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Clubbing of income

Every assessee is liable to pay tax on the total income earned by him during the previous year.

In certain cases an assessee will become liable to pay tax on the income earned by some other
persons also.

So income belonging to certain other persons will compulsorily added to the income of an
assesse in some cases. This process is called clubbing of income.

It is done with the purpose of avoiding the possibility of tax evasion by the assessees.

Section 60 to 65 of Income Tax Act 1961.

 Transfer of income by an assessee without transferring the ownership of the property

from which the income arises [Sec. 60]: Where an assessee transfers income from a
property to somebody else, without transferring the ownership of the property, such
income will be added to the income of the assessee.

 Income of spouse [Sec. 64(1)]: While computing the income of an individual, certain
incomes of the spouse will be clubbed. The following are the incomes so clubbed with
the income of the spouse.

 Income to a spouse from a firm in which the other spouse has substantial interest: Any
income which arises to a spouse in the form of salary, commission or the like from a
concern in which such individual has substantial interest is clubbed with the income of
the husband or wife having greater income. However, income arising from the
application of personal skill, talent or experience shall not be clubbed. [Batta Kalyani vs.
CIT (1985)]

 Income from asset transferred [Sec. 64(1)(iv)]: Where an individual transfers an asset
other than house property to spouse without receiving adequate consideration income
from such property is clubbed with the income of the transferor.

 Income of daughter in law [Sec. 64(1) (vi)] : Income of daughter in law, earned from an
asset transferred to her on after 1.6.1973 the income of the tra clubbed with the income
of the father in law, if the transfer was without adequate the cross transfer is do 15
consideration.

 Income from asset transferred to a person or association of persons for 10. Income
from the benefit of spouse [Sec. 64(1) (vii)]: Income arising from an asset transferred to
a person or association of persons for the direct or indirect benefit of the spouse, will be
clubbed with the income of the transferor. If the spouse gets only a part of the income
from such asset, so much part of income will be clubbed.

Prepared by Anaswara U, BBA LL.B, LL.M, Assistant Professor, KMCT Law College Kuttipuram
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 Income from assets transferred to a person or AOP for the benefit of son's wife [Sec.
64(1) (viii)]: Income arising from an asset transferred after 31.5.1973 to a person or
association of persons for the benefit of son's wife shall be included in the income of
the transferor. However, such income need not be clubbed if the transfer is for adequate
consideration.

 Income fron business [Section 64(1)]: Where an individual transfers an asset to the
spouse or son's wife and such asset is invested in a business by the transferee,
proportionate profits from such business, shall be clubbed with the income of the
transferor.

 Income of a minor child [ Section 64(1A)]: Income of a minor child is included in the
income of the parent having greater income. However, if the marriage of the parents
does not persist, income will be clubbed with the income of the parent who looks after
the child. Minor's income is not clubbed in the following cases:

1. Where the minor earns income employing personal skill, talent or experience;

2. The minor earns income from manual work;

3. The minor is a handicapped child (physically or mentally).

 Cross transfers: In the case of cross transfers of assets, income from asset so
transferred shall be included in the income of the transferor, if the assessing officer has
sufficient reasons to believe that the cross transfer is done to evade tax.

 Income from converted property [Sec. 64(2)]: When a member of a Hindu Undivided
Family transfers his self acquired property to the common benefit of the HUF, it is called
converted property. Income from the converted property is clubbed with the income of
the transferor and the HUF is not liable to pay tax on converted property with effect from
31.12.1969.

Set off and carry forward of losses

Specific provisions have been made in the Income-tax Act, 1961 for the set-off and carry
forward of losses. In simple words, “Set-off” means adjustment of losses against the profits
from another source/head of income in the same assessment year. If losses cannot be set-off
in the same year due to inadequacy of eligible profits, then such losses are carried forward to
the next assessment year for adjustment against the eligible profits of that year. The maximum
period for which different losses can be carried forward for set-off has been provided in the Act.

The following are the important provisions regarding set off;

 If a particular source of income shows loss during the previous year, the assessee can

Prepared by Anaswara U, BBA LL.B, LL.M, Assistant Professor, KMCT Law College Kuttipuram
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set off the loss against any other income earned during the previous year from the same
head of income.

 Set off is possible only against income liable to tax and not allowed against exempt
incomes.

 Members of an AOP or BOI cannot set off such losses against their personal incomes.

Situations where set off is not allowed:

 Loss from speculation business; loss form speculative business can be set off against
profits of speculative business only.

 Loss from an illegal business cannot be set off against the income of a lawful business.

 Long term capital loss can be set off against long term capital gains only.

 Loss from owning and maintaining of race horses can be set off against income from
horse races or prizes from horse races only.

Carry forward of losses

If an assessee could not fully set off the losses incurred during the previous year against the
income earned during the year, so much of the losses as has not been set off can be carried
forward to be set off against the income in the succeeding year.

Assessee must have filed a return of loss to become eligible to carry forward and set pff losses
against income in the succeeding years.

Following losses can be carried forward and set off :

 Loss under the head income from house property

 Loss in non speculation business or profession

 Loss in speculation business

 Short term capital loss

 Long term capital loss

 Loss from activity of owning and maintaining race horses.

Any loss other than mentioned above cannot be carried forward and set off in the future years.

Liability in special cases

Section 159 to 181

Prepared by Anaswara U, BBA LL.B, LL.M, Assistant Professor, KMCT Law College Kuttipuram
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 Assessment of deceased person [Section 159]

If a person dies, his legal representative shall be liable to any sum which the deceased
would have been liable to pay if he had not died.

Any proceedings taken against the deceased before his death is taken against the legal
representative and may be continued against the legal representative from the stage at
which it stood on the date of the death of the deceased.

The liability of the legal representative is limited to the extent to which the estate of the
deceased is capable of meeting the liability.

 Representative assessee [ Section 160 to 167]

Representative assessee means;

Non resident - agent

Minor, lunatic, or idiot - the guardian or manager who is entitled to receive or is in receipt
of such income on behalf of such minor, lunatic or idiot.

In respect of income which the court of wards, the Administrator General, the official
trustee or any receiver or manager.

In respect of income of a trustee appointed under a trust by a duly executed instrument

in writing, such trustee or trustees

Every representative assessee is deemed to be an assesee for the purpose of this Act.

He shall have the same duties, responsibilities and liabilities as if income is liable to
assessment in his own name.

 Executors [ Section 168 and 169]

The income of the estate of a deceased person shall be chargeable to tax in the hands
of the executors.

If there is only one executor, the as if the executors were an individual or if there are
more executors than one, then as association of persons.

The assessment of an executor shall be made seperately from any assessment that
may be made on him in respect of his income.

Executor who pays any sum is entitled to be reimbursed from the estate of the deceased.

 Assessment after partition of a HUF [ Section 171]

 Profits of non residents from occasional shipping business [ Section 172]

Prepared by Anaswara U, BBA LL.B, LL.M, Assistant Professor, KMCT Law College Kuttipuram
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 Recovery of tax in respect of non residents [ Section 173]

Tax on income which is deemed to accrue in India may be recovered by deduction at

source by an assessment on the non resident or his agent.

 Assessment of persons leaving India [ Section 174]

 Assessment of persons likely to transfer property to avoid tax [Section 175]

 Discontinued business [ Section 176]

Prepared by Anaswara U, BBA LL.B, LL.M, Assistant Professor, KMCT Law College Kuttipuram