TRANSFER OF ASSETS TO SPOUSE SECTION 64

1.                 if any person has transferred any asset, other than a house property to his or her spouse directly or indirectly without adequate consideration, in such cases, the income of the asset shall be clubbed in the income of transferor.

2.                 If the asset is transferred for adequate consideration, clubbing provisions are not applicable. Similarly, if the asset is transferred under an agreement to live apart, clubbing provision shall not apply.

Example

Mr. X has transferred one deposit to his wife Mrs. X by charging full consideration of Rs.10,00,000. In this case, interest income shall not be clubbed in the income of Mr. X.

3.                 If there is inadequate consideration, clubbing provisions shall be applicable only with regard to income relating to that part of the consideration which is considered to be inadequate.

Example

Mr. X has transferred one deposit of 10,00,000 for consideration of 7,00,000 and there is interest income of 1,00,000 from the said deposit, in this case, the income of 30,000 shall be clubbed.

4.                 In order to apply clubbing provision relationship of husband and wife must exist on the date of transfer of the asset and also on the date of accrual of income otherwise clubbing provision shall not be applied.

Example

Mr. X has transferred certain assets on 01.01.2019 to his would-be wife. He got married on 10.01.2019, in this case, clubbing provision shall not apply.

5.         If any person has transferred the asset to the spouse and there is an accretion to the asset, income from such accretion shall not be clubbed.

E.g. Mr. X gifted certain shares to Mrs. X and Mrs. X has received bonus shares, dividend from-bonus shares shall not be clubbed and also-capital gains on the sale of bonus shares shall not be clubbed.

Similarly, if an asset has been transferred to a spouse, income from the asset shall be clubbed but if the same income is invested further, income from such Income shall not be clubbed.

E.g. -Mr. X. has gifted one fixed deposit to Mrs. X; interest income from such -fixed deposit shall be clubbed but if the interest income is invested further, any fresh income from such income shall not be clubbed.

Illustration 1: Mr. X transferred 2,000 debentures of Rs.100 each of Wild Fox Ltd. to Mrs. X on 03.04.2019 without consideration. The company paid interest of Rs.30,000 in September, -2019 which was deposited by Mrs. X with K Finance Co. in October 2019.

K Finance Co. paid interest of Rs.3,000 up to March 2020. How would both the interest income be charged to tax?

Solution:

As per section 64(1), income arising from assets transferred without adequate consideration by an individual to his spouse is liable to be clubbed in the hands of the individual, but if there is any further income from -such income, it will not be clubbed. Therefore, Rs.30,000, being the interest on debentures received by Mrs. X. in September 2019 Will be clubbed with the income of Mr. X, since he had transferred. the debentures of the company without consideration to her.

However, the interest of Rs.3,000 up to March 2020 earned by Mrs. X on the interest of the debentures deposited by her with K Finance Company shall be taxable in her individual capacity-and. will not be clubbed with the income of Mr. X.

6.                 Where the asset transferred directly or indirectly by an individual to the spouse has been invested by the transferee in any business, the income arising out of the business to the transferee in any previous year shall be clubbed in the income of transferor but for this purpose capital as on the first day of the relevant previous year shall be taken into consideration.

Example

(i)              Mr. X has gifted Rs.5,00,000 to his wilt, Mrs. X, on 01.04.2019 and She invested it in the proprietary business online the same date and there were profits of Rs.2,00,000. In this case, the entire income of Rs.2,00,000 shall be clubbed in the income of Mr. X.

(ii)           Mrs. X has one business on 01.01.2019 with a capital of Rs.5 lakh and Mr. X has gifted Rs.5,00,000 to Mrs. X on 01.04.2019 and She invested it in the proprietary business on the same date and there were profits of Rs.2,00,000. In this case, the income of Rs.1,00,000 shall be clubbed in the income of Mr. X.

(iii)         Mrs. X has one business on 01.04.2019 with a capital of Rs.5 lakh and Mr. X has gifted Rs.5,00,000 to Mrs. X on 20.04.2019 and She invested it in the proprietary business on the same date and there were profits of Rs.2,00.000. In this case, income from business shall not be clubbed in the income. of Mr.- X because the amount was transferred in business after the first day of the previous year.