Can you be taxed for income earned by somebody else? The short answer is yes - under some circumstances. Just what are these circumstances? When does clever tax planning get just too clever for your own good? As an advisor, knowledge of clubbing provisions in the Income Tax Act can help you help your clients avoid ill-conceived tax avoidance plans, just as you help them avoid ill-conceived investment strategies. Saturday School's Personal Tax Planning series aims to help you broaden the scope of your advice, to include tax planning on all sources of your clients' income streams. Click here to view the series so far.

Clubbing of income is an important principle under Income tax law. Clubbing provisions have been inserted with a view to make tax avoidance difficult and to give clarity on the actual tax liability an individual would face in certain situations.

In general a person is taxed on the income earned by him/her.Nevertheless there are some special circumstances when incomes of other persons are clubbed together in the hands of the assessee. For example,incomes of minor children are clubbed with the incomes of their parents.

Clubbing Provisions

Sections 60 to 64 of the Income Tax act contain various provisions relating to clubbing of income. Situations and circumstances where incomes may be clubbed are listed below.

Transfer of income without transfer of asset

Earnings are clubbed in cases where incomes alone are transferred without transfer of the asset producing the income.For example,when rents generated by a building are given to another person while the building continues to be owned by the transferor.

Revocable transfer

Similarly when the transfer of an asset is revocable, that is, the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.As per Section 61 of the Income Tax act, if a transfer is held to be a revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. The provisions of section 61 will not apply in case of a transfer by way of trust which is not revocable during the life time of the beneficiary or a transfer which is not revocable during the lifetime of the transferee.

Remuneration received by spouse

Remuneration received by spouse from a concern in which the individual is substantially interested will be clubbed in the hands of the individual.The conditions for this to happen are that the spouse should be employed by the concern and he//she is employed without any technical, professional knowledge or experience; that is, remuneration is not justified. An individual shall be deemed to have substantial interest in any concern, if such individual alone or along with his relatives beneficially holds at any time during the previous year 20% or more of the equity shares (in case of a company) or is entitled to 20% of profit (in case of concern other than a company).

Assets transferred to spouse without adequate consideration

Income from assets transferred to spouses without adequate consideration can be clubbed in the hands of the individual.Income from transfer of house property without adequate consideration will also attract clubbing provisions, however, in such a case clubbing will be done as per section 27 and not under section 64(1)(iv). The clubbing provisions of section 64(1)(iv) will apply even if the form of asset(from cash to securities or vice versa) is changed by the transferee-spouse.

When clubbing provisions do not apply in case assets transferred to spouse

The clubbing provisions of section 64(1)(iv) are not applicable in the following situations:

1. If the transfer of asset is for adequate consideration;

2. If the transfer of asset is in connection with an agreement to live apart;

3. If the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income;

4. If on the date of accrual of income, transferee is not spouse of the transferor (i.e. the relation of husband and wife does not exist).

Assets transferred to son's wife without adequate consideration

If an individual transfers assets to his/her son's wife income arising from that asset would be clubbed in the hands of the individual. As per section 64(1)(vi), if an individual transfers (directly or indirectly) his/her asset to his/ her son's wife otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor being father-in-law/mother-in-law).The provisions of clubbing will apply even if the form of asset is changed by the transferee-daughter-in-law. The clubbing provisions will not apply if the transfer is made before the date of marriage or if on the date of accrual of income the relation of father-in-law/mother-in-law and daughter-in-law does not exist.

Assets transferred to any person for the benefit of spouse or for the benefit of son's wife without adequate consideration

Even assets transferred for inadequate consideration to other persons, or association of persons, the income from which benefits spouse or son's wife can be clubbed with the income of the transferor.

Minor child's income

The income of a minor child is clubbed with the income of his/her parent whose income (excluding minor's income) is higher. However income of minor child earned on account of manual work or any activity involving application of his/her skill, knowledge, talent, experience, etc. will not be clubbed with the income of his/her parent. However, accretion from such income will be clubbed with the income of parent of such minor. If the marriage of parents does not sustain, then minor's income will be clubbed with the income of parent who maintains the minor. These provisions do not apply to a minor suffering from a disability.

Transfer of assets to Hindu Undivided Family

According to the income tax act, section 64(2), when an individual, being a member of HUF, transfers his property to the HUF otherwise than for adequate consideration or converts his property into the property belonging to the HUF (it is done by impressing such property with the character of joint family property or throwing such property into the common stock of the family), then clubbing provisions will apply as follows:

Before partition of the HUF, entire income from such property will be clubbed with the income of transferor.

After partition of the HUF, such property is distributed amongst the members of the family. In such a case income derived from such property by the spouse of the transferor will be clubbed with the income of the individual and will be charged to tax in his hands.

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