Income of an Individual to Include Income of Spouse (Husband/Wife of the Taxpayer) - Clubbing of Income [Section 64]

1. Remuneration of Spouse from a concern in which the other Spouse has Substantial Interest [Section 64(1)(ii)]:

2. When an Individual is Assessable in respect of Income from Assets Transferred to Spouse [Section 64(1)(iv)]:

3. An Individual is Assessable in respect of Income from Assets Transferred to Son's Wife [Section 64(1)(vi)]:

4. An Individual Is Assessable In Respect Of Income From Assets Transferred To A Person For The Benefit Of Spouse [Section 64(1)(vii)]

5. An Individual Is Assessable In Respect of Income from Assets Transferred to a Person tor the Benefit of Son's Wife [Section 64(1)(viii)]

1. Remuneration of Spouse from a concern in which the other Spouse has Substantial Interest [Section 64(1)(ii)]:

Section 64(1)(ii) is applicable if the following conditions are satisfied—

1. Condition 1 : The taxpayer is an individual.

2. Condition 2 : He/she has a substantial interest in a concern.

3. Condition 3 : Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-mentioned concern.

4. Condition 4 : Spouse is employed in the concern without any technical or professional knowledge or experience.

If the aforesaid conditions are satisfied, then salary income of the spouse will be taxable in the hands of the taxpayer.

In computing the total income of an individual, there shall be included all such sums as arise 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.

Therefore, any remuneration derived by a spouse from a concern in which the other spouse has a substantial interest, shall be clubbed in the hands of the spouse who has a substantial interest in that concern.

Any other income, not specified above, is outside the scope of this section and will not the clubbed even if it accrues to the spouse from a concern in which the individual has a substantial interest.

(A) No Clubbing if Remuneration is due to Technical or Professional Qualifications:

The provisions of this clause shall not apply to any income arising to the spouse:

1. on account of technical or professional qualifications possessed by the spouse, and

2. the income is solely attributable to the application of his/her technical or professional knowledge or experience.

For example,

X is a partner in a partnership concern and is entitled to 50% share of the profit of the firm. Mrs. X is employed as the General Manager of the firm and is getting a salary of Rs.25,000 per month. The taxable salary of Mrs. X will be clubbed with the total income of X under the head 'Income from salaries'. However, if Mrs. X is receiving the salary on account of her technical or professional knowledge or experience, then the salary would not be clubbed.

(B) Where both Husband and Wife have Substantial Interest and both are getting Remuneration from the concern:

If the husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income, before including such remuneration, is greater. In this case, the clubbing will be done for the first time in the previous year in which the following three conditions are satisfied:

1. Both the husband and wife have a substantial interest in the concern.

2. Both the husband and wife get remuneration from such a concern.

3. The relationship of husband and wife subsists at the time of accrual of such income.

Where such income is once included in the hands of either spouse, any such income arising in any succeeding year shall not be included in the total income of other spouse unless the Assessing Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary so to do.

(C) Substantial Interest - Meaning

An individual has a “substantial interest” in any of the following two situations—

1. In the case of a company - If an individual beneficially holds (individually or along with his relatives) 20 per cent (or more) of equity shares in the company at any time during the previous year.

2. In the case of a concern other than company - If an individual is entitled to 20 per cent (or more) share in profit in the concern (individually or along with his relatives) at any time during the previous year.

(D) When both Husband and Wife have Substantial Interest :

If once clubbing is done in the hands of X, salary of X and Mrs. X will be included in the income of X (in the subsequent years), even if income of X is lower than that of Mrs. X in that year. In such a case, the Assessing Officer can club the income of X and Mrs. X in the hands of Mrs. X only if the Assessing Officer is satisfied that it is necessary to do so. The Assessing Officer can take such action only after giving Mrs. X an opportunity of being heard.

2. When an Individual is Assessable in respect of Income from Assets Transferred to Spouse [Section 64(1)(iv)]:

Section 64(1)(iv) is applicable if the following conditions are satisfied—

1. Condition 1 : The taxpayer is an individual.

2. Condition 2 :He/she has transferred an asset (other than a house property).

3. Condition 3 :The asset is transferred to his/her spouse.

4. Condition 4 :The transfer may be direct or indirect.

5. Condition 5 : The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an agreement to live apart.

6. Condition 6 : The asset may be held by the transferee-spouse in the same form or in a different form.

• If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.

• The income from asset transferred must be calculated 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.

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—

1. Step 1 : Find out total investment of transferee-spouse in the business on the first day of the previous year.

2. 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.

3. 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).

4. 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:

1. If assets are transferred before marriage.

2. If assets are transferred for adequate consideration.

3. If assets are transferred in connection with an agreement to live apart.

4. If on the date of accrual of income, transferee is not spouse of the transferor.

5. 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.

3. An Individual is Assessable in respect of Income from Assets Transferred to Son's Wife [Section 64(1)(vi)]:

Section 64(1)(vi) is applicable if the following conditions are satisfied—

1. Condition 1 : The taxpayer is an individual.

2. Condition 2 :He/she has transferred an asset after May 31, 1973.

3. Condition 3 :The Asset is tranferred to his/her son's wife.

4. Condition 4 : Transfer may direct or indirect.

5. Condition 5 : The Asset is transferred otherwise than for adequate consideration.

6. Condition 6 : The Asset may be held hy the transferee in the same form or in a different form.

• If the above conditions are satisfied, then income from the asset is included in the income of the taxpayer who has transferred the asset.

For Example :

R transfers 1,000 10% bonds of Rs. 100 each of IDBI to his son's wife without any consideration. IDBI declares Rs.10,000 as interest. Although the sum of Rs.10,000 as interest is received by his son's wife, this amount shall be included in the income of R under the head 'Income from Other Sources' for the purpose of computing his total income.

Other Points ....

The following points should be noted—

1. 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.

2. Transfer includes indirect transfer.

3. For computation of income from transferred asset.

4. For consequences when the identity of transferred asset is changed.

4. An Individual Is Assessable In Respect Of Income From Assets Transferred To A Person For The Benefit Of Spouse [Section 64(1)(vii)]

Section 64(1)(vii) is applicable if the following conditions are satisfied—

Condition 1 : The taxpayer is an individual.

Condition 2 : He/she has transferred an asset.

Condition 3 : The transfer may be direct or indirect.

Condition 4 : The asset is transferred to a person or an association of persons.

Condition 5 : It is transferred for the immediate or deferred benefit of his/her spouse.

Condition 6 : The Transfer is without adequate consideration

If the aforesaid conditions are satisfied then income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.

In other words, where an asset is transferred to some other person, without adequate consideration for the benefit of the spouse of the individual as well as for some other persons, income on such an asset to the extent of benefit which accrues to the spouse, shall be included in the total income of the individual.

For example,

X transfers a house to his friend Y with a direction that 50% of the rental income is to be used for the benefit of his wife Mrs. X and 50% for others, then the rental income to the extent of 50% shall be included in the total income of X.

5. An Individual Is Assessable In Respect of Income from Assets Transferred to a Person tor the Benefit of Son's Wife [Section 64(1)(viii)]

Section 64(1)(viii) is applicable if the following conditions are satisfied—

1. Condition 1 : The taxpayer is an individual.

2. Condition 2 :He/she has transferred an asset after May 31, 1973.

3. Condition 3 :The Asset is tranferred to any Person or an Association Of Person (AOP).

4. Condition 4 : Transfer may be direct or indirect.

5. Condition 5 : The Asset is transferred for the immediate or deferred benefit of his/her Son's Wife.

6. Condition 6 : The Asset is Transferred otherwise than for adequate consideration.

• If the above conditions are satisfied, then income from the asset to the extent of such benefit is included in the income of the taxpayer who has transferred the asset..