CLUBBING OF INCOME UNDER THE DIRECT TAX CODE BILL, 2010

DIRECT TAX PROJECT ESSAY

Fifth Year Monsoon Semester

Atindriya Chakraborty I.D. No. 207097

There is a possibility that the taxpayers. of course. in such situations. divorce etc. to certain conditions. this section of the Direct Tax Code will not operate. In order to deal with such malpractices aimed at purposeful and malafide avoidance of tax liability. and. subject. the income which is not legally earned by the assessee but by some other person may also be taxed. 1961 defines ‘substantial interest’ though this definition is conspicuous by its absence in the Direct Tax Code Bill. the provision on clubbing provision will not be applicable. the liability to pay tax on any income earned by the spouse or daughter in law of the individual by virtue of assets which transferred to the recipient without adequate consideration vests on the transferor of such assets and not on the actual recipient i. This system is termed as ‘clubbing of income’. The Direct Tax Code. It is slated to change the existing direction taxation machinery which is currently regulated and governed by the Income Tax Act. 2010 Generally an assessee is taxed in respect of his own income. liability to pay tax on income earned by the spouse vests on the actual recipient or spouse whoever has higher income prior to inclusion of income liable for clubbing. 1961 were formulated. proposes major deviations from the present direct tax regime and is likely to have significant impact on the business community. 1957.e. According to Section 9(1)(a)(ii) of the Direct Tax Code Bill. Liability to pay tax on income which is earned by spouse by way of salary. Sections 60 to 64 of the Income Tax Act.e.CLUBBING OF INCOME UNDER THE DIRECT TAX CODE BILL.. i. despite enjoying the benefits of their own income themselves. I would discuss how the proposed Direct Tax Code Bill is similar to the existing Income Tax Act with regards to clubbing of income by the spouse and by the minor child of an individual as well as the points in which the present Act and the proposed Code differ on the same issue. in certain situations. By virtue of these Sections. may endeavour to reduce their tax liability through transfer of their assets in favour of their family members or else through arrangement of their sources of income in a manner that the liability to pay the tax is incurred by some other person. commission etc from a concern in which the individual holds considerable interest vests on the spouse who earns higher income before inclusion of such income. However. in cases where such transfer of asset occurs in pursuance of an agreement between the individual and the spouse to live apart. In this essay. a person is liable to pay tax on his own income as well as income earned by others. Explanation 2 to Section 64(1) of the Income-Tax Act. A. 2010.. However. I would also describe how the concept of “converted property”. the Direct Tax Code takes a slightly different stand from that taken in Section 64 of the Income Tax Act. the liability to pay tax on such income vests solely on the recipient of the income. . where the spouse earns his/her income by virtue of the application of technical or professional knowledge and experience which he/she is in possession of. which is directly related to the concept of “clubbing of income”. This is different from the provisions relating to clubbing as present in the Income Tax Act. Following Section 9(3) of the Direct Tax Code Bill. the spouse or daughter on law. as per Section 9(2) of the Bill. However. has been dealt with by the Direct Tax Code. Clubbing of income has been dealt with in Section 9 of the Direct Tax Code Bill. in cases like mutual separation. CLUBBING OF INCOME EARNED BY SPOUSE (AND IN SOME CASES BY DAUGHTER IN LAW) With regards to the clubbing of income earned by spouse for taxation purposes.

under the existing taxation regime. 2010 seeks continuation of this regime. In case of income earned by the minor child through manual or through application of skill. by virtue of partition of Hindu Undivided Family. while computing the tax payable. income earned by a minor child suffering from disability as well as income earned by a minor child through manual work or through exercise of personal skill or talent is not taxable by his/her parent earning higher taxable income.B. with a few changes. the property is called ‘converted property’. Even if. talent or specialised knowledge and experience of the child is not liable for clubbing. Under the Code. Liability to pay tax on income from such property vests on the individual who owns the property. notwithstanding the manner in which such income is earned. such converted property is obtained by the spouse or minor child of the individual. C. 2010 deals with the concept of clubbing as regards to converted property. When an individual in possession of separate property seeks to impress that such property is owned by his or her family or puts such separate property into the common stock of the family or transfers such property to the family without sufficient consideration. CLUBBING OF INCOME EARNED BY MINOR CHILD With regards to the minor child’s income. is that the income of a minor child who suffers from any disability which might also be severe. the minor child’s income is to be considered as income of his or her guardian. Under this Code. In this regard. . This definition is presented by Section 314(65) of the Code. the liability to pay tax on the income which is earned from the converted property will vest on the individual who had initially converted the property. income of minor child is to be included in the total income of the guardian-parent. and does any of these in order to reduce his or her tax liability in a fraudulent and malafide manner. 2010 Now let us see how the DTC Bill. The Direct Taxes Code. This provision is akin to Section 64(2) of the Income Tax Act. Another deviation from the Income Tax Act. the liability to pay tax on the income of a minor child rests on his or her parent father or mother whosoever has got greater taxable income. the Direct Tax Code reflects the existing provisions of the Income Tax Act. The most noteworthy alteration in these regards lies in determining who the guardian for purposes of clubbing the income earned by the minor child is. CONVERTED PROPERTY UNDER THE DIRECT TAX CODE BILL. However. This rule is laid down by Section 64(1A) of the Income Tax Act. as noted in the Direct Tax Code. is not liable for clubbing. If both the parents are guardians of the minor child. in that case the minor child’s is to be included in the income of the parent whose total income is higher such inclusion.

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