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NEERAJ GUPTA CA IPCC TAX CLASSES

CLUBBING OF INCOME

CHAPTER -8 CLUBBING OF INCOME [Section 60 65]


Section 60 61 62 63 64 64 (1) (ii) 64 (1) (iv) 64 (1) (vi) 64 (1) (vii) 64 (1) (viii) 64 (1A) 64 (2) 65 Particulars Transfer of income without transfer of assets. Revocable transfer of assets Transfer irrevocable for a specified period Transfer and revocable transfer defined Income of an individual to include income of spouse, minor child etc. Remuneration of a spouse from a concern in which the other spouse has substantial interest Income from asset transferred to the spouse Income from asset transferred to the sons wife Income from asset transferred to any person for the benefit of the spouse of the transferor Income from asset transferred to any person for the benefit of the sons wife of the transferor Clubbing of income of a minor child Income from self acquired property converted to joint family property. 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 the various 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 pay tax at a higher rate than those in lower brackets. By transfers and arrangements, which have the effect of diverting a part of a person's normal income to someone else, it is thus possible to reduce the incidence of tax. In order to counteract such steps, certain special provisions have been made in the Act. Some of these provisions relate to the inclusion in one spouse's total income 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 of Mr. Y without transferring the house property to him. Here the income from house property will be 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) (ii) it contains any provision for the transfer directly or indirectly of the whole or any part of the income or assets to the transferor [Sec. 63(a)(i)], or it, in any way, gives the transferor a right to resume power directly or indirectly over the whole 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 transferred asset had been applied for the benefit of the transferor. Important note: The above rule is applicable even if the power to revoke has not been exercised so far. IRREVOCABLE TRANSFER OF ASSETS SECTION 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 the transferee and not in the income of the transferor. This exception shall apply only if the transferor derives no direct or indirect benefit from such income in either case.

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However, all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises (i.e. on the death of the beneficiary/transferee), and shall then be 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 the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience. The words "technical or professional qualifications" do not necessarily relate to technical or professional qualifications acquired by obtaining a certificate, diploma, degree or in any other form a recognized body like a university, institute, etc. In simple terms, Professional qualification means, fitness to do a job or ability to adopt some occupation requiring manual or other intellectual skills. Similarly technical qualification means 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 relatives beneficially holds, at any time during the previous year (i.e. beneficial owner ship is relevant than the registered ownership) equity shares carrying not less than 20% voting power. In any other case, if such person is entitled, or such person and one or more of his relatives are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent of the profits of such concern.

(b)

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 both proprietary and non proprietary concerns are included. When both husband and wife have a substantial interest in the concern and both are in receipt of remuneration from the concern, the remuneration will be included in the total income of husband or wife whose total income, excluding such remuneration, is greater. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 3

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Where such income is once included in the total income of either spouse, any such income arising in any subsequent year will not be included in the total income of the other spouse unless the Assessing Officer is satisfied after giving that spouse an opportunity of being heard that it is necessary to do so. Salary - How computed - For the purpose of clubbing under section 64(1)(ii), salary has to be 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 a shareholding 35%. Salary of Mr. A = 1,80,000 p.a. Salary of Mrs. A = 2,20,000 p.a. Interest Income of Mr. A = 50,000 Foreign dividend Income of Mrs. A = 35,000 Computation of Total Income Mr. A 1,80,000 2,20,000 50,000 4,50,000 Mrs. A 35,000 35,000

Salary Income Clubbed U/s 64(1) (ii) Interest Income Foreign dividend Gross Total Income

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 house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor. This provision is not applicable to house property because in that case the transferor is deemed to be the owner of the house property and the annual value of the property is taxed in the hands of the transferor as per section 27.

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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 in the hands of A, even after their marriage as the relationship of husband and wife does not 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 her personal expenses (called pin money).

Example 1. Mr X gifts a Flat to Mrs. X Rental Income is taxable for Mr. X U/s 27 of House Property as deemed Owner. Example 2. Mr. X Gifts bonds to Mrs. X Interest 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 are parts of the same transaction, the aforesaid rule of clubbing is applicable. For instance, if X gifts or cross transfers Rs. 20,000 to Mrs. A and A gifts property worth Rs. 20,000 to Mrs. X, the transaction 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 must be 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 to his wife and the latter invests the same in units and deposits, interest income is included in assessee's total income. Capital gain on sale of transferred assets - If an individual transfers an asset without consideration to his wife who sells it at a profit, capital gain arising to wife on sale of asset is chargeable to tax in the hands of the transferor. INCOME FROM ASSETS TRANSFERRED TO THE SONS WIFE [SECTION 64(1)(vi)]: In computing the total income of any individual, there shall be clubbed all such income as arises directly or indirectly to the sons wife, of such individual, from assets transferred directly or indirectly to the sons wife by such individual otherwise than for adequate consideration. Assessment Year 2013-14 For sms only 9810139214 Page 5

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The relationship of father-in-law (or mother-in-law) and daughter-in-law should subsist both at the time of transfer of asset and at the time of accrual of income. It means transfer of asset before son's marriage by an individual to his prospective daughter-in-law is outside the scope of clubbing even if income is accrued after son's marriage. INVESTMENT OF FUNDS IN BUSINESS or FIRM BY SPOUSE / SONS 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, then proportionate income shall be clubbed with the income of the transferor. It shall be computed by following formula: The amount taxable for transferor = Taxable business income to transferee X How much is gifted money out of Total 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 of contribution of capital as a partner in a firm, then proportionate interest shall be clubbed with the 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 on 26.03.2012 invest Rs. 75,000 (25,000 out of gift and 50,000 of her own) in a partnership firm as her 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 75,000

9,900 =

3,300

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 the spouse invest the transferred funds in partnership firm. Also there is no question of clubbing the remuneration received by the spouse from such firm in which she invests the transferred funds since remuneration allowed is for actual working and has no relation with the capital invested.

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Example 1: Mrs. X Gifts Rs. 5 lacs to Mr. X Mr. X Borrowed Rs.10 lacs from Bank Total 15 lacs invested in Business on 1st Day of Previous Year. Business Income = 6,00,000 Clubbing for Mrs. X = 6,00,000 x 5,00,000 15,00,000 = 2,00,000 Rs. Taxable income for Mrs. X = 2,00,000 Taxable income for Mr. X = 4,00,000 Example 2. Mrs. X Gifts Rs.5 lacs to Mrs. X Mr. X borrowed Rs.10 lacs from Bank Total 15 lacs invested in Partnership Firm 1. Interest on Capital = 1, 80,000 Clubbing to Mrs. X = 1, 80,000

5,00,00 15,00,000

60,000

2. Salary = 8,000 p.m. No Question of Clubbing. Taxable for Mr. X 3. Share of Profit = 2,00,000 Exempt 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 sons wife [Section 64(1)(vii) & 64(1)(viii)]: In computing the total income of any individual, 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 sons wife.

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Example: X transfers a factory to an association of persons subject to the condition that out of the 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 inadequate consideration: There may be cases where the transfer of assets to spouse is for consideration passed, but the amount of the consideration is not adequate. Property worth Rs. 1,50,000 may have been transferred for a consideration of Rs. 1,00,000 only. In such cases, the income from the property includible in the spouse would be in the proportion of the inadequacy of the consideration, 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)]: In computing the total income of any individual, 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 section 80U. Provided that nothing contained in this sub-section shall apply in respect of such income as 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 be included 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 such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied after giving that parent an opportunity of being 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 the parent and can be claimed by him. After inclusion of minor childs income. The assessee will be entitled to exemption from his total 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 the parents e.g. income arising from shares/ deposits gifted by uncles/ grandparents etc. will be clubbed with the income of the parents. Similarly if a minor earns any interest or other income, by investing money earned from his professional skill, it will still be clubbed because here the money is not being earned by his skills. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 8

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IF PARENTS ARE DEAD: In this situation, clubbing shall not apply with grandparents or relatives. Similarly no assessment in the name of minor in this situation. Concept of deemed assessee shall apply in this case i.e. somebody shall file tax returns on behalf of minor. INCOME FROM SELF-ACQUIRED PROPERTY CONVERTED TO JOINT-FAMILY PROPERTY [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 family property 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 such self-acquired property. For example, X owns a house property from which he derives an income of Rs 3 lacs per annum. With effect from 1.4.2007, he converts this property as the property of an HUF of which he is a member. Although the income shall from now be received by the HUF but it shall be deemed to be the individual income of X and shall be included in computation of his total income under the head Income from house property. Implication in the case of subsequent partition: Where the converted property has been the subject matter of partition, amongst the members of the family, the income derived from such converted 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 by the individual to the spouse, without adequate consideration. In the example given above if there is a partition in the family and there are four members entitled to share in the HUF property i.e. X, Mrs. X, a minor child and a major child, assuming they decide to share the property equally, then the income from the property shall be treated as follows: 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 1/4th share of minor child of X Rs 75,000 ( to be clubbed with the income of X u/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 his return of income separately along with other incomes, if any.

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INCOME ON INCOME IS NOT TO BE CLUBBED [Income arising from accretions to transferred assets]: It may be noted that under all the provision discussed above, income arising from assets transferred without adequate consideration is to be clubbed. But the income derived on the accretion of such property cannot be clubbed. For example, if bonds are transferred 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 a foreign company then dividend income of such shares shall not be clubbed and shall be taxable as income of Mrs.X. INCOME INCLUDED LOSS: For the purpose of above provision the word income includes loss. Thus, under all the above situations, where the income arising to one person is to be clubbed in the hands of another person, in the event of loss, the loss shall be taken into account in computing the income of such person. The clubbed person shall be entitled for carry forward of loss. Section 65 LIABILITY OF THE TRANSFEREE IN RESPECT OF CLUBBED INCOME Where, by reason of the provisions contained in section 60 to 64 or section 27, the income from any asset is to be clubbed with the income of the transferor, then the transferee shall on the service of a notice of demand by the Assessing Officer, shall be liable to pay that portion of the tax 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 income from house property is Rs. 50,000. Mr. A has other incomes of Rs. 2,00,000. The Assessing Officer includes Rs. 50,000 in the assessment of A in view of section 61. A notice of demand of Rs. 5,150 is served on A and A goes underground. The Assessing Officer can recover proportionate tax on Rs. 50,000 from Mr. B under section 65, i.e., Rs. 1,030 which is computed as below. 50,000 -------------- X 5,150 = 1,030 2,50,000 Head of income under which the clubbed income will be included : First compute the income in the hands of actual recipient under the relevant head of income as if the actual recipient of income is liable to pay tax. After computing the income in the hands of recipient, it will be included under the same head of income in the hands of other person.

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Summary of the Chapter Sec. 60 Transfer of income, no transfer of Asset Sec. 61 Sec. 62 Sec.64(1) (ii) Sec.64(1) (iv) Sec.64(1) (vi) Sec. (vii/viii) 64(1A) 64(2) Revocable transfer of Asset Irrevocable transfer of Asset Remuneration to spouse interested individual without qualification substantial

Transfer of Asset to spouse (Relationship both on date of transfer & date of income) Transfer of Asset to Sons wife (Relationship should exist both at the date of transfer & date of income)

64(1) Transfer of Asset for the benefit of spouse/sons wife Minor childs income exemption upto 1,500 p.a. U/s 10(32) No Clubbing Income to physically disable/by work or skill Transfer of asset by individual to HUF & the same asset distributed to its members at the time of partition. (Income from such partition clubbed into income of that individual arising to his wife u/s 64(2), minor child u/s 64(1A) & sons wife u/s 64(1) (vi) After clubbing if assessee not paying tax, proportionate collection from transferee. - Proportionate income is clubbed. - Proportionate interest is clubbed. - Not clubbed - Clubbed - Proportionate Clubbing

Sec. 65

Investment in Business Investment in Firm Income on Income Income includes loss Inadequate consideration

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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 professional singing is Rs. 50,000 and Rs. 30,000, respectively. Besides interest on bank deposits (term deposits) of A and B (deposit was made out of income from singing) is Rs. 6,000 and Rs. 700 respectively. 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 Xs friend and Rs. 70,000 from a relative. 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% per annum. 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 X and 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 tax for 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. Rs. 21,000 17,000 12,000 50,000 1,80,000 1,90,000

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

Interest on Bank deposits (term deposits) Interest on Debentures Dividend on shares of a company Income from Acting in a Play His fathers total income His mothers total income

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: Rs. 4,00,000 36,000 24,000 3,00,000 2,00,000

Gross Salary Family Pension received by wife Rs. 3,000 12 Children Pension @ Rs. 1,000 p.m. per child for two minor children Accumulated balance in PF of her husband after his death Gratuity received after the death of husband 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 of 10% per annum. On 1-7-2012, Mrs. A withdraws the money and gifts it to their sons wife. She claims that the interest which has accrued to the daughter-in-law, from 1-7-2012 to 31-3-2013 on 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 of the daughter-in-law?

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Question 7. Determine the Gross Total Income of A and his wife from the following particulars for the year ending 31-3-2013: (i) (ii) A and his wife are partners in a firm carrying on paints business, their respective shares of profit being Rs. 40,000 and Rs. 20,000. Their 15 years old son has been admitted to the benefits of another firm, from which he received Rs. 25,000 as his share of profit in the firm and Rs. 36,000 as interest on capital. The capital was invested out of the minors own funds amounting to Rs. 3,00,000. A house property in the name of A was transferred to his wife for adequate consideration. Taxable IFHP comes to Rs 35,000. Debentures of a company of Rs. 4,00,000 and Rs. 1,00,000 purchased two years ago are 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 the purchase of the debentures in As name. 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 the previous year 2011 -12, which was also given on loan to B. During the financial year 2012-13, she received interest at 20% p.a. on Rs. 1,20,000. A transferred Rs. 50,000 to a trust, the income accruing from its investment as interest amounted on Rs. 7,500, out of which Rs. 4,000 shall be utilised for the benefit of his sons wife.

(iii) (iv)

(v)

(vi)

Question 8. A minor son of X received interest Rs. 2,65,000 from his investments in a firm owned by his uncle. X transferred to his wife 1,000 shares (cost of acquisition Rs. 95,000) in 2002 without consideration. The company issued 400 bonus shares to Mrs. X in 2008. On 19-9-2012 the company paid dividend @ Rs. 9 per share. Mrs. X sold entire holdings on 10-2-2013 and made a 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. X 40,000 --

Compute the gross total income of Mr. X and Mrs. X for the assessment year 2013-14. Mrs. X claimed, as income on income is not clubbed, gain on bonus shares should be taxable in her hands. 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 being Rs. 30,000 and Rs. 15,000 respectively) without any technical/ professional qualification. Other income of X and Mrs. X are Rs. 80,000 and Rs. 1,10,000 respectively. Find out the net income of X and Mrs. X for the assessment year 2013-14.

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Question 10. X and Y form a partnership firm on April 1, 2012 (profit sharing ratio : 1 : 2) by investing Rs. 8 lakh and Rs. 16 lakh respectively. The investment has been financed from the following sources X Rs. 6,00,000 --2,00,000 Y Rs. -8,00,000 8,00,000

Gift from Mrs. X Gift from Mrs. Y Past saving of X and Y

For the year ending March 31, 2013, share of profit from the firm is as follows : X Rs. Interest on capital @ 12 percent Salary as working partner Share of profit 96,000 48,000 50,000 Y Rs. 1,92,000 48,000 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 any professional qualification to justify remuneration. Ascertain in whose hands salary income is chargeable to tax. Does it make any difference if Mrs. X was employed by Y Ltd. even prior to her marriage. Whether Mr Xs plea that at least the justified remuneration of Rs 7,000 pm should not 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 minors 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 brothers wife Mrs. B. Mr. B gifts cash of Rs.1,00,000 to Mrs. 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 specified in section 80U), earns bank interest of Rs.50,000 and Rs.60,000 from marking bags manually by himself. The total income of Mr. Y shall be computed in his hands separately.

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Page 14

NEERAJ GUPTA CA IPCC TAX CLASSES

CLUBBING OF INCOME

Question 15. On 21-3-2012, Mr. Janak gifted to his wife Mrs. Thilagam 200 listed shares, which had been bought by him on 19-4-2011 at Rs.2,000 per share. On 1-6-2012, bonus shares were allotted in the ratio of 1:1. All these were sold by Mrs. Thilagam as under : Date of Manner of sale No. of Shares Net sales safe value (Rs.) 21.5.2012 Sold in recognized stock exchange, 100 2,20,000 STT paid 21.7.2012 Private sale to an outsider All bonus shares 1,25,000 28.2.2013 Private sale to her friend Mrs. Hema 100 1,70,000 (Market value on this date was Rs.2,30,000) 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 quantum and the head of income in respect of the above transactions. Detailed computation of total income is NOT required. Net sales value represents the amount credited after all taxes, levies, brokerage, etc., and the same 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 a condition that out of the rental income, a sum of Rs.36,000 per annum shall be utilized for the benefit of her sons wife. Mrs. Kasturi claims that the amount of Rs.36,000 (utilized by her sons wife) should not be included 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. 2,30,000 3,90,000 15,000 32,000 3,000 2,500

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

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

Question 18. A proprietary business was started by Smt. Rani in the year 2010. As on 1.4.2011 her 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 her business on the same date. Smt. Rani earned profits from her proprietory business for the Financial year 2011-2012, Rs.1,50,000 and Financial year 2012-2013 Rs.3,90,000. Compute the income, to be clubbed in the hands of Ranis husband for the Assessment year 2013-14 with reasons. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 15

NEERAJ GUPTA CA IPCC TAX CLASSES

CLUBBING OF INCOME

Question 19. Mr. Ghose has four minor children consisting 2 daughters and 2 sons. The annual income of 2 daughters was Rs.7,500 and Rs.5,000 and of sons was Rs.5,500 and Rs.1,250 respectively. The daughter who was having income of Rs.5,000 was suffering from a disability specified under section 80U. Work out the amount of income earned by minor children to be clubbed in the hands of Mr. Ghose. Question 20. Mr. Vatsan has transferred, through a duly registered document, the income arising from a godown to his sons, without transferring the godown. In whose hands will the rental income from godown be charged? Question 21. Mr. Dhaval and his wife Mrs. Hetal furnish the following information : Salary income (computed) of Mrs. Hetal Income of minor sons B suffers from disability specified in Section 80U Income of minor daughter C from singing Income from profession of Mr. Dhval Cash gift received by C on 2.10.2012 from friend of Mrs. Hetal on winning of singing competition Income of minor married daughter A from company deposit Rs. 4,60,000 1,08,000 86,000 7,50,000 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 childrens income are as under : Rs. Minor daughter has earned the following income: From a TV show 50,000 From interest on FD with a bank (deposited by Mr. Dhaval from his 5,000 income) Minor son has earned the following income : From the sale of a own painting 10,000 From interest on FD with a bank (deposited by Mr. Dhaval fro his income) 1,000

Questions based on study module


Question 23. Mr. A is an employee of X Ltd. and he has 25% shares of that company. His salary is Rs.50,000 p.m. Mrs. A is working as a computer software programmer in X Ltd. at a salary of Rs.30,000 p.m. She is, however, not qualified for the job. Compute the gross total income of Mr. A and Mrs. A for the A.Y. 2013-14, assuming that they do not have any other income. Question 24. Mr. B is an employee of Y Ltd. and has substantial interest in the company. His salary is Rs.20,000 p.m. Mrs. B is also working in Y Ltd. at a salary of Rs.12,000 p.m. without any qualifications. Mr B also receives Rs.30,000 as interest on securities. Mrs. B owns a house property which she has let out. Rent received from tenants is Rs.6000 p.m. Compute the gross total income of Mr. B and Mrs. B for the A.Y. 2013-14.

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NEERAJ GUPTA CA IPCC TAX CLASSES

CLUBBING OF INCOME

Question 25 : Write a short note on Cross Transfers. Ans: Cross Transfers In the case of cross transfers also (e.g. A making gift of Rs.50,000 to the wife of his brother B for the purchase of a house by her and a simultaneous gift by B to As minor sons of shares in a foreign 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 connected as to form part of a single transaction, and each transfer constitutes consideration for the other by being mutual or otherwise. Thus, in the instant case, the transfers have been made by A and B to persons who are not their spouse or minor child so as to circumvent the provisions of this section, 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 if two transactions are inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would be attracted. Accordingly, the income arising to Mrs. B from the house property should be included in the total income of B and the dividend from shares transferred to As 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 -2012
Question (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 to credit the interest on the deposit @ 9% from 01.04.2012 to 31.03.2013 to the savings bank 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.25,000 from the firm for promoting the sales of the firm. Mrs. A possesses no technical or professional qualification. (c) Mr. A gifted a flat to Mrs. A on April 1, 2012. During the previous year the flat had income 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. As 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. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 17

NEERAJ GUPTA CA IPCC TAX CLASSES

CLUBBING OF INCOME

IPCC NOV - 2011


Before solving the following question, students please note that deemed ownership u/s 27 is attracted if house property is transferred without consideration to spouse or minor children (other than minor married daughter). Question 27. (5 Marks) Shri Madan (age 67 years) gifted a building owned by him to his sons wife Smt. Hema on 01.10.2012. 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 for the second half-year was not paid till 30.09.2013. Incomes of Shri Madan and Smt. Hema other than income from house property are given below: Name Shri. Madan Smt.Hema Business income Rs.1,00,000 Rs.(75,000) Capital gain Rs.50,000 (long-term) Rs.2,00,000 (short-term) Other sources Rs.1,50,000 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 from property given above and also compute their income-tax liability for the assessment year 201314.

PCC NOV - 2011


Question 28. (5 Marks) Mr. X started a proprietary business on 01.04.2011 with a capital of Rs.5,00,000. He incurred a loss 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. Compute the amount to be clubbed in the hands of Mrs. X for the Assessment Year 2013-2014. If Mrs. X gave the said amount as loan, what would be the amount to be clubbed?

IPCC MAY - 2011


Question (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 is not revocable during the life time of the beneficiary/transferee?

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NEERAJ GUPTA CA IPCC TAX CLASSES

CLUBBING OF INCOME

Question 30. (8 Marks) Mr. John commenced a proprietary business in the year 2003. His capital as on 01.04.2011 was Rs.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.3,00,000 Previous year 2012-13 = Profit Rs.4,40,000 During the Financial Year 2012-13, he sold a vacant site which resulted in chargeable long-term capital 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 - 2008


Question 31. (2 Marks) Already covered Mr. X has transferred through a duly registered document the income arising from a godown, to his son, without transferring the godown. In whose hands will the rental income from godown be charged?

PCC NOV - 2007


Question (5 Marks) Already covered

PE-II NOV - 1999


Question 32 Balu is the Karta of a HUF, whose members derive income as given below: (i) Income from Balus own business (ii) Mrs. Balu a dermatologist draws salary (iii) Minor son Deepak (earning interest on fixed deposits with bank, which were gifted to him by his grandfather) (iv) Minor daughter Priya gave a dance performance and received remunerate (v) Deepak got winnings from lottery (gross) Explain how the above will be taxed. (10 Marks) Rs. 50,000 80,000 15,000 1,00,000 2,00,000

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