UNIT 3

Aggregation of Income and Taxability CO3

Clubbing of Income, Set-off and Carry Forward of Losses, Tax Deduction at Source (TDS),
Advance Payment of Tax, and Tax Collection at Source.

Clubbing of Income

As per the Income Tax Act, every person has to pay taxes on the taxable income earned. No
person is allowed to divert his income to any relatives to reduce tax liability. As the term
suggests, clubbing of income means adding or including the income of another person (mostly
family members) to one’s own income. This is allowed under Section 64 of the IT Act. However,
certain restrictions pertaining to specified person(s) and specified scenarios are mandated to
discourage this practice.

Section 60: Transfer of Income Without Transfer of Asset

Section 61: Income Arising from Revocable Transfer of Assets

Section 62: Exceptions Where Clubbing Provisions are Not Attracted Even in Case of
Revocable Transfer

Following two cases are the exceptions to the rule that incomes arising from revocable
transfers are taxed in the hands of the transferor:

1. a transfer by way of trust, which is not revocable during the lifetime of the beneficiary; and

2. any other transfer, which is not revocable during the lifetime of the transferee.

In the above cases, the income from the transferred asset is not includible in the total income of
the transferor, provided the transferor derives no direct or indirect benefit from such income.

Section 63: Meaning of Revocable Transfer

Transfer is deemed to be revocable if:

1. it contains any provision for the retransfer, directly or indirectly, of the whole or any part of
the income or assets to the transferor, or

2. it gives, in any way to the transferor, a right to reassume power, directly or indirectly, over
the whole or any part of the income or the assets.

Clubbing of Income Arising to Spouse

We’ll be studying this topic under three categories:

1. Income by way of remuneration from a concern in which the individual has substantial
interest [Section 64(1)(ii)]

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 Exception: If remuneration is received by spouse because of some technical and
professional qualification, and such remuneration is attributable to such qualification,
then the above provision is not applicable.
Note: Where both husband and wife are having substantial interest in a concern and
both receive remuneration from that concern, then remuneration is included in the
hands of that spouse whose total income is higher before clubbing remuneration.
2. Income arising to the spouse from an asset transferred without adequate consideration
[Section 64(1)(iv)]
Transferred Asset Invested in Business
Where any asset is transferred by an individual to his spouse or son’s wife and such
amount is invested in business by transferee, then proportionate profit of such business
shall be clubbed as per the following formula:
𝐼𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠× 𝐺𝑖𝑓𝑡𝑒𝑑 𝑏𝑦 𝐴𝑠𝑠𝑒𝑠𝑠𝑒𝑒
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑜𝑓 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑜𝑛 1𝑠𝑡 𝐷𝑎𝑦 𝑜𝑓 𝑃.𝑌.(𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)

3. Transfer of assets for the benefit of spouse [Section 64(1)(vii)]

Clubbing of Income Arising to Son’s Wife

We’ll be studying this topic under two categories:

1. Income arising to son’s wife from the assets transferred without adequate consideration by
the father-in-law or mother-in-law [Section 64(1)(vi)]

2. Transfer of assets for the benefit of son’s wife [Section 64(1)(viii)]

Section 64(1A): Clubbing of Minor’s Income

Income of minor child is taxable in hands of parent whose income is more before clubbing
minor’s income. However, in the following 3 cases, minor’s income is taxable in the hands of
minors only:

1. Income due to skill and talent

2. Income due to manual work

3. Minor suffering from disability

Notes:

1. While including minor’s income in the hands of parent, parent is eligible for exemption u/s
10(32) of ₹1,500 p.a. per child.

2. Once minor’s income is clubbed in the hands of one parent, it will continue to be clubbed
with that parent only in subsequent years. However, assessing officer may change after giving
opportunity of being heard.

3. Where the marriage of parents does not subsist, the income of minor shall be included in the
income of that parent who maintains the minor child in the relevant previous year.

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4. Clubbing provisions are applicable even in respect of income of minor married daughter.

5. Child includes stepchild as well as a legally adopted child.

6. If a house property is transferred by a parent to a minor child (other than a minor married
daughter), without consideration or for inadequate consideration, then the transferor parent
shall be treated as the deemed owner of such house property as per section 27. Therefore,
clubbing provisions would not get attracted and hence benefit u/s 10(32) shall also not be
applicable.

7. However, if the house property is transferred by a parent to his or her minor married
daughter, without consideration or for inadequate consideration, then, section 27(i) is not
attracted. In such a case, the income from house property will be included u/s 64(1A) in the
hands of that parent, whose total income before including minor child’s income is higher; and
benefit of exemption u/s 10(32) can be availed by that parent in respect of the income so
included.

Cross Transfers

Let’s take an example to understand this. Suppose I gift ₹50,000 to the wife of my brother,
Tushar, for investing in an FD, and Tushar simultaneously gifts shares worth ₹50,000 to my
minor son. This is known as cross transfer. Both the transfers are clearly inter-connected and
are parts of the same transaction in such a way that it can be said that the circuitous method
was adopted as a device to evade tax. Hence, clubbing provisions are attracted.

Accordingly, the interest income arising to Mrs. Tushar from the FD should be included in the
total income of Tushar and the dividend from shares transferred to my minor son would be
taxable in my hands. This is because Tushar and I are the indirect transferors to our spouse and
minor child, respectively, of income yielding assets, so as to reduce their burden of taxation.

Set-off and Carry Forward of Losses

If income is one side of the coin, loss is the other side. When a person earns income, he pays
tax.
However, when he sustains loss, law affords him to have benefit in the form of reducing the
said loss from income earned during the subsequent years. Thus, tax liability is reduced at a
later date, if loss is sustained.

This will be discussed on :

1. Set off of Loss in the Same Year

2. Carry forward and Set off of Loss in Subsequent Years

i) Basic Conditions for carry forward of loss.
ii) Conditions applicable to each Head of Income.

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In case computation results in to a positive figure, it is “Income.” Likewise, if the computation
results into a negative figure, it is ‘Loss”. Therefore, there cannot be loss from the head ‘Salary’.
Loss can occur from all the remaining heads.

The term “Set-off” and “Carry forward of losses” in simple words,

“Set-off” means adjustments of losses against the profit from another source/head of income in
the same assessment year.
If losses cannot be set-off in the same year due to inadequacy of eligible profit, then such losses
are carry forward to next assessment year for adjustment against the eligible profit of that
year.
The maximum period for which different losses can be carried forward for set-off has been
provided in the Act.

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Procedure for setting off losses:
The process of setting off of losses and their carry forward may be covered in the following
Steps:
Step 1.
Set-off loss from same head of income – “Inter-source”/Intra head adjustment.
Step 2.
If the loss is still existing after Step 1, loss can be set-off from other heads of income (subject to
certain restrictions) – “Inter - head” adjustments.
Step 3.
If loss still persists after Step 1 & Step 2, the same can be carried forward to the subsequent
assessment years – Carry forward of losses.

.No Type of loss to be carried Profit against which For how many years loss
forward to next year(s) carried forward loss can can be carried forward
be set off in next year(s)
1 House Property Loss Income under the head 8 years
Income from House
Property
2 Speculation Loss Speculation Profits 4 years

3 Non speculation business loss

3.1 On account of unabsorbed Any income except salary No time limit

depreciation capital income
expenditure on scientific
research and family
planning
3.2 Loss from a specified Income from a specified No time limit
business under section business under section
35AD 35AD
3.3 Other remaining business Any business profit 8 years
loss (whether from
speculation or
otherwise)
4 Capital Loss

4.1 Short term Capital Loss Any income under the 8 years
head “Capital Gains”

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4.2 Long term Capital Loss Long Term Capital Gains 8 years

5 Loss from the activity of Income from the activity 4 years

owning and maintaining of owning and
race horses maintaining race horses

From the below information, compute the total income of 'A' for Assessment Year 2022-23;

Description Rs.
Income under the head salary 3,00,000
Income under the head house property 40,000
Business loss (-) 1,90,000
Loss from a specified business referred to in section 35AD (-) 60,000
Short-term capital loss (-) 60,000
Long-term capital gain without STT 2,40,000

Solution
Description Rs. Rs.
Income from salary 3,00,000
Income from House Property

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Income 40,000
Less: Business loss adjusted (-) 10,000 30,000
Business loss (-) 1,90,000
Less: Set off against capital gain 1,80,000
Less: Set off against house property income 10,000 Nil
Loss from specified business not allowed to be set off (-) 60,000
Income from Capital Gain
Long-term Capital Gain without STT 2,40,000
Less: Short-term capital loss (-) 60,000
1,80,000
Less: Business loss adjusted (-) 180,000 Nil
Gross total income 3,30,000
Less: Deductions Nil
Total Income 3,30,000
Note: Business loss should first be set off from long-term capital gain as it is taxable @ 20%
whereas the income from house property is taxable at much lower rate, in this case, @ 5%.

Tax Deduction

The total income of an assessee for the previous year is taxable in the relevant assessment
year. For example, the total income for the P.Y. 2020-21 is taxable in the A.Y. 2021-22.
However, income-tax is recovered from the assessee in the previous year itself through – (1)
Tax deduction at source (TDS) (2) Tax collection at source (TCS) (3) Payment of advance tax
Another mode of recovery of tax is from the employer through tax paid by him under section
192(1A) on the non-monetary perquisites provided to the employee. These taxes are
deductible from the total tax due from the assessee. The assessee, while filing his return of
income, has to pay self-assessment tax under section 140A, if tax is due on the total income as
per his return of income after adjusting, inter alia, TDS, TCS, relief of tax claimed under section
89, tax credit claimed to be set off in accordance with the provisions of section 115JD, any tax
or interest payable according to the provisions of section 191(2) and advance tax.

Tax Deduction at Source (TDS)

TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of
making specified payments such as rent, commission, professional fees, salary, interest etc. by
the persons making such payments. Usually, the person receiving income is liable to pay
income tax. But the government with the help of Tax Deducted at Source provisions makes sure
that income tax is deducted in advance from the payments being made by you. The recipient of
income receives the net amount (after reducing TDS). The recipient will add the gross amount
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to his income and the amount of TDS is adjusted against his final tax liability. The recipient
takes credit for the amount already deducted and paid on his behalf.

TDS should be deducted by any person who provides perks or benefits, whether convertible
into money or not, to any resident for carrying out any business or profession by such resident.
The person giving such benefits should deduct TDS at 10% on the value or aggregate value of
such benefit given.

Let’s take an example to understand this. Suppose Amitabh Bachchan is the employer of Shahrukh
Khan. Amitabh Bachchan is supposed to pay ₹1 lakh per month as salary to Shahrukh Khan. At the time
of payment, Amitabh Bachchan will not pay the entire ₹1 lakh to Shahrukh Khan, rather, he would pay
Shahrukh a little less, say, ₹90,000. The difference of ₹10,000 thatAmitabh Bachchan hasn’t paid to
Shahrukh Khan, will be deposited by him (Amitabh Bachchan) to the government’s account, on
Shahrukh Khan’s PAN. Therefore, ₹10,000 tax has been paid on behalf of Shahrukh Khan by Amitabh
Bachchan. Shahrukh Khan will still consider the entire ₹1 lakh (i.e., the gross value) as his salary
income, and calculate the tax liability on this. From this tax liability, he will reduce the amount
deposited by Mr. Bachchan on his behalf, i.e., ₹10,000, and will be required to pay only the balance
amount.
Here, we can say that the source of payment for Mr. Khan was Mr. Bachchan, and since Mr. Bachchan
only deducted certain amount as tax, this process is known as “Tax Deducted at Source”.

Rates of TDS
1. The recipient is required to furnish his PAN to the payer.
2. If the recipient furnishes his PAN to the payer, the payer is required to deduct TDS at the prescribed
rates.
3. However, if the recipient does not furnish his PAN to the payer, the payer is required to deduct TDS
at the prescribed rate, or, 20%, whichever is higher.

Surcharge and Health and Education Cess on TDS

Surcharge and Health and Education Cess on TDS is applicable only in the following two cases:
1. Payment of Salary to a Resident or Non-Resident
2. Payment/Credit (other than salary) to a Non-Resident or a Foreign Company

Any person making specified payments mentioned under the Income Tax Act is required to
deduct TDS at the time of making such specified payment. But no TDS has to be deducted if the
person making the payment is an individual or HUF whose books are not required to
be audited.

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However, in case of rent payments made by individuals and HUF exceeding Rs 50,000 per
month, are required to deduct TDS @ 5% even if the individual or HUF is not liable for a tax
audit. Also, such Individuals and HUF liable to deduct TDS @ 5% need not apply for TAN. Your
employer deducts TDS at the income tax slab rates applicable. Banks deduct TDS @10%. Or
they may deduct @ 20% if they do not have your PAN information.
Section 191: Direct Payment
Section 192: Salary
Section 192A: Premature Withdrawal from Employees Provident Fund
Section 193: Interest on Securities
Section 194: Dividends
Section 194A: Interest Other Than Interest on Securities
Sections 194B and 194BB: Winnings from Lotteries, Crossword Puzzles
and Horse Races
Section 194C: Payments to Contractors and Sub-Contractors
Section 194D: Insurance Commission
Section 194DA: Payment in Respect of Life Insurance Policy
Section 194E: Payments to Non-Resident Sportsmen or Sports
Associations
Section 194EE: Payments in Respect of Deposits Under National Savings
Scheme etc.
Section 194F: Repurchase of Units by Mutual Fund or Unit Trust of India
Section 194G: Commission etc. on the Sale of Lottery Tickets
Section 194H: Commission or Brokerage
Section 194I: Rent
Section 194IA: Payment on Transfer of Certain Immovable Property Other
Than Agricultural Land
Section 194IB: Payment of Rent by Certain Individuals or Hindu Undivided
Family
Section 194J: Fees for Professional or Technical Services
Section 194N: TDS on Cash Withdrawal
Section 194O: TDS on Payment by E-Commerce Operator to E-Commerce
Participants
Section 194P: TDS in case of Specified Senior Citizens
Section 197: Certificate for Deduction of Tax at a Lower Rate
Section 197A: No Deduction in Certain Cases

What is a TDS certificate?

Form 16, Form 16A, Form 16 B and Form 16 C are all TDS certificates. TDS certificates have to
be issued by a person deducting TDS to the assessee from whose income TDS was deducted
while making payment. For instance, banks issue Form 16A to the depositor when TDS is
deducted on interest from fixed deposits. Form 16 is issued by the employer to the employee.

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 New Section 194S- A person is liable for Tax Deduction at Source (TDS) at 1% at the time
of payment of the transfer of virtual digital assets.
 Sale of immovable property under Section 194-IA- It is proposed to amend the amount
on which TDS should be deducted. The person buying the property should deduct tax at
1% on the sum paid/credited or the stamp duty value of such property, whichever is
higher.
 New Section 194R- TDS at 10% should be deducted by any person who provides perks or
benefits, whether convertible into money or not, to any resident for carrying out any
business or profession by such resident.

Advance Payment of Tax (Sections 207 to 219)

Advance Payment of Tax refers to the liability to pay Income Tax for income earned during the
same Financial Year. In general, taxpayers are required to pay tax only for the income of the
preceding year. However, if the tax payable is in excess of ten thousand rupees, the tax should
be remitted to the government before the due date mentioned in the Act. The purpose of
incorporating Advance Tax provisions in the Act is to ensure that revenue reaches the
Government without delay. According to Section 208 of Income Tax Act 1961, every person
whose estimated tax liability for the financial year exceeds Rs.10,000 has to pay tax in advance.

Calculation of Advance Tax Liability

1. Every assessee shall be liable to pay advance income-tax during any financial year in
respect of the taxpayer’s total income of the financial year if the amount of advance
income-tax payable exceeds ten thousand rupees.
2. The amount of advance income-tax payable by an assessee in the financial year should
be computed in the specified manner. The assessee should first estimate the total
income and calculate income-tax which is payable on the total income. The tax liability
should be calculated using the rates in force in the financial year. The tax payable should
include secondary and higher education cess. It should also include surcharge. The
assessee should note that surcharge is calculated at a percentage of income tax, while
cess is calculated as a percentage of the sum of income tax and surcharge.
3. The income-tax calculated as per the above step shall be reduced by the amount of
income-tax which would be deductible or collectible at source during the financial year
from any income which is taken into account in estimating the total income. Further, a
deduction should also be made in relation to the amount of credit availed under Section
207, allowed to be set-off in the financial year.
4. The balance amount of income-tax shall be the advance income-tax payable.
5. The advance income-tax, in case of any person other than a company, shall be payable in
three installments during the financial year, on or before the specified dates.

Who should pay advance tax?

Salaried persons are not required to pay advance tax, as the employer usually deducts tax at
source (TDS). However, if an employee has any other income other than salary income for

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which tax has not been deducted at source and the tax liability exceeds more than Rs.10000,
then advance tax must be paid. On the other hand, professionals (self-employed), businessmen
and corporates will have to pay taxes in advance as they typically have taxable income that
exceeds the advance tax payment threshold.

When to pay advance tax?

The advance tax is to be paid in the following three installments on the following dates:

For Non-Corporate Assessee:

 On or before 15 September – not less than 30% of the tax payable for the year.
 On or before 15 December – not less than 60% of the tax payable for the year.
 On or before 15 March – not less than 100% of the tax payable for the year.

For Corporate Assessee:

On or before 15 June – not less than 15% of the tax payable for the year.
On or before 15 September – not less than 45% of the tax payable for the year.
On or before 15 December – not less than 75% of the tax payable for the year.
On or before 15 March – not less than 100% of the tax payable for the year.

How to pay advance tax?

You can pay advance tax using the tax payment challan at the bank branches impaneled with
the Income Tax department. Advance tax can be deposited with State Bank of India, ICICI Bank,
HDFC Bank, Indian Overseas Bank, Indian Bank, and other authorised banks. There are over
926 branches in India that can accept advance tax payments. At present, advance tax can also
be paid through the NDSL website.

Exemption for Senior Citizens

According to Section 207 of the Act, a resident senior citizen (an individual aged 60 years or
more) who does not have any income from business or profession is not liable to pay advance
tax. For instance, a senior citizen may have various sources of income such as rental income,
pension, interest from bank deposits, or dividends. Senior citizens do not have to pay advance
tax, as these sources of income do not fall under the income tax head of income from business
or profession. Also, this exemption is provided irrespective of the amount of income that a
senior citizen earns from a source other than business or profession.

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Tax Collection at Source
Tax Collected at Source (TCS) is a tax payable by a seller which he collects from the buyer at the time of
sale of goods. Section 206 of the Income Tax Act mentions the list of goods on which the seller should
collect tax from buyers.

Who is a Seller for TCS?

A seller is categorized as any individual or organization authorized under Tax Collected at Source. The
following are defined as Sellers –
1. Central Government
2. State Government
3. Statutory Corporation or Authority
4. Local Authority
5. Company
6. Co-operative Society
7. Partnership Firms
8. Any Individual or Hindu Undivided Family (HUF) defined under the Section 44AB, who has gross
receipts or total sales that exceed the specified financial restricts based on the previous year
Who is a Buyer for TCS?
A buyer is categorsied as any individual, who receives the actual goods or the rights of receiving goods at
a tender, auction, sale, or other modes. All individuals (except for the below – mentioned list of
individuals and organizations) are classified as buyers for TCS –
1. Public Sector Entities
2. Central Government
3. State Government
4. Consulates and any other Trade Representations of a Foreign Nation
5. High Commission Embassies
6. Clubs such as social clubs or sports clubs
What Goods & Transactions Covered under TCS Provisions?
The following goods and/or transactions are considered for Tax Collected at Source –
1. Liquors of alcoholic nature including IMFL (Indian Made Foreign Liquor) that are deemed for
human consumption
2. Timber wood obtained from a leased forest area
3. Tendu Leaves
4. Timber wood obtained from any mode other than leased
5. Forest produces (other than timber and Tendu leaves)
6. Scrap
7. Parking lot tickets, Toll Plaza, Mining and Quarrying
8. Minerals that include iron ore, lignite or coal
9. Bullion having valuation over Rs. 2 lakh
10. Jewellery whose value exceeds Rs. Five lakhs
11. Motor vehicle purchases over Rs. 10 Lakhs

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What are the TCS Rates Applicable in India?
The rates of TCS for various goods and transactions are listed in the table below (source – Income Tax
Department of India.)
Kindly note that the interest charges for any late payment of the TCS are 1% for every month delayed.

Existing Reduced TCS Rates

Type of Goods TCS Rate (14/05/2020 to
(in %) 31/03/2021
Liquors of alcoholic nature including IMFL (Indian Made 1.00 NA
Foreign Liquor) that are deemed for human
consumption
Timber wood obtained from a leased forest area 2.50 1.875%
Tendu Leaves 5.00 3.75%
Timber wood obtained from any mode other than leased 2.50 1.875%
Forest produces (other than timber and Tendu leaves 2.50 1.875%
Scrap 1.00 0.75%
Parking lot tickets, Toll Plaza, Mining and Quarrying 2.00 1.5%
Minerals that include iron ore, lignite or coal 1.00 0.75%
Bullion having valuation over Rs. 2 lakh or Jewelry 1.00
whose value exceeds Rs. Five lakhs
Purchase of Motor vehicle exceeding Rs. 10 Lakhs 1.00 0.75%

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