General Law applicable to Clubbing of Income - Income Tax - Ready Reckoner - Income Tax

General Law applicable to Clubbing of Income Clubbing of income means the income of other person is included in assessee's total income. General laws applicable to clubbing of income is explained hereinafter:- The clubbing shall continue to apply even if the transferee has converted the transferred assets to some other form. Income shall include loss also. Therefore, losses are also to be clubbed. If the transferee sells the transferred assets, then capital gains shall also be clubbed with the income of the transferor. Income arising out of income earned on transferred assets has not to be clubbed. The Supreme Court in the case of J.H. Gotla held that the clubbed income shall be retained under the same head in which it is earned [CIT Vs J.H. Gotla 1985 (8) TMI 5 - SUPREME COURT] . Therefore, business income of a minor child shall be clubbed in the hands of the parent under the head Profit and gains of a Business or Profession . This business losses of the parent can set off against such income. While clubbing the income, the deductions available under the five heads of income shall be allowed and the income after such deductions shall be clubbed. Clubbing will take place even if the assets are indirectly transferred or transferred through cross transfers. If interest free loan is given by husband to wife/ individual to son s wife/ individual to his HUF, and the person to whom the loan is given purchases an asset out of the loan, then income from such asset shall not be clubbed in the hands of the person who has given the loan. This is because giving a loan is not a transfer of assets. Clubbing applies when assets are transferred for inadequate consideration. If assets transferred by an individual to his spouse/ son s wife are invested by the transferee in any business, then the following income shall be clubbed with the income of the transferor individual: A/B x C where, A = Investment in the business as on the first day of the previous year out of the transferred funds made by the spouse or son s wife B = Total investment in the business as on the first day of the previous year made by spouse or son s wife C = Income from such business of spouse or son s wife Note: In case the spouse/ son s wife invests the assets in partnership firm as their capital contribution then the interest received from partnership firm shall be clubbed in above ratio. The share of profit from firm is exempt under section 10(2A) . Salary cannot be attributed to capital contribution and therefore salary shall not be clubbed.