideration is

not equal to or nearly equal to the value of assets transferred, section 64(1)
(iv) will be attracted. It cannot be contended that the section will not apply
where the consideration has been paid at least in part. Section 64(1) (i’) has
to be strictly construed and only the part of the income referable to the
transfer for inadequate consideration is assessable under section 64(1)
(“iv”).

MONEY PAID TO WIFE TO OBTAIN HER CONSENT FOR ADOPTION - Since

payment of any amount or other reward in consideration of adoption is
prohibited under the Hindu Adoptions and Maintenance Act, the payments
made by an assessee to his wife cannot be treated as consideration paid for
obtaining her consent to adoption. These payments should be treated as
gift to wife and, therefore, the income from such gifts was includible in the
assessee’s income

Condition 6 – There may be change in the identity of transferred asset –

Where cash is gifted by an assessee to wife and the latter deposits the
same in a bank, interest income is includible in the assessee’s total income.
Similarly, if gifted money is invested by wife in house property, rental
income is taxable under section 64.

CAPITAL GAIN ON SALE OF TRANSFERRED ASSETS – If an individual transfer

an asset without consideration to his wife who sells it at a profit, capital
gain arising to wife on sale of assets is chargeable to tax in the hands of the
transferor.

APPROPRIATION WHEN TRANSFERRED ASSET IS INVESTED IN A BUSINESS

-An asset (may be in cash or kind) without adequate consideration. She
invests the asset in a business. How much will be clubbed in the hands of
husband will be determined as follows-

Step one Find out total investment of transfree spouse in the business
on the first day of the previous year.
Step two Find out the amount invested by the transferspouse out of the
assets transferred to her without adequate consideration by
her husband on the first day of the previous year in said
business.
Step three Find out the taxable income (exempt income is not included)
of the transfree-spouse from the business. If the transfree-
spouse becomes a partner of a firm by investing the aforesaid
asset then only interest income from the firm is considered
under step three.
Share of profit from the firm is considered under step three, as
it is exempt under section.
Step four The amount which shall he included in the hands of transferor
is determined as follow –step three x step two-J- step one.

WHEN TRANSFERRED ASSET IS INVESTED IN A FIRM- The aforesaid rule is

also applicable in case transferred asset is invested by the spouse to
become partner in a firm. However, from the assessment year 1993-94,
clubbing provisions are not attracted in respect of share of profit from a
firm where the transferred assets are invested vby way of contribution of
capital. Proportionate interest on capital will, however, continue to be
clubbed if transferred asset is invested in a firm.

INCOME ARISING FROM ACCRETION TO TRANSFER RED ASSETS- If an

assessee gifts units to his or her spouse and subsequently the bonus units
are issued to the spouse, interest on bonus units will not he includible in
the hands of the assessee under sec Lion 64(iv) as there is no transfer of
bonus units by the assessee to the spouse-

When clubbing is not attracted- In the following cases section 64(i)(iv) is not
applicable:
1. if assets are transferred before marriage.
2. if assets are transferred for adequate consideration.
3. if assets are transferred in connection with an agreement to live apart.
4. if on the date of accrual of income, transferee is not the spouse of the
transferor.
5. if property is transferred by a karta of HUF, gifting coparcenary property
to his wife.
6. if property is acquired by the spouse out of pin money(i.e., an allowance
given to the wife by her husband for her dress and usual household
expenses) or household savings.

When individual is assessable in respect of income from assets

transferred to son’s wife[ sec.64(1)(vi)]
The provisions of section 64(1)(vi)are given below-
Conditions – one has to satisfy the following condition-

Condition 1 The taxpayer is an individual.

Condition2 He/she transferred an asset after May 31, 1973.
Condition3 The asset is transferred to his /her son’s wife.
Condition4 Transfer may be direct or indirect.
Condition5 The asset is transferred otherwise than for adequate
consideration.
Condition6 The asset may be held by the transferee in the same form or
in a different form.

CONSEQUENCES IFTHE ABOVE CONDITIONS ARE SATISFIED- If the above

conditions satisfied, then income from the asset is included in the income
of the taxpayer who has transferred the asset.

Provision illustrated- X (or Mrs. X) transfers a bank deposit of Rs. 20000 in

favor of his(or her) son’s wife, without adequate consideration income
accrued to son’s wife shall be included in the income of x( or Mrs. X)

When individual is assessable in respect of income from assets

transferred to a person for the benefit of spouse[sec.64(1)(viii)]
The provision of section 64(1)(vii)are given below-
Conditions- one has to satisfy the following conditions-

Condition 1 The taxpayer is an individual.

Condition2 He/she has transferred an asset.
Condition3 The transfer may be direct or indirect.
Condition4 The asset is transferred to a person or an association of
persons.
Condition5 It is transferred for the immediate for deferred benefit of
his/her spouse.
Condition6 The transfer is without adequate consideration.
CONSEQUENCES IF THE ABOVE CONDITIONS ARE SATISFIED- If the
aforesaid conditions are satisfied then income from such asset to the
extent of such benefit is taxable in the hands of the taxpayer who has
transferred the asset.

Provision illustrated- X transfers government bonds without consideration

to an association of persons subject to the condition that, the interest
income from these bonds will be utilized for the benefit of Mrs. X interest
from bonds shall be included in the income of X.

Clubbing is not attracted for “non-existent” income- If no income or

benefit is accrued or derived by wife, directly or indirectly, out of the
property transferred by the individual, then “non-existent” income or
benefit cannot be included in the income of individual.

Section 64(i) (vii) is attracted even if the transferor and trustee is the
same person –

The capacity of the declarer of trust and his capacity as trustee are different
and after the declaration of trust he holds the assets as a trustee. Under the
transfer of property Act, there can be a transfer by a person to himself or to
himself and another person or persons. For instance if an individual makes
a declaration of trust in respect of certain shares for the benefit of his wife
and appoints himself as trustee, provision of section 64(1)(viii) will
Be attracted.

Clubbing provision cannot be avoided on the ground that assessment is

made on trustee under section161(1)- where, in respect of properties
settled on trust for the benefit of spouse, the spouse was assesses to tax on
her share in the income of the trust under section161(2) such assessment
will not affect the validity of the inclusion of the trust income in the hands
of the settler under section 64(1)(vii)and all the assessments made against
the spouse beneficiary must be annulled and tax recovered if any be
refunded.