Prevention of tax avoidance strategies "transfer of income without a corresponding transfer of the asset" in Clause 96 of the Income Tax Bill, 2025 Vs. Section 60 of the Income-tax Act, 1961

Clause 96 Transfer of income without transfer of assets.

Income Tax Bill, 2025

Introduction

Clause 96 of the Income Tax Bill, 2025, and Section 60 of the Income-tax Act, 1961, both address the issue of income transfer without the corresponding transfer of assets. These provisions are situated within Chapter V of their respective legislations, which deals with the inclusion of income of other persons in the assessee's total income. The core principle underlying these provisions is the prevention of tax avoidance strategies where individuals might attempt to transfer income to another person without transferring the underlying asset, thereby potentially reducing their tax liability. This commentary will explore the legislative intent, analyze the provisions in detail, and compare the two statutory texts to understand their implications and potential areas for reform.

Objective and Purpose

The primary objective of both Clause 96 and Section 60 is to ensure that income cannot be shifted from one taxpayer to another without transferring the asset that generates such income. This provision targets arrangements where the transferor retains control over the asset but attempts to divert the income to another party, often to benefit from a lower tax rate. By stipulating that such income remains taxable in the hands of the transferor, these provisions aim to uphold the integrity of the tax system and prevent tax avoidance. Historically, similar provisions have existed to counteract schemes that exploit the separation of income from assets. The legislative intent is clear to close loopholes that allow for the artificial reduction of taxable income through the transfer of income without a corresponding transfer of the asset.

Detailed Analysis

Clause 96 of the Income Tax Bill, 2025

Clause 96 introduces a provision that is almost identical in language to Section 60 of the Income-tax Act, 1961. It states that any income arising to a person by virtue of a transfer, regardless of whether the transfer is revocable or irrevocable, and irrespective of whether it occurred before or after the commencement of the Act, will be charged to income-tax as the income of the transferor if there is no transfer of the assets from which the income arises.

Key elements of Clause 96:

Revocability: - The clause applies to both revocable and irrevocable transfers, ensuring that the provision captures a broad range of transfer arrangements.

Temporal Scope: - The clause applies to transfers made before or after the commencement of the Act, indicating a retrospective and prospective application.

Non-transfer of Assets: -  The crucial condition is the absence of asset transfer, which is the basis for including the income in the transferor's taxable income.

Section 60 of the Income-tax Act, 1961

Section 60 mirrors the language and intent of Clause 96, reinforcing the principle that income should not be separated from its source asset for tax purposes. This section has been a part of the Indian tax landscape for decades, serving as a deterrent against tax avoidance through income transfer.

Key elements of Section 60:

Comprehensive Scope: -  Similar to Clause 96, it covers both revocable and irrevocable transfers, ensuring that all forms of transfer arrangements are addressed.

Inclusion in Transferor's Income: - The income arising from such transfers is included in the transferor's total income, maintaining the integrity of the tax base.

Comparative Analysis

Upon comparing Clause 96 of the Income Tax Bill, 2025, with Section 60 of the Income-tax Act, 1961, it is evident that the two provisions are nearly identical in wording and intent. Both provisions aim to prevent tax avoidance by ensuring that income cannot be transferred without transferring the asset that generates it. The language used in both provisions is clear and unambiguous, leaving little room for varied interpretations. The consistency in language suggests a legislative intent to maintain continuity in tax policy regarding income transfers without asset transfers. The introduction of Clause 96 in the 2025 Bill appears to be a reaffirmation of the principles enshrined in Section 60, indicating that the lawmakers intend to uphold this anti-avoidance measure in the new legislative framework.

Practical Implications

The practical implications of these provisions are significant for taxpayers and tax professionals. For taxpayers, especially those engaged in estate planning or structuring financial arrangements, understanding these provisions is crucial to ensure compliance and avoid unintended tax liabilities. Tax professionals must be vigilant in identifying arrangements that could fall within the ambit of these provisions and advise their clients accordingly. The provisions also impose a compliance burden on taxpayers, who must ensure that any income transfer is accompanied by a corresponding asset transfer, failing which the income will be taxed in their hands. This requirement may necessitate additional documentation and record-keeping to substantiate the transfer of assets. For tax authorities, these provisions provide a clear basis for challenging arrangements that appear to be structured to avoid tax through the separation of income from assets. The clarity in the statutory language aids in the enforcement of these provisions and supports the broader objective of preventing tax avoidance.

Conclusion

Clause 96 of the Income Tax Bill, 2025, and Section 60 of the Income-tax Act, 1961, serve as critical components of India's tax framework, aimed at preventing the artificial separation of income from the assets that generate it. By ensuring that such income remains taxable in the hands of the transferor, these provisions uphold the integrity of the tax system and deter tax avoidance strategies. The continuity in the language and intent of these provisions underscores the importance of this anti-avoidance measure in the legislative framework. As tax laws evolve, it is essential to monitor the application of these provisions and consider any potential reforms or clarifications that may enhance their effectiveness and address emerging tax avoidance strategies.

Full Text:

Clause 96 Transfer of income without transfer of assets.

Dated: 29-3-2025