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STUDY NOTE - 10
CLUBBING OF INCOME
(i) Where the income arises to any person by virtue of a transfer by any of the trust, which is
not revocable, during the lifetime of the beneficiary and, in case of any transfer, which is
not revocable, during lifetime of the transferee.
(ii) Where the income arises to any person by virtue of a transfer made before 1.4.1986, which
is not revocable for a period of six years or more. However, income will be chargeable to
tax as the income of the transferor as and when the power to revoke the transfer comes
into play.
Case Law:
Circumstances prevailing in each year must be looked into - In determining whether the settle-
ment is irrevocable for the requisite period, regard must be had to the effect of the settlement in
the light of the circumstances actually existing in each year of assessment - CIT v. Ratilal Nathalal
25 ITR 426.
IRREVOCABLE TRANSFER OF ASSETS FOR SPECIFIED PERIOD [Sec.62]
(1) The provisions of section 61 shall not apply to any income arising to any person by virtue
of a transfer—
(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in
the case of any other transfer, which is not revocable during the lifetime of the trans-
feree ; or
(ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding
six years :
Provided that the transferor derives no direct or indirect benefit from such income in
either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any person
by virtue of any such transfer shall be chargeable to income-tax as the income of the trans-
feror as and when the power to revoke the transfer arises, and shall then be included in his
total income.
Case Law:
In determining whether the settlement is irrevocable for the requisite period, regard must be
had to the effect of the settlement in the light of the circumstances actually existing in each year
of assessment - CIT v. Ratilal Nathalal 25 ITR 426.
Case Laws:
The provision only contemplates cases where the settlor can lawfully reassume power over the
income or assets. A provision enabling the settlor to give directions to trustees to employ the
assets or funds of the trust in a particular manner or for a particular charitable object contem-
plated by the trust cannot be said to confer a right to reassume power within this provision.
Otherwise settlor can never name himself a sole trustee - CIT v. Jayantilal Amratlal 67 ITR 1.
The use of the word ‘indirectly’ does not seek to bring within the purview of section 63(a) cases
where the settlor was under the guise of a trust seeking to discharge his own liability. The
provision contemplates cases in which there is a provision for retransfer of the income or assets
and such provision is for retransfer directly or indirectly. It also contemplates cases where
there is a provision which confers a right upon the settlor to reassume power over the income
or assets directly or indirectly. It is the provision for retransfer directly or indirectly of income
or assets which brings the case within the provision. Cases in which there is a settlement but
there is no provision in the settlement deed for a right to reassume power do not fall under the
provision even if under the settlement the settlor obtains a benefit - CIT v. S. Raghbir Singh 57
ITR 408 .
The individual is deemed to have substantial interest, if the beneficiary holds equity share
carrying not less than 20% voting power in the case of a company or is entitled to not less
than 20% of the profits, in any other concern, not being a company at time during the Previous
Year.
Where an asset (other than House Property) is transferred by an individual to his or her spouse
directly or indirectly otherwise than for adequate consideration or in connection with an agree-
ment to live apart any income from such asset will be deemed to be the income of transferor.
However, this section is not applicable in the following cases—
If an individual directly or indirectly transfers the assets after 1.6.73 without adequate consid-
eration to son’s wife or son’s minor child (including son’s minor step child or son’s minor
adopted child), income arising from such assets will be included in the total income of the
transferor from the Assessment Year 1976-77 onwards.
Where a member of a HUF has converted his self-acquired property into joint family property
after 21.12.1969, income arising from the converted property will be dealt with as follows :-
(i) For the Assessment Year 1976-77 onwards, the entire income from the converted property
is taxable as the income of the transferor.
(ii) If the converted property is subsequently partitioned amongst the members of the family,
the income derived from such converted property, as is receivable by the spouse and mi-
nor child of the transferor will be taxable in his hands.
[Refer to Problem No. 24 of Study Note 4]
In the above mentioned cases the income arising to the transferee from the property trans-
ferred, is taxable in the hands of the transferor. However, income arising to the transferee from
such property is not includible in the total income of the transferor. Thus, if Mr. A transfers Rs.
60,000 to his wife without any adequate consideration and Mrs. A deposits the money in a
bank, the interest received from the bank on such deposits is taxable in the hands of Mr. A. If
however, Mrs. A purchases shares in a company from the accumulated interest, the dividend
received by Mrs. A, will be taxable in her hands and will not be clubbed with the income
of Mr. A.
CLUBBING OF NEGATIVE INCOME [EXPLANATION TO Sec. 64]
The income of a specified person is liable to be included in the total income of the individual in
the circumstances mentioned earlier. For the purposes of including income of the specified
person in the income of the individual, the word “income” includes a loss.
Case Laws:
Section 64 applies only to the computation of the total income of any individual. It does not
cover the case of a karta of a HUF gifting coparcenary property to his wife - L. Hirday Narain
v. ITO 78 ITR 26.
As per incomes belonging to ss. 60 to 64 to other persons are included in the total income of the
assessee in such cases, by virtue of sec. 65, the actual recipient of income is liable, on the service
of notice of demand, to pay the tax assessed in respect of income included in the income of
other person (where the Income Tax Officer so desires).