Clubbing Provisions - How do you find what the money was used for?

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  1. TaxPayer123

    TaxPayer123 Member

    Hi!
    Assume I earn 15 lacs in a year. I receive gift of 2 lacs from mother. My expenses are 9 lacs. Here's the distribution of remaining 8 lacs (15+2-9):

    Purchase of a small house - 5 lacs
    Purchase of a scooter - 50k
    Increase in Savings Bank A/c - 1 lac
    Investment in FDs - 1.25 lac
    Investment in MFs - 25 k

    Now, will the clubbing provisions apply here in any way? Will the income from Interest/Divided have to be taxed in the hands of my mother?

    Thanks!
     
  2. ZED

    ZED Well-Known Member

    If you are major then clubbing provisions will not be applicable.
    This income is not to be clubbed either u/s 64(1) or u/s64(1A) or u/s 64(2).
     
    TaxPayer123 likes this.
  3. TaxPayer123

    TaxPayer123 Member

    Thanks ZED. Two followup queries:
    1. Would the treatment have been different if I had received this from my spouse instead of my mother? How would the clubbing provisions have applied, assuming my spouse earns more than me.
    2. Assuming in a given year, I receive a gift of 5 lacs from my parents and another 41k from other sources on birthdays and anniversaries. The 5 lacs would be exempt from tax since it is from a relative. However, would the 41k be taxed because while it is less than 50k, the total value of gifts received is 541k?
     
  4. ZED

    ZED Well-Known Member

    Yes, there would be difference
    S64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly

    (iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart ;


    Hence income from FD would have been clubbed.
    Cash/bank is an asset.


    If the gift is received from relatives then clause does not apply at all.
    Hence 41K will be exempt because it is less than 50K and only 41K is being covered u/s 56(2)(vii)
     
  5. TaxPayer123

    TaxPayer123 Member

    Thanks a ton ZED!

    Now coming to my original query, assuming I got the money from my spouse who earns more than me:
    1. What if I said that I used spouse's 2 lacs to buy the house while it was my own money which I invested in FDs/MFs etc. Money is money. So, how do you distinguish as to which money went where? Is it at the discretion of the ITO?
    2. Since spouse gave 2 lacs and FDs are only 1 lac, will income from Savings Bank Interest, or income from house rent (proportionate to the remaining 1 lac given by spouse) also be clubbed? Why not?
    Thanks again! Really appreciate your help.
     
  6. ZED

    ZED Well-Known Member

    It is at discretion of AO and what do you think what a AO would presume? Needless to say the entire Income Tax Act is based on knowledge of the facts and event ,more so clubbing provisions.


    Further income or any accretion to the asset will not be taxable because only the income from asset (which was transferred) is liable to be clubbed.


    S64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly

    (iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart ;


    However, in case of a minor childs income, even the accretions and if income from asset transferred yielded some other income (like interest on FD invested in FD) then that (new) income is also liable to be clubbed (because drafting of S.64(1A) clubbed all the income and left only following
    • (a) manual work done by him; or

    • (b) activity involving application of his skill, talent or specialised knowledge and experience.
     
  7. TaxPayer123

    TaxPayer123 Member

    Thanks!

    So you're saying that when money is transferred, the interest that the money earns if lying in bank (Savings account or Fixed Deposits) is considered income earned from the asset. However, if that money is invested in something say a house, the income earned is not considered income from the asset?

    Thanks for your patience.
     
  8. ZED

    ZED Well-Known Member

    No, you misunderstood a little.
    I said *further income* , I did not said * Further, the income...*
    Now, reading the above phrase you might have understood the difference.

    What I meant was that the income from the asset will be clubbed, but if the income from THAT ASSET is invested further then that NEW income would not be clubbed. This I explained later also with the help of an example. Good thing you confirmed.



    Before you invest money of someone else into a house , kindly remember the provisions of Benami Transactions (Prohibition) Act as per which one should not utilize money belonging to someone else in purchasing the property.
    Such transaction latter may deny the benefit of exemption to be availed in future in respect of capital gain.


    Kindly do not use the word *invest*.
    If you buy a scooter (as in your first example) then there shall be no clubbing if the scooter is not generating any income.
    But now if you start gaining some income from the scooter (by way of hire or otherwise) then that income will be clubbed. Now if with the money from hire you purchased a car and you rented the same . Now this income from car will not be clubbed.

    For example of accretion you may take an example of live stock.
    For eg From the bigggg money of your spouse , you bought some elephants (In kerala the lease cost alone is somewhere between Rs.75 Lacs to 1 Crore for a single elephant ) and after some year a calf was born. Now in market you can sell that calf ,or you can wait till it matures ,and earn yourself a few more crores. This accretion (calf) will not be clubbed.
     
    SUNNY NARANG likes this.
  9. TaxPayer123

    TaxPayer123 Member

    Hey, those were some really good points explained very lucidly. Thank You.

    There's only one point left in my original query that's still unresolved. For that, I'd phrase my query once more slightly differently.

    Assume I earn 15 lacs in a year. I receive gift of 2 lacs from my spouse who earns more than me. My expenses are 14 lacs. Here's the distribution of remaining 3 lacs (2+1):

    Increase in Savings Bank A/c - 1.5 lac (Interest earned at 4%) - Annual Income (6 k)
    Investment in FDs - 1.5 lac (Interest earned at 7.5%) - Annual Income (11.25 k)

    Now how much income & from what all will be considered for clubbing?

    Thanks for the guidance
     
  10. ZED

    ZED Well-Known Member

    When you have to open a Fixed deposit Account then the bank or depositee requires you to fill and form wherein you have to give certain declarations and acceptances. One of the declaration is that you agree that the money deposited by you is yours and the income therefrom is not liable to be clubbed in any other person's income.

    Money is money, we will not see the number printed on it. But account is also an account, we will check the number of it. I hope you got the hint. AO has authority to check all the bank transactions.
    In this case, you were left with only 1 Lacs but your investment were of 3 lacs, this indicates that you used your spouse income.

    I as an AO will see the amount deposited by you in the bank and will ask for its source.


    I hope all your queries have been answered, if we continue this topic further then instead of discussing of income under the head other sources, we will be discussing scrutiny and income tax raid and search and seizure procedure.
     
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