Clubbing of Income and Loss Set Off

An income of an assessee is taxed in respect of his own income. However in some circumstances the income of another person will be included in the income of the assessee and taxed accordingly. Such a practice is known as clubbing of income. This applies only to individuals and no other type of assessee. The following are applicable cases for clubbing of income:-

Transfer of income without transfer of asset -Income from assets transferred to spouse becomes taxable if the transferor is an individual and has transferred an asset other than a house property to his/her spouse. It is also important to note that the asset should be transferred to the spouse without adequate consideration i.e. for a negligible or NIL value. Moreover there should no agreement to live apart when such asset is transferred.

For example, if Person-X transfers 500 bonds to his wife without adequate consideration. Interest income on these bonds will be included in the income of Person-X.

However there are certain cases under this section wherein the clubbing provisions will not be applicable :

• If assets are transferred prior to marriage
• If assets are transferred for adequate consideration i.e. acceptable value and
• If assets are transferred with an agreement to live apart.

Income from assets transferred to daughter in law – Income from assets transferred to an assessee’s daughter in law without transferring the asset itself will also attract clubbing provisions. In this case also the asset should be transferred without adequate consideration. The asset should also be transferred after 1^st April 1973.

Income of Minor – Any income earned by a minor will be clubbed in the hands of the parent. The minor’s income will be added to the income of the parent whose total income (excluding minor’s income) is greater. However, in case of parents being separated, the minor’s income will be included in the income of that parent who maintains the child.

An exemption of Rs. 1500/- per annum per child is available in respect of such clubbed income. This specific provision is not applicable, i.e. the income of the minor will not be clubbed in hands of the parent in the following cases:-

• Income earned by the minor on account of his skill, talent, specialized knowledge and experience e.g. Child Actor.
• Income of a minor child suffering from any disability specified under section 80 – U of the Income Tax Act (physically handicapped and disabled persons)

Set off and carry forward of losses – Whenever losses are incurred in any particular financial year, an assessee has an option to set off the same against his income under different head/source in the same financial year. In case those incomes are not sufficient enough to cover his losses he may carry forward the said losses to subsequent years. However there is a limitation to carrying forward of losses to subsequent years.  All losses (except speculation loss) can be carried forward for a period of 8 financial years. Speculation loss can be carried forward only for a period of 4 financial years.

In order to carry forward the losses it is mandatory to file the return of income before the due date specified by the IT department. However, in case of unabsorbed depreciation and loss from house property the losses can still be carried forward even if the return of income is filed after the due date.

Article Published by Guest Author : Aashish Ramchand (makemyreturns.com)

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