1. Asset is transferred by an individual -
The above noted rule of clubbing is applicable if the transferor is an individual (i.e., husband or wife). If the transferor is a person other than an individual then the above provisions are not applicable.
2. An asset other than a house property is transferred -
To attract the above noted provisions, an asset other than a house property should be transferred. If a house property is transferred and the above noted conditions are satisfied, then the transferor is “deemed” as owner of the property under section 27 [see para 66.2-2a].
3. Relationship of husband and wife -
The relationship of husband and wife should subsist both at the time of transfer of asset and at the time when income is accrued. It means that transfer of asset before marriage is outside the scope of this section.
For instance, X transfers 1,000 debentures of IFCI without adequate consideration to his would be wife Miss Y on April 10, 2018. Interest income from these debentures will not be taxable in the hands of X even after their marriage.
Similarly, if transferor-spouse dies, income, though continued to be enjoyed by the transferee, cannot be included in the income of deceased transferor’s heir, as a widow or widower is not a spouse.
4. 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.10,000 to Mrs. A and A gifts property worth Rs.10,000 to Mrs. X, the transaction would be indirect transfer without consideration by X to Mrs. X and by A to Mrs. A.
5. Consideration measured in terms of Money or Money's Worth -
Natural love and affection may be good consideration but that would not be adequate consideration for the purpose of section 64(1). The consideration that supports the transfer should be one, the value of which can be measured in terms of money or money’s worth. Therefore, religious or spiritual benefits are not consideration which cannot be measured in terms of money or money’s worth.
- Payment of consideration in part - If consideration is payable in part, only the part of income referable to transfer for inadequate consideration is assessable in the hands of transferor.
6. There may be change in identity of transferred asset -
Where cash is gifted by an assessee to his wife and the latter deposits the same in a bank, interest income is included in the assessee’s total income.
7. 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.
8. Appropriation when Transferred Asset is Invested in a Business
An asset (maybe in cash or kind) is transferred by husband to his wife (or vice versa) (directly or indirectly) without adequate consideration. She invests the asset in a business. The amount of income that will be clubbed in the hands of husband will be determined as follows—
Step 1 : Find out total investment of transferee-spouse in the business on the first day of the previous year.
Step 2 : Find out the amount invested by the transferee-spouse out of the assets transferred to her without adequate consideration by her husband on the first day of the previous year in the said business.
Step 3 : Find out the taxable income (exempt income is not included) of the transferee-spouse from the business. If the transferee-spouse becomes a partner of a firm by investing the aforesaid asset then only interest income from the firm is considered under Step three. Share of profit from the firm is not considered under Step three as it is exempt under section 10(2A).
Step 4 : The amount which shall be included in the hands of transferor is determined as follows—
Step 3 × Step 2 ÷ Step 1.
9. Income arising from Accretions to Transferred Assets
If an assessee gifts debentures of a company to the spouse and, subsequently, the company issues bonus debentures to the spouse, interest on bonus debentures will not be includible in the hands of the assessee under section 64(1)(iv) as there is no transfer of bonus debentures by the assessee to the spouse.
10. When Clubbing of Income Under Section 64(1)(iv) is Not Applicable :
section 64(1)(iv) is not applicable in the following cases:
If assets are transferred before marriage.
If assets are transferred for adequate consideration.
If assets are transferred in connection with an agreement to live apart.
If on the date of accrual of income, transferee is not spouse of the transferor.
If property is acquired by the spouse out of pin money (i.e., an allowance given to the wife by her husband for her dress and usual household expenses)
In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the hands of the transferor.