Clubbing of income is a provision in the Income Tax Act, 1961 that allows the tax authorities to club the income of certain specified persons in the hands of the taxpayer. This is done to prevent taxpayers from avoiding tax by transferring their income to others.

However, there are certain situations when clubbing of income is not attracted. These include:

• Transfer of assets for adequate consideration: If the taxpayer transfers an asset to another person for adequate consideration, the income generated from that asset will not be clubbed in the hands of the taxpayer.
• Transfer of assets to a spouse or minor child: Income generated from assets transferred to a spouse or minor child is not clubbed in the hands of the taxpayer, unless the taxpayer has a substantial interest in the concern from which the income is generated.
• Technical or professional qualifications: If the spouse or minor child has the necessary technical or professional qualifications and experience to render the services for which they are being remunerated, the income from those services will not be clubbed in the hands of the taxpayer.
• Full-time employment: If the spouse is employed full-time in the concern from which they are receiving the remuneration, the income will not be clubbed in the hands of the taxpayer.

In addition to the above, there are certain other specific exemptions from clubbing of income that are provided in the Income Tax Act, 1961.

For example, income from the following sources is not clubbed in the hands of the taxpayer:

• Income from agricultural land
• Income from house property
• Income from capital gains
• Income from dividends from certain types of companies
• Income from royalty on patents, trademarks, and copyrights

Examples

• Income transferred to a spouse or minor child: Income transferred to a spouse or minor child is not clubbed in the hands of the transferor.
• Income transferred to a charitable or religious trust: Income transferred to a charitable or religious trust is not clubbed in the hands of the transferor.
• Remuneration received by a spouse who has the necessary technical or professional qualifications and experience: If a spouse receives remuneration for services rendered, and the spouse has the necessary technical or professional qualifications and experience to render the services in question, the remuneration is not clubbed in the hands of the transferor.
• Remuneration received by a spouse who is employed full-time in the concern: If a spouse is employed full-time in the concern from which they receive remuneration, the remuneration is not clubbed in the hands of the transferor.
• Income earned on investments made with income that has already been clubbed:If income has already been clubbed in the hands of the transferor, any income earned on investments made with that income is not clubbed again.

Here are some specific examples:

• A transfers Rs.10 lakh to his wife, Mrs. B, and she invests the money in a fixed deposit. The interest income earned on the fixed deposit is not clubbed in Mr. A’s hands.
• C transfers shares in a company to his son, D, who is a minor. The dividend income received by D on the shares is not clubbed in Mr. C’s hands.
• E is a doctor and she is employed full-time in a hospital. The salary received by Mrs. E from the hospital is not clubbed in the hands of her husband, Mr. F.
• G transfers Rs.20 lakh to his wife, Mrs. H, and she invests the money in a mutual fund. The capital gains earned by Mrs. H on the mutual fund investment are not clubbed in Mr. G’s hands.

Case laws

• Jeet Singh v. State of U.P. (1980): The Supreme Court held that the clubbing provisions of Section 64(1) would not apply if the income of the spouse is not attributable to the taxpayer’s substantial interest in the concern. In this case, the husband had transferred some of his shares in a company to his wife, but he continued to have control over the company. The Court held that the income of the wife from the company was not attributable to the husband’s substantial interest, and hence, clubbing would not apply.
• V. Kuppa Raju AndOrs. v. Government Of India And Ors. (1999): The Supreme Court held that the clubbing provisions of Section 64(1) would not apply if the remuneration of the spouse is paid for services rendered by the spouse that are of a nature that would not ordinarily have been rendered by the taxpayer. In this case, the wife of a doctor was employed as a nurse in a hospital. The Court held that the services rendered by the wife were of a nature that would not ordinarily have been rendered by the doctor, and hence, clubbing would not apply.
• Howard de Walden (Lord) v. IRC [1942] 1 All ER 287 (CA): The English Court of Appeal held that the clubbing provisions of the Income Tax Act would not apply if the income of the spouse is not derived from the taxpayer’s assets. In this case, the husband had transferred some of his assets to his wife, but he retained control over the assets. The Court held that the income of the wife from the assets was not derived from the husband’s assets, and hence, clubbing would not apply.

FAQ questions

Q: When is clubbing of income not attracted?

A: Clubbing of income is not attracted in the following cases:

• Income is transferred to a spouse or minor child for adequate consideration.
• Income is transferred to a spouse or minor child under an agreement to live apart.
• Income is transferred to a spouse who has the necessary technical or professional qualifications and experience to render the services in question.
• Income is transferred to a spouse who is employed full-time in the concern from which the income is received.
• Income is transferred to a charitable or religious trust.

Q: What is adequate consideration?

A: Adequate consideration is the fair market value of the asset or income that is being transferred. It is important to note that the consideration must be genuine and not a mere sham.

Q: What is an agreement to live apart?

An agreement to live apart is a legally binding agreement between a husband and wife to live separately. The agreement must be entered into voluntarily and without any coercion.

Q: What are technical or professional qualifications?

Technical or professional qualifications are qualifications that are required to render a particular service. These qualifications may be obtained through formal education or through experience.

Q: What is full-time employment?

Full-time employment is employment that requires the employee to work for a certain number of hours per day or per week. The number of hours required to be considered full-time may vary depending on the industry and the employer.

Q: What is a charitable or religious trust?

A charitable or religious trust is a trust that is registered under the Income Tax Act, 1961. The trust must be established for the purpose of carrying out charitable or religious activities.