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NEERAJ GUPTA CA IPCC TAX CLASSES CLUBBING OF INCOME

www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 1

CHAPTER -8CLUBBING OF INCOME

[Section 60 – 65]

Section Particulars

60 Transfer of income without transfer of assets.

61 Revocable transfer of assets

62 Transfer irrevocable for a specified period

63 Transfer and revocable transfer defined

64 Income of an individual to include income of spouse, minor child etc.

64 (1) (ii) Remuneration of a spouse from a concern in which the other spouse has

substantial interest

64 (1) (iv) Income from asset transferred to the spouse

64 (1) (vi) Income from asset transferred to the son’s wife

64 (1) (vii) Income from asset transferred to any person for the benefit of the spouse of thetransferor

64 (1) (viii) Income from asset transferred to any person for the benefit of the son’s wife ofthe transferor

64 (1A) Clubbing of income of a minor child

64 (2) Income from self acquired property converted to joint family property.

65 Liability of person in respect of income included in the income of another person.

Question 1 : Normally, a person is himself taxable for income received by him. Explain thevarious situations, when one person is taxable for the incomes earned and received by others.

Ans: Income tax is levied at progressive rates and persons in the higher income brackets paytax at a higher rate than those in lower brackets. By transfers and arrangements, which havethe effect of diverting a part of a person's normal income to someone else, it is thus possible toreduce the incidence of tax. In order to counteract such steps, certain special provisions havebeen made in the Act. Some of these provisions relate to the inclusion in one spouse's totalincome of income arising to the other spouse or in the total income of a parent income arising to

his or her minor child.

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TRANSFER OF INCOME WHERE THERE IS NO TRANSFER OF ASSETS [Section 60]

• All income arising to any person

• by virtue of a transfer

• whether revocable or not ,

• where there is no transfer of the assets from which the income arises,• shall be chargeable to income-tax

• as the income of the transferor

• and shall be included in his total income.For example, Mr. X transfers the income from house property his friend Mr. Y for the life time ofMr. Y without transferring the house property to him. Here the income from house property willbe clubbed with the income of Mr. X.

REVOCABLE TRANSFER OF ASSETS (SEC. 61).

• All income

• arising to any person

• by virtue of a revocable transfer of assets• is to be included

• in the total income of the transferor.

A transfer is deemed to be revocable if:

(i) it contains any provision for the transfer directly or indirectly of the whole or any part ofthe income or assets to the transferor [Sec. 63(a)(i)], or

(ii) it, in any way, gives the transferor a right to resume power directly or indirectly over thewhole or any part of the income or assets [Sec. 63(a)(ii)].

If the transfer is revocable, the entire income of the transferred asset is includible in the

total income of the transferor. This is so even if only part of the income of the transferredasset had been applied for the benefit of the transferor.

Important note: The above rule is applicable even if the power to revoke has not beenexercised so far.

IRREVOCABLE TRANSFER OF ASSETSSECTION 62. Where an asset is transferred:(i) by way of trust which is not revocable during the lifetime of the beneficiary, or(ii) in the case of any other transfer, which is not revocable during the lifetime of the

transferee.

then all incomes arising from such asset shall be included in the income of thetransferee and not in the income of the transferor.

This exception shall apply only if the transferor derives no direct or indirect benefit fromsuch income in either case.








However, all income arising to any person by virtue of any such transfer shall bechargeable to income-tax as the income of the transferor as and when the power torevoke the transfer arises (i.e. on the death of the beneficiary/transferee), and shall thenbe included in his total income.

It is immaterial when this actual power to revoke is exercised.

Section 64(1)(ii) Income of individual to include remuneration of spouse

• In computing the total income of any individual,

• there shall be clubbed

• 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.

No such clubbing shall take place in relation to any income arising to the spouse where thespouse possesses technical or professional qualifications and the income is solelyattributable to the application of his or her technical or professional knowledge andexperience.

The words "technical or professional qualifications" do not necessarily relate to technicalor professional qualifications acquired by obtaining a certificate, diploma, degree or in anyother form a recognized body like a university, institute, etc.

In simple terms, Professional qualification means, fitness to do a job or ability to adopt someoccupation requiring manual or other intellectual skills. Similarly technical qualificationmeans expertise in a particular field like science, commerce, management etc.

An individual shall be deemed to have a substantial interest in a concern.

(a) In a case where the concern is a company, if he himself or along with his relativesbeneficially holds, at any time during the previous year (i.e. beneficial owner ship isrelevant than the registered ownership) equity shares carrying not less than 20% votingpower.

(b) In any other case, if such person is entitled, or such person and one or more of hisrelatives are entitled in the aggregate, at any time during the previous year , to notless than twenty per cent of the profits of such concern.

Relative - Meaning of - Relative in relation to an individual means the husband, wife, brother

or sister or any lineal ascendant or descendant of that individual.

Concern: It includes both business concerns and professional concerns. Similarly bothproprietary and non proprietary concerns are included.

When both husband and wife have a substantial interest in the concern and both are inreceipt of remuneration from the concern, the remuneration will be included in the totalincome of husband or wife whose total income, excluding such remuneration, is greater.








Where such income is once included in the total income of either spouse, any suchincome arising in any subsequent year will not be included in the total income of the otherspouse unless the Assessing Officer is satisfied after giving that spouse an opportunity ofbeing heard that it is necessary to do so.

Salary - How computed - For the purpose of clubbing under section 64(1)(ii), salary has tobe computed in accordance with the provisions of sections 15 to 17. It does not make any difference if she has joined the concern before marriage.

If only one is employed then clubbing shall be done in normal way, ignoring the aspect,whose income is greater.

Example : ABC Ltd. is a company in which Mr. A has a shareholding of 25% and Mrs. A has ashareholding 35%.Salary of Mr. A = 1,80,000 p.a.Salary of Mrs. A = 2,20,000 p.a.

Interest Income of Mr. A = 50,000Foreign dividend Income of Mrs. A = 35,000

Computation of Total Income

Mr. A Mrs. ASalary 1,80,000 -Income Clubbed U/s 64(1) (ii) 2,20,000 -Interest Income 50,000 -Foreign dividend - 35,000Gross Total Income 4,50,000 35,000

INCOME FROM ASSETS TRANSFERRED TO THE SPOUSE [SECTION 64(1)(iv)]:

• In computing the total income of an individual,

• all such income

• as arises directly or indirectly to the spouse of such individual

• from assets

• (other than house property)

• transferred directly or indirectly to the spouse of such individual

• otherwise than for adequate consideration

• or in connection with an agreement to live apart

• shall be included.

As per this provision, if an individual transfers any asset other than houseproperty to his/her spouse, the income from such an asset shall be included in the totalincome of the transferor.

This provision is not applicable to house property because in that case thetransferor is deemed to be the owner of the house property and the annual value of theproperty is taxed in the hands of the transferor as per section 27.








The income from the transferred assets shall not be clubbed in the following cases:(i) if the transfer is for adequate consideration;(ii) the transfer is under an agreement to live apart;(iii) if the relationship of husband and wife does not exist, either at the time of transfer of

such asset or at the time of accrual of the income e.g., A makes a gift to his finance

(would be wife) then the income arising on the amount so gifted, shall not be taxable inthe hands of A, even after their marriage as the relationship of husband and wife doesnot exist at the time of making the gift. Similarly, if A makes a gift to his wife and later on

A divorces his wife, income arising after such event will not be clubbed.

Similarly, if transferor spouse dies, later on clubbing shall not apply.

(iv) If any property is acquired by the wife out of an allowance given by her husband for herpersonal expenses (called pin money).

Example 1. Mr X gifts a Flat to Mrs. XRental Income is taxable for Mr. X U/s 27 of House Property as deemed Owner.

Example 2. Mr. X Gifts bonds to Mrs. XInterest income is taxable for Mr. X U/s 64(1) (iv) of clubbing of income.

Transfer includes indirect transfer - If the two or more transfers are inter-connected and areparts of the same transaction, the aforesaid rule of clubbing is applicable. For instance, if X giftsor cross transfers Rs. 20,000 to Mrs. A and A gifts property worth Rs. 20,000 to Mrs. X, thetransaction would be indirect without consideration by X to Mrs. X and by A to Mrs. A.

How to compute income from transferred asset - The income from assets transferred mustbe 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.

When the identity of transferred asset is changed - Where cash is gifted by an assessee tohis wife and the latter invests the same in units and deposits, interest income is included inassessee's total income.

Capital gain on sale of transferred assets - If an individual transfers an asset withoutconsideration to his wife who sells it at a profit, capital gain arising to wife on sale of asset ischargeable to tax in the hands of the transferor.

INCOME FROM ASSETS TRANSFERRED TO THE SON’S WIFE [SECTION 64(1)(vi)] :


•

there shall be clubbed• all such income

• as arises

• directly or indirectly

• to the son’s wife,

• of such individual,

• from assets transferred directly or indirectly to the son’s wife

• by such individual

• otherwise than for adequate consideration.








The relationship of father-in-law (or mother-in-law) and daughter-in-law should subsist both atthe time of t ransfer of asset and at the time of accrual of income. It means transfer of assetbefore son's marriage by an individual to his prospective daughter-in-law is outside the scope ofclubbing even if income is accrued after son's marriage.

INVESTMENT OF FUNDS IN BUSINESS or FIRM BY SPOUSE / SON’S WIFE

Where the assets transferred directly or indirectly by an individual to his spouse or son's wife(hereafter referred to as "the transferee") are invested by the transferee in a business, thenproportionate income shall be clubbed with the income of the transferor. It shall be computedby following formula:

The amount taxable for transferor =

Taxable business income to transferee X How much is gifted money out ofTotal investment on 1st day of PY

--------------------------------------------Total investment on 1st day of P/Y

Where the assets transferred directly or indirectly by an individual to his spouse or son's wife(hereafter referred to as "the transferee") are invested by the transferee in the nature ofcontr ibution of capital as a partner in a firm, then proportionate interest shall be clubbed withthe income of the transferor.

To Illustrate, Mr. A makes a gift of Rs. 25,000 to his wife Mrs. A on 25.03.2012. Mrs. A on26.03.2012 invest Rs. 75,000 (25,000 out of gift and 50,000 of her own) in a partnership firm asher capital. During the year ended 31.03.2013 she earns an interest of Rs. 9,900 from the firm.Therefore, the following amount shall be clubbed with the income of Mr. A for the previous year

31.03.2013:

25,000-------- X 9,900 = 3,30075,000

It may be noted that the share of profit from partnership firm is exempt under section 10(2A)and therefore there is no question of clubbing of share of income from partnership firm if thespouse invest the transferred funds in partnership firm. Also there is no question of clubbingthe remuneration received by the spouse from such firm in which she invests the transferredfunds since remuneration allowed is for actual working and has no relation with the capitalinvested.








Example 1:Mrs. X Gifts Rs. 5 lacs to Mr. XMr. X Borrowed Rs.10 lacs from Bank

Total 15 lacs invested in Business on 1st Day of Previous Year.

Business Income = 6,00,000Clubbing for Mrs. X = 6,00,000 x 5,00,00015,00,000

= 2,00,000 Rs.Taxable income for Mrs. X = 2,00,000Taxable income for Mr. X = 4,00,000

Example 2.Mrs. X Gifts Rs.5 lacs to Mrs. XMr. X borrowed Rs.10 lacs from BankTotal 15 lacs invested in Partnership Firm

1. Interest on Capital = 1, 80,000Clubbing to Mrs. X = 1, 80,000 x 5,00,00 = 60,000

15,00,000

2. Salary = 8,000 p.m.No Question of Clubbing.Taxable for Mr. X

3. Share of Profit = 2,00,000Exempt U/s 10(2A)

Please note: Above two provisions only for two specified relations.

Income from assets transferred to a person for the benefit of spouse or son’s wife[Section 64(1)(vii) & 64(1)(viii )]:


• there shall be clubbed

• all such income as arises directly or indirectly

• to any person or association of persons

• from assets transferred directly or indirectly,

• otherwise then for adequate consideration,

• to the extend to which

• the income• from such assets

• is for the immediate or deferred benefit

• of his or her spouse

• or

• for the immediate or deferred benefit

• of his son’s wife.








Example: X transfers a factory to an association of persons subject to the condition that out ofthe annual income of Rs 20 lacs, Rs 3 lacs shall be utilized for the benefit of Mrs X. In this case,Rs 3 lacs shall be included in the income of Mr X.

INADEQUATE CONSIDERATION

Extent of inclusion under section 64(1)(iv), (vi), (vii) and (viii) in cases of inadequateconsideration: There may be cases where the transfer of assets to spouse is for considerationpassed, but the amount of the consideration is not adequate. Property worth Rs. 1,50,000 mayhave been transferred for a consideration of Rs. 1,00,000 only. In such cases, the income fromthe property includible in the spouse would be in the proportion of the inadequacy of theconsideration, i.e., Rs. 50,000. Thus, if the income from the property is Rs. 3,000, only Rs.1,000 will be included under these provisions in the transferors income.

Income of the minor is to be clubbed [64(1A)]:


• there shall be included

• all such income as arises or accrues• to his minor child

• not being a minor child suffering from any disability of the nature specified in section80U.

• Provided that nothing contained in this sub-section shall apply in respect of such incomeas arises or accrues to the minor child on account of the following:

(a) manual work done by him;(b) activity involving application of his skill, talent or specialised knowledge and experience.

Explanation : Where the marriage of his parents subsists, income of the minor shall beincluded in the income of that whose total income (excluding the income includible under this

sub-section) is greater. Where however the marriage of his parents does not subsist, it shall be included in the

income of that parent who maintains the minor child in the previous year.

Where any such income is once included in the total income of either parent, any suchincome arising in any succeeding year shall not be included in the total income of the otherparent, unless the Assessing Officer is satisfied after giving that parent an opportunity ofbeing heard, that it is necessary to do so.

Since the income includes loss, the loss of a minor child will be clubbed in the hands of theparent and can be claimed by him.

After inclusion of minor child’s income. The assessee will be entitled to exemption from histotal income to the extent of the income so included subject to a maximum of Rs. 1,500 per

minor child u/s 10(32). When the child attains majority: The provisions of Section 64 shall not apply when the

child has attained majority.

Income shall always be clubbed even if income arises not by transferring properties by theparents e.g. income arising from shares/ deposits gifted by uncles/ grandparents etc. will beclubbed with the income of the parents. Similarly if a minor earns any interest or otherincome, by investing money earned from his professional skill, it will still be clubbed becausehere the money is not being earned by his skills.








IF PARENTS ARE DEAD: In this situation, clubbing shall not apply with grandparents orrelatives. Similarly no assessment in the name of minor in this situation. Concept of deemedassessee shall apply in this case i.e. somebody shall file tax returns on behalf of minor.

INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED TO JOINT-FAMILYPROPERTY [SECTION 64(2)]

• Where an individual,

• who is a member of Hindu Undivided family,

• converts his private property as a property of HUF

• otherwise than for adequate consideration,

• then the income from such property

• shall continue to be included

• in the total income of the individual.

In other words, if self-acquired property of an individual is treated/ converted into joint familyproperty without adequate consideration, the income derived by the joint family on account of

such property shall be included in the total income of the individual who was the owner of suchself-acquired property.

For example, X owns a house property from which he derives an income of Rs 3 lacs perannum. With effect from 1.4.2007, he converts this property as the property of an HUF of whichhe is a member. Although the income shall from now be received by the HUF but it shall bedeemed to be the individual income of X and shall be included in computation of his totalincome under the head ‘Income from house property’.

Implication in the case of subsequent partition: Where the converted property has been thesubject matter of partition, amongst the members of the family, the income derived from suchconverted property as is received by the spouse on partition shall be clubbed in the hands of the

transferor.

Such income shall be deemed to arise to the spouse from assets transferred indirectly bythe individual to the spouse, without adequate consideration.

In the example given above if there is a partition in the family and there are four membersentitled to share in the HUF property i.e. X, Mrs. X, a minor child and a major child, assumingthey decide to share the property equally, then the income from the property shall be treated asfollows:

• income from 1/4th share of X – Rs 75,000 (taxable for X)

• income from 1/4th share of Mrs. X - Rs 75,000 ( to be clubbed with the income of Mr. X)

•

income from 1/4

th

share of minor child of X –Rs 75,000 ( to be clubbed with the income of Xu/s 64(1A). However, X can claim exemption upto Rs 1,500 u/s 10(32).

• Income share of Major child shall be treated as his personal income and he will submit hisreturn of income separately along with other incomes, if any.








INCOME ON INCOME IS NOT TO BE CLUBBED [Income arising from accretions totransferred assets]: It may be noted that under all the provision discussed above, incomearising from assets transferred without adequate consideration is to be clubbed. But the incomederived on the accretion of such property cannot be clubbed. For example, if bonds aretransferred by Mr. X to Mrs. X without consideration, interest income shall be clubbed with the

income of Mr. X. But if Mrs. X accumulates such interest income and invests in shares of aforeign company then dividend income of such shares shall not be clubbed and shall be taxableas income of Mrs.X.

INCOME INCLUDED LOSS:For the purpose of above provision the word income includes loss. Thus, under all the abovesituations, where the income arising to one person is to be clubbed in the hands of anotherperson, in the event of loss, the loss shall be taken into account in computing the income ofsuch person. The clubbed person shall be entitled for carry forward of loss.

Section 65 LIABILITY OF THE TRANSFEREE IN RESPECT OF CLUBBED INCOMEWhere, by reason of the provisions contained in section 60 to 64 or section 27, the income fromany asset is to be clubbed with the income of the transferor, then the transferee shall on theservice of a notice of demand by the Assessing Officer, shall be liable to pay that portion of thetax levied on the transferor which is attributable to the income so clubbed.

For example, Mr. A transfers his house property to B under a revocable transfer. The incomefrom house property is Rs. 50,000. Mr. A has other incomes of Rs. 2,00,000. The AssessingOfficer includes Rs. 50,000 in the assessment of A in view of section 61. A notice of demand ofRs. 5,150 is served on A and A goes underground. The Assessing Officer can recoverproportionate tax on Rs. 50,000 from Mr. B under section 65, i.e., Rs. 1,030 which is computedas below.

50,000-------------- X 5,150 = 1,030

2,50,000

Head of income under which the clubbed income will be included : First compute theincome in the hands of actual recipient under the relevant head of income as if the actualrecipient of income is liable to pay tax. After computing the income in the hands of recipient, itwill be included under the same head of income in the hands of other person.








Summary of the Chapter

Sec. 60 Transfer of income, no transfer of Asset

Sec. 61 Revocable transfer of Asset

Sec. 62 Irrevocable transfer of Asset

Sec.64(1) (ii) Remuneration to spouse without qualification substantialinterested individual

Sec.64(1) (iv) Transfer of Asset to spouse (Relationship both on date of transfer& date of income)

Sec.64(1) (vi) Transfer of Asset to Son’s wife (Relationship should exist both atthe date of transfer & date of income)

Sec. 64(1)(vii/viii)

Transfer of Asset for the benefit of spouse/son’s wife

64(1A) Minor child’s income exemption upto 1,500 p.a. U/s 10(32) NoClubbing – Income to physically disable/by work or skill

64(2) Transfer of asset by individual to HUF & the same assetdistributed to its members at the time of partition. (Income fromsuch partition clubbed into income of that individual arising to hiswife u/s 64(2), minor child u/s 64(1A) & son’s wife u/s 64(1) (vi)

Sec. 65 After clubbing if assessee not paying tax, proportionate collectionfrom transferee.

Investment in Business - Proportionate income is clubbed.Investment in Firm - Proportionate interest is clubbed.Income on Income - Not clubbedIncome includes loss - Clubbed

Inadequate consideration - Proportionate Clubbing








Question 2. A and B are minor sons of X and Mrs. X. Business income of X is Rs. 4,00,000.Income from other sources of Mrs. X is Rs. 2,50,000. Income of A and B from professionalsinging is Rs. 50,000 and Rs. 30,000, respectively. Besides interest on bank deposits (termdeposits) of A and B (deposit was made out of income from singing) is Rs. 6,000 and Rs. 700respectively. A and B have received the following Diwali gifts - gift received by A from friends

and relatives: Rs. 40,000, gift received by B– Rs. 60,000 from X’s friend and Rs. 70,000 from arelative. Find out the income of X, Mrs. X, A and B.

Question 3. X gifts Rs. 5 lakhs to Mrs. X. She deposits the same in a Ltd company @ 10% perannum. A is minor child of X and Mrs. X. A has a bank deposit (term deposits) of Rs. 1,00,000(rate of interest 9.50 percent), which was gifted to him by his grandmother. Other income of Xand Mrs. X is follows – X : Rs. 3,00,000 (salary : Rs. 1,60,000, Capital Gain : Rs. 1,40,000),Mrs. X : Rs. 1,10,000 (Income from a part time business). Find out the income chargeable to taxfor X, Mrs X & A.

Question 4. Decide about the person in whose hands the following incomes shall be taxable:(i) A transfers 2000 debentures of Rs. 1000 each carrying 12% interest to B on the

condition that he will have a right to receive 9% interest till his life time.(ii) B (Age 16 years) received following incomes during 2012-13.

(a)(b)(c)(d)(e)(f)

Interest on Bank deposits (term deposits)Interest on DebenturesDividend on shares of a companyIncome from Acting in a PlayHis fathers total incomeHis mothers total income

Rs.21,00017,00012,00050,000

1,80,0001,90,000

(iii) X, transfers a Factory (monthly rent Rs. 40,000) to his relative Y on the condition that

Factory will revert back to X on the death of Y.

Question 5. Mrs. X received the following amounts during 2012-13:

Gross Salary

Family Pension received by wife Rs. 3,000 × 12Children Pension @ Rs. 1,000 p.m. per child for two minor children

Accumulated balance in PF of her husband after his deathGratuity received after the death of husband

Rs.4,00,000

36,00024,000

3,00,0002,00,000

Calculate taxable income of Mrs. X for the assessment year 2013-14.

Question 6. A gifts Rs. 5 lakhs to his wife on 1-4-2010, which she invests in a firm on interest of10% per annum. On 1-7-2012, Mrs. A withdraws the money and gifts it to their son’s wife. Sheclaims that the interest which has accrued to the daughter-in-law, from 1-7-2012 to 31-3-2013on investment made by her is not assessable in her hands but in the hands of A. Is this correct?What would be the position, if Mrs. A had gifted the money to their minor daughter, instead ofthe daughter-in-law?








Question 7. Determine the Gross Total Income of A and his wife from the following particularsfor the year ending 31-3-2013:

(i) A and his wife are partners in a firm carrying on paints business, their respective sharesof profit being Rs. 40,000 and Rs. 20,000.

(ii) Their 15 years old son has been admitted to the benefits of another firm, from which hereceived Rs. 25,000 as his share of profit in the firm and Rs. 36,000 as interest oncapital. The capital was invested out of the minor’s own funds amounting to Rs.3,00,000.

(iii) A house property in the name of ‘A’ was transferred to his wife for adequateconsideration. Taxable IFHP comes to Rs 35,000.

(iv) Debentures of a company of Rs. 4,00,000 and Rs. 1,00,000 purchased two years agoare in the names of A and his wife respectively, on which interest is receivable at 12%p.a. His wife had in the past transferred Rs. 50,000 out of her income to A for thepurchase of the debentures in A’s name.

(v) A had transferred Rs. 1,00,000 to his wife in the year 2008 without any consideration,

which was given as a loan by her to B. She earned Rs. 20,000 as interest during theprevious year 2011 -12, which was also given on loan to B. During the financial year2012-13, she received interest at 20% p.a. on Rs. 1,20,000.

(vi) A transferred Rs. 50,000 to a trust, the income accruing from its investment as interestamounted on Rs. 7,500, out of which Rs. 4,000 shall be utilised for the benefit of hisson’s wife.

Question 8. ‘A’ minor son of X received interest Rs. 2,65,000 from his investments in a firmowned by his uncle. X transferred to his wife 1,000 shares (cost of acquisition Rs. 95,000) in 2002 withoutconsideration. The company issued 400 bonus shares to Mrs. X in 2008. On 19-9-2012 thecompany paid dividend @ Rs. 9 per share. Mrs. X sold entire holdings on 10-2-2013 and madea capital gain of Rs. 80,000 on original shares and Rs. 70,000 on bonus shares.

Other income of Mr. X and Mrs. X are:

1.2.

Salary (computed)Own business

Mr. X--

80,000

Mrs. X40,000

--

Compute the gross total income of Mr. X and Mrs. X for the assessment year 2013-14. Mrs. Xclaimed, as income on income is not clubbed, gain on bonus shares should be taxable in herhands. Is she legally correct.

Question 9. X and Mrs. X hold 40 percent and 50 percent equity shares in C Private Ltd.respectively. They are also employed in Surat branch of C Private Ltd. (monthly salary beingRs. 30,000 and Rs. 15,000 respectively) without any technical/ professional qualification. Otherincome of X and Mrs. X are Rs. 80,000 and Rs. 1,10,000 respectively. Find out the net incomeof X and Mrs. X for the assessment year 2013-14.








Question 10. X and Y form a partnership firm on April 1, 2012 (profit sharing ratio : 1 : 2) byinvesting Rs. 8 lakh and Rs. 16 lakh respectively. The investment has been financed from thefollowing sources –

X Rs. Y Rs.

Gift from Mrs. XGift from Mrs. YPast saving of X and Y

6,00,000---

2,00,000

--8,00,0008,00,000

For the year ending March 31, 2013, share of profit from the firm is as follows : -

X Rs. Y Rs.

Interest on capital @ 12 percentSalary as working partnerShare of profit

96,00048,00050,000

1,92,00048,000

1,00,000

Find out the income chargeable to tax in the hands of X and Mrs. X, Y & Mrs Y.

Questions based on practice manual

Question 11. X holds 25 percent equity share capital in Y Ltd. Mrs. X is employed by Y Ltd.(salary being Rs. 30,000 per month) as Sr. Accounting Officer. She does not have anyprofessional qualification to justify remuneration. Ascertain in whose hands salary income ischargeable to tax. Does it make any difference if Mrs. X was employed by Y Ltd. even prior toher marriage. Whether Mr X’s plea that at least the justified remuneration of Rs 7,000 pm shouldnot be clubbed will be entertained by the income tax officer.

Question 12. Choose the correct answer with reference to the provisions of the Income-tax Act, 1961:

Income arising to a minor married daughter is

(a) To be assessed in the hands of the minor married daughter

(b) To be clubbed with the income of that parent whose total income, before including

minor’s income, is higher

(c) Completely exempt from tax

(d) To be clubbed with the income of her husband.

Question 13. Fill up the blanks :

Mr. A gifts cash of Rs.1,00,000 to his brother’s wife Mrs. B. Mr. B gifts cash of Rs.1,00,000 toMrs. A. From the cash gifted to her, Mrs. B invests in a fixed deposit, income therefrom is

Rs.10,000 . Aforesaid Rs.10,000 will be included in the total income of ………………..

Question 14. State True or False, with reasons :Mr. Y, who is a physically handicapped minor (suffering from a disability of the nature specifiedin section 80U), earns bank interest of Rs.50,000 and Rs.60,000 from marking bags manuallyby himself. The total income of Mr. Y shall be computed in his hands separately.








Question 15. On 21-3-2012, Mr. Janak gifted to his wife Mrs. Thilagam 200 listed shares, whichhad been bought by him on 19-4-2011 at Rs.2,000 per share. On 1-6-2012, bonus shares wereallotted in the ratio of 1:1. All these were sold by Mrs. Thilagam as under :

Date ofsafe

Manner of sale No. of Shares Net salesvalue (Rs.)

21.5.2012 Sold in recognized stock exchange,STT paid

100 2,20,000

21.7.2012 Private sale to an outsider All bonus shares 1,25,00028.2.2013 Private sale to her friend Mrs. Hema

(Market value on this date wasRs.2,30,000)

100 1,70,000

Briefly state the income-tax consequences in respect of the sale of the shares by Mrs.Thilagam, showing clearly, the person in whose hands the same is chargeable, the quantumand the head of income in respect of the above transactions. Detailed computation of totalincome is NOT required.

Net sales value represents the amount credited after all taxes, levies, brokerage, etc., and thesame may be adopted for computing the capital gains.

Cost inflation index for the FY 2011-12 is 785 and for the FY 2012– 13 is 852.

Question 16: Mrs. Kasturi transferred her immovable properly to ABC Co. Ltd, subject to acondition that out of the rental income, a sum of Rs.36,000 per annum shall be utilized for thebenefit of her son’s wife.

Mrs. Kasturi claims that the amount of Rs.36,000 (utilized by her son’s wife) should not beincluded in her total income as she no longer owned the property.State with reasons whether the contention of Mrs. Mrs. Kasturi is valid in law.

Question17. Compute the total income of Mr. & Mrs. A from the following information.

Rs.

(a)(b)( c)(d)(e)

(f)

Salary income (computed ) of Mrs. AIncome from profession of Mr. AIncome of minor son B from company depositIncome of minor daughter C from special talentInterest from bank received by C on deposit made outof her special talent (term deposits)Gift received by C on 30.09.2012 from friend of Mrs. A

2,30,0003,90,000

15,00032,000

3,0002,500

Question 18. A proprietary business was started by Smt. Rani in the year 2010. As on 1.4.2011her capital in business was Rs.3,00,000.Her husband gifted Rs.2,00,000 on 10.4.2011, which amount Smt. Rani invested in herbusiness on the same date. Smt. Rani earned profits from her proprietory business for theFinancial year 2011-2012, Rs.1,50,000 and Financial year 2012-2013 Rs.3,90,000. Computethe income, to be clubbed in the hands of Rani’s husband for the Assessment year 2013-14 withreasons.








Question 19. Mr. Ghose has four minor children consisting 2 daughters and 2 sons. The annualincome of 2 daughters was Rs.7,500 and Rs.5,000 and of sons was Rs.5,500 and Rs.1,250respectively. The daughter who was having income of Rs.5,000 was suffering from a disabilityspecified under section 80U. Work out the amount of income earned by minor children to beclubbed in the hands of Mr. Ghose.

Question 20. Mr. Vatsan has transferred, through a duly registered document, the incomearising from a godown to his sons, without transferring the godown. In whose hands will therental income from godown be charged?

Question 21. Mr. Dhaval and his wife Mrs. Hetal furnish the following information :

Rs.

Salary income (computed) of Mrs. HetalIncome of minor sons ‘B’ suffers from disability specified inSection 80UIncome of minor daughter ‘C’ from singingIncome from profession of Mr. Dhval

Cash gift received by ‘C’ on 2.10.2012 from friend of Mrs.Hetal on winning of singing competitionIncome of minor married daughter ‘A’ from company deposit

4,60,0001,08,000

86,0007,50,000

48,000

30,000

Compute the total income of Mr. Dhaval and Mrs. Hetal for the Assessment Year 2013-14.

Question 22. Mr. Dhaval has an income from salary of Rs.3,50,000 and his minor children’sincome are as under :

Rs.

Minor daughter has earned the following income:From a TV showFrom interest on FD with a bank (deposited by Mr. Dhaval from his

income)Minor son has earned the following income :From the sale of a own paintingFrom interest on FD with a bank (deposited by Mr. Dhaval fro his income)

50,0005,000

10,0001,000

Questions based on study module

Question 23. Mr. A is an employee of X Ltd. and he has 25% shares of that company. Hissalary is Rs.50,000 p.m. Mrs. A is working as a computer software programmer in X Ltd. at asalary of Rs.30,000 p.m. She is, however, not qualified for the job. Compute the gross totalincome of Mr. A and Mrs. A for the A.Y. 2013-14, assuming that they do not have any otherincome.

Question 24. Mr. B is an employee of Y Ltd. and has substantial interest in the company. Hissalary is Rs.20,000 p.m. Mrs. B is also working in Y Ltd. at a salary of Rs.12,000 p.m. withoutany qualifications. Mr B also receives Rs.30,000 as interest on securities. Mrs. B owns a houseproperty which she has let out. Rent received from tenants is Rs.6000 p.m. Compute the grosstotal income of Mr. B and Mrs. B for the A.Y. 2013-14.








Question 25 : Write a short note on “Cross Transfers”. Ans: Cross TransfersIn the case of cross transfers also (e.g. A making gift of Rs.50,000 to the wife of his brother Bfor the purchase of a house by her and a simultaneous gift by B to A’s minor sons of shares in aforeign company worth Rs.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 connectedas to form part of a single transaction, and each transfer constitutes consideration for the otherby being mutual or otherwise. Thus, in the instant case, the transfers have been made by A andB to persons who are not their spouse or minor child so as to circumvent the provisions of thissection, showing that such transfers constituted consideration for each other.

The Supreme Court, in case of CIT v. Keshavji Moraji [1967] 66 ITR 142, observed that iftwo transactions are inter-connected and are parts of the same transaction in such a way that itcan be said that the circuitous method was adopted as a device to evade tax, the implication ofclubbing provisions would be attracted. Accordingly, the income arising to Mrs. B from thehouse property should be included in the total income of B and the dividend from sharestransferred to A’s minor son should 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.

EXAMINATION QUESTIONS

IPCC MAY -2012Question (4 Marks) Already covered.

Question 26. (8 Marks)

During the previous year 2012-13 the following transactions occurred in respect of Mr. A.

(a) Mr. A had a fixed deposit of Rs. 5,00,000 in Bank of India. He instructed the bank tocredit the interest on the deposit @ 9% from 01.04.2012 to 31.03.2013 to the savingsbank account of Mr. B, son of his brother, to help him in his education.

(b) Mr. A holds 75% share in a partnership firm. Mrs. A received a commission of Rs.25,000from the firm for promoting the sales of the firm. Mrs. A possesses no technical orprofessional qualification.

(c) Mr. A gifted a flat to Mrs. A on April 1, 2012. During the previous year the flat hadincome under the head House Property Rs.52,000 to Mrs. A.

(d) Mr. A gifted Rs.2,00,000 to his minor son who invested the same in a business and he

got a share income of Rs. 20,000 from the investment.(e) Mr. A’s minor son derived an income of Rs.20,000 through a business activity involving

application of his skill and talent.

During the year Mr. A got a monthly pension of Rs.10,000. He had no other income. Mrs. A received salary of Rs. 20,000 per month from a part time job.

Discuss the tax implications of each transaction and compute the total income of Mr. A,Mrs. A and their minor child.








IPCC NOV - 2011Before solving the following question, students please note that deemed ownership u/s27 is attracted if house property is transferred without consideration to spouse or minorchildren (other than minor married daughter).

Question 27. (5 Marks) Shri Madan (age 67 years) gifted a building owned by him to his son’s wife Smt. Hema on01.10.2012. The building fetched a rental income of Rs.10,000 per month throughout the year.Municipal tax for the first half-year of Rs.5,000 was paid in June 2012 and the municipal tax forthe second half-year was not paid till 30.09.2013.Incomes of Shri Madan and Smt. Hema other than income from house property are givenbelow:

Name Business income Capital gain Other sources

Shri. Madan Rs.1,00,000 Rs.50,000 (long-term) Rs.1,50,000

Smt.Hema Rs.(75,000) Rs.2,00,000 (short-term) Rs.50,000

Note: Capital gain does not relate to gain from shares and securities.Compute the total income of Shri. Madan and Smt. Hema taking into account income fromproperty given above and also compute their income-tax liability for the assessment year 2013-14.

PCC NOV - 2011Question 28. (5 Marks)Mr. X started a proprietary business on 01.04.2011 with a capital of Rs.5,00,000. He incurred aloss of Rs.2,00,000 during the year 2011-12. To overcome the financial position, his wife Mrs. X,a software Engineer gave a gift of Rs.5,00,000 on 01.04.2012, which was immediately invested

in the business by Mr. X. He earned a profit of Rs.4,00,000 during the year 2012-13. Computethe amount to be clubbed in the hands of Mrs. X for the Assessment Year 2013-2014. If Mrs. Xgave the said amount as loan, what would be the amount to be clubbed?

IPCC MAY - 2011Question (5 Marks) Already covered

PCC NOV - 2010

Question 1 (5 Marks) Already covered

PCC MAY - 2010

Question 29. (4 Marks)In whose hands the income from an asset is chargeable to tax in the case of transfer which isnot revocable during the life time of the beneficiary/transferee?








Question 30. (8 Marks)Mr. John commenced a proprietary business in the year 2003. His capital as on 01.04.2011 wasRs.6,00,000.On 10.04.2011 his wife gifted Rs.2,00,000 which he invested in the business on the same date.Mr. John earned profit from his proprietary business as given below:

Previous year 2011-12 = Profit Rs.3,00,000Previous year 2012-13 = Profit Rs.4,40,000

During the Financial Year 2012-13, he sold a vacant site which resulted in chargeable long-termcapital gain of Rs.5,00,000 (computed). The vacant site was sold on 20.12.2012.Compute the total income and tax liability of Mr. John for AY 2013-14.

PCC MAY - 2008Question 31. (2 Marks) Already coveredMr. X has transferred through a duly registered document the income arising from a godown, tohis son, without transferring the godown. In whose hands will the rental income from godown becharged?

PCC NOV - 2007Question (5 Marks) Already covered

PE-II NOV - 1999Question 32 (10 Marks)Balu is the Karta of a HUF, whose members derive income as given below: Rs.

(i) Income from Balu’s own business 50,000 (ii) Mrs. Balu a dermatologist draws salary 80,000

(iii) Minor son Deepak (earning interest on fixed depositswith bank, which were gifted to him by his grandfather) 15,000(iv) Minor daughter Priya gave a dance performance and received remunerate 1,00,000(v) Deepak got winnings from lottery (gross) 2,00,000Explain how the above will be taxed.




Documents

550_clubbing of Income