Generally, a person is assessed for tax in respect of her/his own income. In certain circumstances this basic principle has a deviation and the assessee may be taxed in respect of income which legally belongs to somebody else.
Earlier a taxpayer would reduce the tax liability by transferring assets in favour of family members or by arranging their sources of income in such a way that tax incidence falls on others, whereas benefits of income is derived to the assessee. To counteract such practice of tax avoidance, necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act, 1962. The provisions are applicable only to individuals and not to company, firms and other category of assesses. A person is liable to pay tax on his own income as well as income belonging to others on fulfillment of certain conditions. Inclusion of other’s Incomes in the income of the assessee is called Clubbing of Income and the income which is so included is also termed as Deemed Income.
If the taxpayer owns an asset, the ownership of asset is not transferred by her/him, the income from the asset is transferred to any person under a settlement or agreement then the income from the asset would be taxable in the hands of the transferor.
If an asset is transferred under a ‘revocable transfer’, and the transfer for this purpose includes any settlement, or agreement then any income from such an asset is taxable in the hands of the transferor and not the transferee (owner). ‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or income from such an asset, either whole or in parts at any time in future, during the lifetime of transferee.
When the spouse of an individual gets any salary, commission, fees or any remuneration from a concern and the individual has a substantial interest in such a concern and the remuneration paid to the spouse is not due to technical or professional knowledge of the spouse then such income of the spouse will be considered as income of the individual and not of the spouse.
Where both the husband and wife have a substantial interest in a concern and both are in receipt of the remuneration from such concern both the remunerations will be included in the total income of husband or wife whose total income, excluding such remuneration, is greater.
Income from assets transferred to spouse becomes taxable she/he has transferred an asset (other than a house property) to her/his spouse and the asset is transferred without adequate consideration without an agreement to live apart. Such asset shall be deemed to be the income of the taxpayer who has transferred the asset. This is in accordance with the provisions contained in Section 64 (i). However, this is not applicable in case assets are transferred before marriage, assets transferred for adequate consideration or in connection with an agreement to live apart. Also, non applicability arises if on the date of accrual of income; transferee is not spouse of the transferor or if such asset is is acquired by the spouse out of ‘pin money’ that is, an allowance given to the spouse for dress and usual household expenses. Income arising from the transferred asset cannot be clubbed in the hands of the transferor.
