Income Tax 267

CHAPTER 4: CLUBBING OF INCOME

• 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

Section 60 – Transfer of income without transfer of Asset

If Only income is transferred without transfer of asset , then such income is to be clubbed
in the hands of transferor.
E.g. 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.

Section 61 - Revocable transfer of Asset

If only asset is transferred on revocable basis, then income from such assets shall be clubbed
in the hands of transferor

Section 62 – Exception of Section 61

Section 61 will not apply to any income arising to any person if there is –
1. A transfer by way of trust which is not revocable during the lifetime of beneficiary; and
2. Any other transfer, which is not revocable during the lifetime of transferee
Provided the transferor does not derive any direct or indirect benefit.
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.
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.

Section 63 – Meaning of Revocable Transfer

Transfer is deemed to be revocable if –

(a) It contains any provision for the re-transfer , 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
 Income Tax 269

Note: Once the transfer is revocable transfer, entire income from transferred asset is
included in the total income of Transferor

EXAMPLE 1
MR. J TRANSFER HOUSE PROPERTY FOR LIFETIME OF MR. F , WHO LET OUT PROPERTY AT 50,000 PER
MONTH RENT TO MR. S

EXAMPLE 2
MR. J TRANSFER HOUSE PROPERTY FOR LIFETIME OF MR. F ON A CONDITION THAT MR. F WILL PAY
50,000 PER MONTH TO MR. J
MR. F EARNS RENTAL INCOME OF ₹1,20,000 FROM SUCH HOUSE PROPERTY

Illustration 1
Mr. A transferred 2,000 debentures of ₹100 each of W Ltd. to Mrs. A on 13.05.2024 without
consideration. The company paid interest of ₹130,000 in September, 2024 which was given
as a loan by Mrs. A to K in October, 2024. K paid interest of ₹13,000 upto March, 2025. How
would both the interest income be charged to tax in assessment year 2025–26?

Section 64 – Provisions related to Spouse, Son’s wife, HUF and Minor Child

Provisions related to Spouse:-

• Remuneration to Spouse
• Assets transferred to Spouse on non-revocable basis
• Capital invested in Spouse’s business

Remuneration to Spouse

If the spouse of any individual receives any salary , commission , fees or other remuneration
from a concern where such individual has substantial interest , then such remuneration shall
be clubbed in hands of such individual
No Clubbing shall be done in the above case , if :-
• Such remuneration is paid because of technical or professional qualifications of the
spouse , or
• Skills and experience possessed by the spouse

Meaning of Substantial Interest

If individual along with their relatives hold atleast 20% of ownership or has atleast 20% shares
in profits of the concern at any time during the PY
Relative means –
• Spouse of the individual
• Brother / Sister of the individual
• Lineal ascendent or descendent of the individual
 Income Tax 271

Notes:
1. In case if both husband and wife has substantial interest and both receives
remuneration , then clubbing provisions will apply and income will be added in the
hands of such spouse , whose income is higher before adding the clubbed income
2. In case if other income does not exist , then clubbing will apply to such individual
whose income is higher
3. Once Such clubbing is applied in the hands of any of the spouse , then it will be
continue to be clubbed in such hands in subsequent years also , irrespective of the level
of income unless Assessing Officer is satisfied to club such income in the hands of other
spouse

Example 3
Mr. C is 12th Pass and holding 21% equity in X Ltd. And gets salary of ₹6,00,000 per annum
without having any prior knowledge and skills. Mrs. C (Wife) is 5th Fail and holding 22%
equity in X Ltd. And gets salary of ₹7,00,000 per annum without having any prior knowledge
and skills. Show Tax treatment

Illustration 2
Mr. Ram, entered into the following transactions during the previous year 2024–25:
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 01.04.2024 to 31.03.2025 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, [Link] the previous year 2024–25, 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. 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.

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. Mrs. 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 Mrs. Ram, assuming that they do not have any other income.

Click Here to Buy The Combo

 Income Tax 273

Illustration 4
Will your answer be different if Mrs. Ram 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. Mrs. 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. Mrs. 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 Mrs. Ram.

Income from assets transferred to spouse on non-revocable basis

If the individual transfers any asset (Other than House Property) to the spouse , without
consideration or inadequate consideration , then the income arising on such transferred
asset shall be clubbed in the hands of transferor
• If there is inadequate consideration, clubbing provisions shall be applicable only with
regard to the income relating to that part of consideration which is considered to be
inadequate
• Provisions of clubbing shall be apply if the relationship of spouse exists both at the
time of transfer of assets as well as at the time of accrual of income
• Income from Clubbed income shall not be clubbed
• If the asset is transferred under an agreement to live apart, clubbing provisions shall
not apply
• If an individual transfers a house property to the spouse, then transferor shall be
deemed to be the owner of the house property

Capital contribution in Spouse’s business

𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 𝐨𝐨𝐨𝐨 𝐭𝐭𝐭𝐭𝐭𝐭 𝐲𝐲𝐲𝐲𝐲𝐲𝐲𝐲 𝐱𝐱 𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢 𝐛𝐛𝐛𝐛 𝐭𝐭𝐭𝐭𝐭𝐭 𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢𝐢 𝐚𝐚𝐚𝐚 𝐨𝐨𝐨𝐨 𝟏𝟏𝟏𝟏𝟏𝟏 𝐝𝐝𝐝𝐝𝐝𝐝 𝐨𝐨𝐨𝐨 𝐏𝐏𝐏𝐏
Amount to be clubbed = 𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂 𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞𝐞 𝐢𝐢𝐢𝐢 𝐭𝐭𝐭𝐭𝐭𝐭 𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛𝐛 𝐚𝐚𝐚𝐚 𝐨𝐨𝐨𝐨 𝟏𝟏𝟏𝟏𝟏𝟏 𝐝𝐝𝐝𝐝𝐝𝐝 𝐨𝐨𝐨𝐨 𝐏𝐏𝐏𝐏
If any person has transferred the asset to the spouse and spouse has invested it in some
partnership firm as capital contribution , in this case –
• Interest received from the partnership firm shall be clubbed
• If any salary has been received from firm , it will not be clubbed
• If any salary has been received from the profits of the firm , it will be exempt
Note : If any person has given loan to spouse , income earned by spouse, by investing such
loan amount then clubbing provision shall not applied.

Example 4
Capital as on 01/04/24 was ₹5,00,000
Mr. A gifted ₹7,00,000 to Mrs. A on 01/04/24 which she Invested In business immediately
a) Profit of PY 2024 -25 = ₹5,00,000
b) Profit of PY 2025-26 = ₹7,00,000
Mrs. A transferred 50% of profit to Mr. A as Gift
Show Tax Implication
 Income Tax 275

Illustration 6
A proprietary business was started by Smt. X in the year 2020. As on 01.04.2023, her capital
in business was 4,00,000. Her husband gifted ₹3,00,000 on 01.04.2023, which Smt. X invested
in her business on the same date. Smt. X earned profits from her proprietary business for
the Financial year 2023–24 ₹2,00,000 Financial year 2024–25 ₹2,40,000 Financial year 2025–
26 ₹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.
Transfer of asset for benefit of spouse
If any asset is transferred by any individual to any other person, but for the benefit of the
spouse , then income from such assets shall also be clubbed in the hands of transferor
Provisions related to Son’s wife
Same Provisions as that of spouse
Note :- The relation of Son’s Wife must exist both at the time of transfer as well as accrual
of income

Illustration 7
Mr. Ram gifts ₹1 lakh to his wife MR. Ram on April 1, 2024 which she invests in a firm on
interest rate of 14% per annum. On January 1, 2025, 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, 2025 to March 31, 2025 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-in law?
Provisions related to minor
Income of minor child , including minor married daughter shall be clubbed in the hands of
either of the parent whose before such clubbing is higher
Note :-
• Once such clubbing is done in any PY then it will continue to be clubbed in the hands of
same parent in subsequent years also , irrespective of the level of income unless the
Assessing Officer is satisfied to change
• If child is maintained by a single parent , then clubbing shall be apply in hands of that
parent who maintains the child
• If parents of minor child is not alive then the income of minor child cannot be clubbed
and guardian of minor child shall file the return of such income on behalf of the minor
child
• Under optional tax regime – Whenever minor child’s income is clubbed , exemption up
to ₹1500 per child can be claimed
Minor child’s income shall not be clubbed if :-
1. Income is earned by minor child through manual or physical work
2. Income earned by minor child through application of knowledge or skills
3. If minor child is suffering from any disability
 Income Tax 277

Illustration 8
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 9
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

Section 64(2) – Provisions related to HUF

If any member of HUF transfers his property to their HUF without consideration , then
income arising from such asset shall be clubbed in the hands of such member
During Partition of HUF – Clubbing provisions 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

Section 65 – Liability of transferee in clubbing

A.O. has the power to collect the tax from transferee also, in case the tax cannot be
recovered from transferor

Cross Transfer

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.

Example :-
A making gift of ₹ 50,000 to the wife of his brother B for the purchase of 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
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 are cross transfers to reduce their burden of Taxation
Accordingly, the income arising to Mrs. B from the house property should be included to the
total income of B and the dividend from the shares transferred to A’s minor son would be
taxable in the hands of A.
 Income Tax 279

CHAPTER 5: SET-OFF AND CARRY FORWARD OF LOSSES

Set-off of Losses

Intra Head Adjustment (Section 70)

Set off of loss from one source of income against another source under the same head of
income is known as Intra Head Adjustment. It is also known as Inter Source Adjustment.

Inter Head Adjustment (Section 71)

Set off of loss from one head of income against another head of income is known as Inter
Head Adjustment.
Heads of Income Intra Head Adjustment Inter Head Adjustment
Loss under head House Set off with any other Loss is allowed to be set
Property income of house property. off with Income under any
head except from Casual
Income
Note: -
1. Loss of Maximum Rs.
2,00,000 is allowed to
be adjusted and
remaining loss shall be
Carry forward
2. No Inter Head
Adjustment is
available under new
regime with respect to
loss under head House
Property.
Loss under head PGBP
• Specified Business Can only be adjusted Not Applicable.
Loss (S.35AD) against specified business
income
• Speculative Business Can only be adjusted Not Applicable.
Loss against speculative
business income
• Non-Speculative Can be adjusted against Can be adjusted against
Business Loss any other business income any other head except
without any monetary Income under head salary
restrictions and Casual Income.
 Income Tax 281

Loss under head Capital Gain

• Short term capital Can be adjusted against Not Applicable
loss any long-term Capital Gain
(LTCG u/s 112 & LTCG u/s
112A) or Short term Capital
Gain (STCG u/s 111A or
other STCG)
• Long term capital Can be adjusted only Not Applicable
loss against Long term Capital
Gain (LTCG u/s 112 & LTCG
u/s 112A)
Loss under head other
sources
• Loss of Owning & Can be adjusted only Not Applicable
Maintaining Race against Income from
Horses Owning and Maintaining
Race Horses
• Any other loss under Can be adjusted against Can be adjusted against
head other sources any other income from any other head except
other sources except from from Casual Income
Casual Income

Notes :-
1. If there is income available then loss has to be adjusted against such income , i.e. Set-
off is mandatory, not optional.
2. Only Intra-Head Adjustment is allowed once loss is carried forward to next assessment
year.
3. No loss is allowed to be set off against Casual Income, unexplained income,
unexplained investment, cash credit etc.

Order of Set-Off under head PGBP

Current year Business income before Depreciation -
(-) Depreciation of Current Year (-)
(-) B/F Business loss (-)
(-) Unabsorbed Depreciation / Scientific Research Expenditure / Family (-)
Planning Promotion Expenditure
Income/Loss under head PGBP -

Click Here to Buy This Book

 Income Tax 283

Carry Forward of Losses

Losses Carry Forward
1. Loss under head house property C/F for Maximum 8 AY
2. Specified Business Loss (S.35AD) C/F Without any limit
3. Speculative Business Loss C/F for Maximum 4 AY
4. Non-Speculative Business Loss C/F for Maximum 8 AY
5. Long Term Capital Loss or Short Term Capital Loss C/F for Maximum 8 AY
6. Loss from Owning & Maintaining Race Horses C/F for Maximum 4 AY
7. Unabsorbed Depreciation / Scientific Research C/F Without any limit
Expenditure / Family Planning Promotion
Expenditure,

Illustration 1
Mr. Rajeev submits the following information:
Particulars Amount
Income under the head salary ₹6,50,000
Income from House-I ₹55,000
Loss from house-II (self-occupied property) ₹1,25,000
Loss from house-III ₹1,90,000
Loss from leather business ₹68,000
Profit from cloth business ₹1,70,000
Business loss of chemical business acquired by Inheritance ₹45,000
Brought forward loss of discontinued business of textile relating to ₹50,000
financial year 2017–18
Long term capital gain on transfer of listed equity shares on which STT ₹75,000
was paid
Short term capital loss in equity-oriented funds on which STT was paid ₹35,000
Income from crossword puzzles ₹12,000
Dividend from foreign company ₹8,500
Loss on owning and maintenance of race horses ₹7,500
Income from owning and maintenance of race bulls ₹9,000
Compute the gross total income and losses to be carried forward of Mr. Rajeev

Illustration 2
Mr. Shyam, a resident of Chandigarh, provides the following information for the financial
year 2024–25:
Particulars Amount
Income from textile business ₹4,60,000
Income from speculation business ₹25,000
Loss from gambling ₹12,000
Loss on maintenance of race horse ₹15,000
 Income Tax 285

Eligible current year depreciation of textile business not adjusted in ₹5,000

the income given above.
Unabsorbed depreciation of Assessment year 2022–23 brought ₹10,000
forward
Speculation business loss of Assessment year 2022–23 ₹30,000
Compute the Gross total Income of Mr. Shyam and any other item of expense or loss eligible
for carry forward.

Illustration 3
Mr. X provides the following details for the previous year ending 31.03.2025.
1. Income under the head salary from XYZ Ltd. ₹6,00,000
2. Interest on FD with SBI for the Financial Year ₹72,000 (Net of TDS @10%)
3. Determined long term capital loss ₹96,000
4. Long term Capital gain ₹75,000
5. Loss of minor son ₹90,000 computed in accordance with the provisions of Income Tax
Act. Mr. X transferred his own house to his minor son without adequate consideration
few years back and minor son let it out and suffered loss.
6. Loss of his wife’s business (₹2,00,000). She carried business with funds which Mr. X
gifted to her.
You are required to compute taxable income.

Illustration 4
Mr. X, a resident individual, furnishes the following particulars of his income and other
details for the previous year 2024–25.

Particulars Amount
Income under the head salary ₹15,000
Income from Business ₹66,000
Long term capital gain on sale of Land ₹10,800
Loss on maintenance of Race Horses ₹15,000
Loss from Gambling ₹9100

The other details of unabsorbed depreciation and brought forward losses pertaining to
Assessment Year 2024–25 are as follows:
1. Unabsorbed depreciation ₹11,000
2. Loss from Speculative business ₹22,000
3. Short term capital loss ₹9,800
Compute the Gross total income of Mr. X for the Assessment Year 2025–26 and the Amount
of loss, if any, that can be carried forward, or not.
 Income Tax 287

Illustration 5
Mr. X an assessee aged 61 years gives the following information for the previous year
31.03.2025 :

Particulars Amount
Loss from profession ₹1,05,000
Capital loss on the sale of property-short term ₹55,000
Capital gains on sale of shares-long term ₹2,05,000
Loss in respect of self occupied property ₹15,000
Loss in respect of let out property ₹30,000
Share of loss from firm ₹1,60,000
Income from card games ₹55,000
Winnings from lotteries ₹1,00,000
Loss from horse races in Mumbai ₹40,000
Medical insurance premium paid by cheque ₹18,000
Compute the total income of Mr. X.

Illustration 6
Mr. X furnishes the following details for year ended 31.03.2025.
Particulars Amount
Short term capital gain ₹1,40,000
Loss from speculative business (₹60,000)
Long term capital gain on sale of land ₹30,000
Long term capital loss on sale of shares (STT not paid) ₹1,00,000
Income from business of textile (after allowing C.Y. depreciation) ₹50,000
Income from activity of owning and maintaining race horses ₹15,000
Income under the head salary ₹1,00,000
Loss from house property (₹40,000)

Following are the carry forward losses:

1. Losses from activity of owning and maintaining race horses-pertaining to A.Y. 2020–
21 ₹25,000
2. Carry forward loss from business of textile 60,000-Loss pertains to A.Y. 2018-19.

Click Here to Buy The Combo