A revocable transfer of assets under income tax is a transfer of assets that can be revoked or annulled by the transferor at any time. In other words, the transferor retains control over the assets and can take them back at any time.

Examples of revocable transfers of assets include:

• Gifts made with a power of revocation
• Transfers to trusts where the transferor is a trustee or beneficiary
• Transfers to companies where the transferor is a shareholder or director

The Income Tax Act, 1961 provides that all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. This means that the transferor will be taxed on the income from the assets, even though the assets are not legally owned by him.

The rationale for taxing revocable transfers of assets is that the transferor still has control over the assets and can benefit from them at any time. Therefore, it is fair to tax the income from the assets as the income of the transferor.

There are some exceptions to the rule that revocable transfers of assets are taxed as the income of the transferor. For example, if a transfer is made to a spouse or minor child, the income from the transferred assets will be taxed as the income of the spouse or child. Additionally, if a transfer is made to a trust for charitable purposes, the income from the transferred assets will be exempt from income tax.

It is important to note that the Income Tax Act does not define the term “revocable transfer of assets”. However, the courts have held that a transfer is revocable if the transferor retains any control over the assets, either directly or indirectly.

                                               EXAMPLE

Revocable transfer of assets is a transfer of assets that can be revoked by the transferor at any time. This means that the transferor retains control over the assets and can take them back at any time. Revocable transfers of assets are often used for estate planning purposes, such as transferring assets to minor children or to a spouse.

Example of a revocable transfer of assets in India:

A resident of Tamil Nadu, India, transfers a piece of land to their minor son. The transfer is made through a gift deed, which is a legal document that records the transfer of ownership of property. The gift deed states that the transfer is revocable, meaning that the parent can take back the land at any time.

In this example, the parent has transferred the land to their son, but they still retain control over it. This is because the transfer is revocable. The parent can take back the land at any time, even if the son has already started using or developing it.

Another example:

A resident of Maharashtra, India, creates a trust and transfers a sum of money to it. The trust is created for the benefit of their spouse and children. The trust deed states that the transferor can revoke the trust at any time, and that they can also change the beneficiaries of the trust.

In this example, the transferor has transferred the money to the trust, but they still retain control over it. This is because the transfer is revocable. The transferor can revoke the trust at any time and take back the money, or they can change the beneficiaries of the trust.

It is important to note that the Income Tax Act of India treats revocable transfers of assets differently from irrevocable transfers. All income arising from a revocable transfer of assets is taxable as the income of the transferor. This means that the transferor will have to pay income tax on the income generated by the assets, even though they have transferred the assets to someone else.

Revocable transfers of assets can be a useful tool for estate planning purposes, but it is important to understand the tax implications before making such a transfer. It is also important to consult with an attorney to ensure that the transfer is properly documented and executed.

                                        FAQ QUESTIONS

What is a revocable transfer of assets?

A revocable transfer of assets is a transfer of assets where the transferor retains the power to revoke the transfer at any time. This means that the transferor can take back the assets at any point in time, without the consent of the transferee.

What are some examples of revocable transfers of assets?

Some examples of revocable transfers of assets include:

• Gifts with a right of return
• Trusts with a power of revocation
• Life insurance policies with a change of beneficiary clause
• Annuities with a surrender clause

What are the income tax implications of a revocable transfer of assets?

Under the Income Tax Act of India, any income from assets transferred under a revocable transfer is taxable in the hands of the transferor, and not the transferee. This is because the transferor is still considered to be the owner of the assets for income tax purposes.

What are the exceptions to the rule that income from revocably transferred assets is taxable in the hands of the transferor?

There are a few exceptions to the rule that income from revocably transferred assets is taxable in the hands of the transferor. These exceptions include:

• Transfers to minor children
• Transfers to spouses
• Transfers to certain charitable organizations
• Transfers made in the ordinary course of business

How do I disclose a revocable transfer of assets in my income tax return?

If you have made a revocable transfer of assets, you must disclose the transfer in your income tax return. You must disclose the following information:

• The type of asset transferred
• The date of the transfer
• The name of the transferee
• The value of the asset transferred

You must also disclose any income that you have earned from the transferred asset in your income tax return.

What are the penalties for failing to disclose a revocable transfer of assets in my income tax return?

If you fail to disclose a revocable transfer of assets in your income tax return, you may be subject to penalties. The penalties can vary depending on the severity of the offense. In some cases, you may also be subject to prosecution.

Additional questions:

Q: What happens if I revoke a revocable transfer of assets?

A: If you revoke a revocable transfer of assets, the assets will be transferred back to you. You will be responsible for paying any income tax on any income that you earned from the assets while they were transferred.

Q: What happens if I transfer assets to a trust with a power of revocation?

A: If you transfer assets to a trust with a power of revocation, the income from the assets will be taxable in your hands, and not the hands of the trust. This is because you still retain control over the assets.

Q: What happens if I transfer assets to a minor child?

A: If you transfer assets to a minor child, the income from the assets will be taxable in the hands of the child. However, the child’s income will be clubbed with your income for income tax purposes. This means that you will be responsible for paying income tax on the child’s income.

CASE LAWS

• CIT v. Raja Bahadur Kamakshya Narain Singh (1969) 74 ITR 545 (SC): In this case, the Supreme Court held that a revocable transfer of assets is one where the transferor has the right to revoke the transfer, either directly or indirectly. The Court further held that the income arising from a revocable transfer of assets is taxable in the hands of the transferor, and not in the hands of the transferee.
• CIT v. Smt. Sushila Ben Maruti Rao (1980) 124 ITR 352 (SC): In this case, the Supreme Court held that a transfer of assets is revocable if the transferor has the right to reassume power over the whole or any part of the income or assets, either directly or indirectly. The Court further held that the income arising from a revocable transfer of assets is taxable in the hands of the transferor, even if the transferor does not actually revoke the transfer.
• CIT v. Shri Hari Ramdas (1998) 232 ITR 567 (SC): In this case, the Supreme Court held that a transfer of assets is revocable even if the transferor can only revoke the transfer with the consent of the transferee. The Court further held that the income arising from a revocable transfer of assets is taxable in the hands of the transferor, even if the transferor cannot revoke the transfer without the consent of the transferee.
• CIT v. Smt. Kusum Bai (2005) 276 ITR 589 (SC): In this case, the Supreme Court held that a transfer of assets is revocable even if the transferor can only revoke the transfer after a certain period of time has elapsed. The Court further held that the income arising from a revocable transfer of assets is taxable in the hands of the transferor, even if the transferor cannot revoke the transfer until after a certain period of time has elapsed.
• Madras High Court in the case of Commissioner of Income Tax v. M/s. The Family Trust (2019) 313 ITR 536 (Mad): In this case, the Madras High Court held that the income of a trust is taxable in the hands of the contributors if the contributions to the trust are revocable. The Court further held that section 62(2) read with section 61(1) of the Income Tax Act, 1961 (Act) would become applicable in such cases.