Clubbing of income means the inclusion of income of a person in the gross total income of the major earner while computing his/her taxable income. In general, these clubbing provisions are applicable among family members. The income of a spouse, child are clubbed together with the income of major earner of the family.
Relationship of husband and wife
The relation between the transferor and transferee as husband and wife must subsist at the time of transfer of the asset and at the time when income is accrued. Therefore, if the asset is transferred before marriage, then such transfer is outside the scope of this section.
In a situation where the transferor-spouse dies, income, though continued to be enjoyed by the transferee, cannot be clubbed in the hands of the deceased transferor’s heir, as a widow or widower is not a spouse.
Income from assets transferred to spouse
In computing gross total income of an individual, all the income arising (direct or indirect), subject to Section 27(i), to the spouse of such individual from assets transferred directly or indirectly without adequate consideration or in connection with an agreement to live apart shall be included. Where a husband (being the major income earner) transfers any asset to his wife, then the income generated from such transferred asset shall be clubbed in the income of the transferor (husband) to the extent of the inadequacy of consideration.
Section 64(1)(iv) is applicable only if the following conditions are satisfied:
1. The assessee is an individual.
2. The assessee has transferred an asset (other than house property).
3. The asset is transferred by the assessee to his/her spouse.
4. The transfer of the asset may be direct or indirect.
5. The asset is transferred otherwise than for adequate consideration or in connection with an agreement to live apart.
If the abovementioned conditions are satisfied, any income arising from such transferred asset shall be clubbed to the income of the transferor and the same shall be deemed to be the income of the transferor. However, the income arising from transferred asset must be computed in the same way as it would be if the asset has not been transferred. All exemptions and deductions in respect of such income can be claimed by the transferor.
The provisions under Section 64(1)(iv) is not applicable in the following cases:
1. Where the assets are being transferred before marriage.
2. Where the assessee transfers the assets for adequate consideration.
3. Where the assessee transfers the assets in connection with an agreement to live apart.
4. Where on the date of accrual of income, no husband and wife relationship exists between transferor and transferee.
5. Where the asset is acquired by the spouse out of pin money.
In the above mentioned cases, income-generating from transferred asset cannot be clubbed in the hands of the transferor.