Subject :

DIRECT TAXATION II

Project Topic :CLUBBING OF

INCOME AND RETURN OF
INCOME

Name : Gunain Sunil Moryani

Roll Number : HSBAF163

Class : SYBAF

Division : B
INTRODUCTION
Clubbing Of Income means adding or including the income of another person to ones own income .
This allowed under Section 64 of The Income Tax Act . Its a taxation principle involving the
inclusion of income in hands of another taxpayer . This is implemented to prevent tax evasion and
ensure income is not unduly distributed among related person to exploit tax benefits .

NEED AND IMPORTANCE

• Prevents Income Splitting :Clubbing of income prevents individuals form splitting their
income among their family members or other entity . This is done to ensure that each taxpayer is
taxed on their actual own income rather than distributing it among family members for lower tax
rates .

• Fair Taxation : Clubbing of income ensures that each taxpayer is properly taxed based on
their actual income leading to fairness in tax system .

• Wealth Distribution Control : Clubbing rules contribute to controlling the distribution of

wealth within family or among related persons , preventing conservation of income in hands of
specific individuals to manipulate tax liabilities .

• Preserves Government revenue : Without clubbing rules , high income individuals could
potentially shift their income to family members in lower taxation slabs , resulting in loss of tax
revenue for the government . Thus , clubbing rules helps to preserve tax revenue for government
.

• Maintaining Equity In Taxation : Clubbing rules lead to maintaining fairness and equity
in tax system . Without clubbing provisions , there would be an imbalance and those with higher
incomes might find ways to avoid paying taxes by diverting income to individuals with lower
tax liabilities .

• Encouragement Of Genuine Transactions : While preventing tax evasion ,

clubbing rules also recognise genuine business transaction to exclude them
from the purview , allowing for legitimate financial planning and transaction
within family .
TYPES OF CLUBBING
A) Spouse’s Income -

• Situation 1: If spouse receives any remuneration irrespective of its nomenclature such as

salary , commission , fees or any other form and by any mode that is by cash or kind form any
concern in which spouse has a substantial interest

• Income To Be Clubbed : In such case U/s 64(1)(ii) , Income shall be clubbed in hands of
the taxpayer or spouse , whose income is greater .

• Exception To Clubbing : Clubbing is not attracted if spouse possess technical or

professional qualifications in ration to any income arising to spouse and such income is solely
due to spouse’s technical / professional knowledge and experience .

• Situation 2 : Direct or indirect transfer of assets to spouse for inadequate consideration .

• Income To Be Clubbed : In such case U/s 64(1)(iv) , Income out of such asset is clubbed
with income of the transferor , provided asset is other than house property .

• Exception To Clubbing :
1) Where asset is received as part of divorce settlement .
2) If asset is transferred before marriage .
3) No husband and wife relationship subsists on the date of accrual of income
4) Asset is acquired by the spouse out of pin money .
B) Minor Child’s Income

• Situation : Any income arising or accruing to minor child . Where child includes both step
child and adopted child . This rule applies even to minor married daughter .

• Clubbing Of Income : Minor’s income will be clubbed in hands of higher earning parent .
In case of child’s parents does not subsist , then such income shall be clubbed in income of parent
who maintains the minor child in previous financial year . If minors income is clubbed in the
hands of parent then exemption of Rupees 1,500 is allowed to the parent .

• Exception :
1) In case of a disabled child having disability U/s 80U

2) Income earned by minor due to their own manual work , specialised skills or technical
knowledge . Example If minor child is a professional dancer and earns money through it then
such income earned by minor is not be clubbed with income of parents

C ) Daughter In Law

• Situation : Transfer of asset directly or indirectly to daughter in law for inadequate

consideration .

• Clubbing Of Income : In such case , U/s 64(1)(vi) , Anu income from such transferred asset
is to be clubbed in come of the transferor .

D) Hindu Undivided Family (HUF)

• Situation : In case , member of HUF transfers his individual property to HUF for inadequate
consideration or converts such property into a HUF property .

• Clubbing Of Income : In such cases , U/s 64(2) , income from such converted property
must be clubbed in hands of the individual .
Case Study - Minors Income Clubbing
Illustration :
1) Mr.A a parent invests a certain sum of money in fixed deposit in the name of his minor child
‘B’.On this fixed deposit ‘B’ gets interest of Rupees 12,000/-. Now income of Mr.A is higher
than that of Mrs.A . In such case the income form interest revived by ‘B’ will be clubbed in
income of Mr.A and on such clubbing a exemption of Rupees 1,500 will be provided to Mr.A

2) Harsh is the minor son of Mr.Mehta and Mrs.Mehta during the previous year 2022-23 , the
first ever income of harsh is Rupees 5,000/- . Now income of Mrs. Mehta is higher than
income of Mr. Mehta so in such case harsh’s income will be clubbed in income of Mrs.Mehta
and an exemption of Rupees 1,500/- . So a net of Rupees 3,500 is clubbed in hands of
Mrs.Mehta .

Case Study - Spouse’s Income Clubbing

1) Mr. Sharma gifted his wife Rupees 5,00,000 .The wife invests this amount in a fixed deposit
giving interest @10% per annum . Since Rupees 5,00,000 gifted to his wife so it is non
taxable.But the interest of Rupees 50,000 earned will be clubbed in hands of Mr.Sharma under
section 64(1)(iv).

2) Mr.A has substantial interest in ‘X’ Ltd and Mrs.A is employed by ‘X’ ltd as she was wife of
Mr.A . It came to note that Mrs.A doesn’t have any experience , technical or professional
qualification for the Job . In such case the income or salary relied by Mrs.A will be clubbed
with income of Mr.A .
RETURN OF INCOME - SEC 139

Introduction :
Section 139 of the Income Tax Act ,1961 lays down provision and rules related to filing of income
tax returns in India

Purpose : The main objective of Section 139 is to ensure that taxpayers disclose their financial
transactions and income earned to the tax authorities .

Applicability :
• Every Person with a total income greater than the exemption limit has to file income tax within
defined due date .

• Any private , public or foreign entity located in India or doing business in India

• Residents who have assets located outside India or any entity which retains authority for an
account based outside India

• Every Hindu Undivided family , Association Of Persons and Body Of Individuals have to file an
income tax return if their income exceeds prescribed limit .

• Voluntary Tax Returns are specific cases when individuals or entity are compulsorily required to
file their tax returns .

CHARACTERISTICS

• Mandatory Filing : This section mandates filing of income tax retunes for eligible
taxpayers .

• Forms And Formats : Prescribes various forms for filing returns , catering to different
sources and levels of income .

• Threshold Limits : Specifies the threshold limit beyond which filing becomes mandatory for
different categories of taxpayers .

• Assessment Year : Assessment Year refers to the year in which income return is filed .
• Previous Year : Previous Year refers to year for which income tax return is filed in assessment
year .
Types Of Returns

• ITR -1 (SAHAJ) : It is applicable for individuals with income from salary , a house property
and income from other or various sources .

• ITR -2 : It is applicable for individuals and Hindu Undivided Family (HUF) not having income
from business or profession . It is useful for those having capital gains , foreign income or
agricultural income exceeding a specific threshold .

• ITR-3: It is applicable for individuals and Hindu Undivided Families having income from
proprietary business or profession . It is useful for those with income from partnership firms .

• ITR-4(SUGAM) : It is applicable for individuals and Hindu Undivided Families having

presumptive income from business and profession. It is suitable for small business opting for
presumptive taxation scheme .

• ITR-5 : It is applicable for Association Of Persons (AOP) and Body Of Individuals (BOI).It is
useful for entities not claiming exemption under Section 11 (like Charitable institutions ) .

Company Returns :

• ITR-6 : It is applicable for companies other than those claiming exemption under section 11.It
is useful for both private and public companies .

• ITR-7 : It is applicable for entities including charitable trusts and political parties , required to
furnish returns under Section 139(4A) or Section 139(4B).

Other Forms :

• ITR-8 : It is applicable for individuals and entities providing details of the accounts audited
under The Income Tax Act .

• ITR-1(4) : It is applicable fro individuals qualifying for the presumptive taxation scheme
under section 44AD.

• ITR-2A : It is applicable for individuals and Hindu Undivided Families not having income
from business or profession and capital gains .
DUE DATES AND EXTENSIONS :
Due Dates :

• Individuals : Generally the due date for filing income tax returns is 31st, July of the
assessment year.Though it can be extended in certain specific cases

• Companies : Due dates vary on the basis of type of company and whether the books of
accounts of company is audited .

Extensions : Taxpayers can request an extension beyond the due date . However , its important to
comply with the conditions outlined by the tax authorities .

Importance Of Filing Returns :

• Legal Compliance : Filing of income tax returns is a must under The Income Tax Act . Non
Compliance can lead to penalties and legal action .

• Claiming Deductions : Filing of income tax returns allows individuals to claim various
deductions and exemptions available under tax laws , thus reducing the net taxable income and
overall tax liability .

Filing Under Sec 139