By CA Surekha
Analytical Commentary, Judicial Insights, Compliance Cautions & Practical Solutions
Introduction: Why Clubbing Provisions Exist
The Income-tax Act, 1961 is founded on the principle of taxing the right person on the income earned by them. However, in the absence of safeguards, taxpayers could reduce tax liability by transferring assets or income to close family members in lower tax brackets.
To curb this, Section 64 of the Act introduces clubbing provisions — anti-avoidance measures designed to prevent income-splitting within families and to ensure equity.
Statutory Framework
Section 64 contains several clauses covering spouse, minor children, son’s wife, HUF, and indirect transfers. The most litigated are:
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Section 64(1)(iv): Income from assets transferred to spouse without adequate consideration.
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Section 64(1A): Income of a minor child to be clubbed with parent, except specified exemptions.
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Section 64(2): Assets transferred to HUF to be clubbed back in transferor’s hands.
Key Scenarios & Analytical Insights
Spousal Transfers (Section 64(1)(iv))
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If an asset is transferred to a spouse without adequate consideration, income arising therefrom is taxed in the hands of the transferor.
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Example: Gift of land to wife → subsequent capital gain → taxable in husband’s hands.
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Case Law: Sushama Rajesh Rao v. DCIT [2025] 178 taxmann.com 266 (Bang. Trib.) — wife can even request AO to invoke clubbing provisions in husband’s hands, despite declaring it herself.
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Compliance Note: Always disclose spousal gifts and ensure AO applies section 64(1)(iv) correctly to avoid double taxation or penalty.
Minor Child’s Income (Section 64(1A))
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Income of a minor child is clubbed with the parent with higher income (before clubbing).
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Exemptions:
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Income from manual work of child.
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Income from skill, talent, specialized knowledge.
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Practical Example: Minor earning from YouTube singing → taxed in child’s own hands.
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Exemption Relief: ₹1,500 per child (max 2 children) u/s 10(32).
When Minor Attains Majority Mid-Year
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Clubbing continues till the date of attaining majority.
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From the date of majority, income is taxable in child’s own hands.
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Case Law: Courts have upheld that majority status is determined on a day-to-day basis (annual income is apportioned).
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Caution: Do not continue clubbing after majority — AO may disallow.
Death of Transferor / Parent Mid-Year
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If spouse/parent dies mid-year, clubbing applies only till date of death.
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Post death:
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For spouse → income taxable in transferee spouse’s hands.
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For minor → income taxed in guardian’s/child’s own hands (depending on age).
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Case Law: CIT v. R. Ponnammal (1987) 164 ITR 706 (Mad.) — clubbing cannot extend beyond life of transferor.
Transfers to Son’s Wife (Section 64(1)(vi))
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Income from assets transferred to son’s wife is clubbed in the hands of transferor.
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Common in family settlements or gifts to daughter-in-law.
Indirect Transfers & Cross-Gifting
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Cross-gifting between couples (e.g., husband gifts to friend’s wife, who gifts back to his wife) is still subject to scrutiny.
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Judicial View: Courts pierce the veil to apply substance-over-form.
HUF Transfers (Section 64(2))
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If individual transfers self-acquired property to HUF without adequate consideration, income continues to be taxable in individual’s hands.
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Exception: If property partitioned, clubbing ceases.
Compliance Cautions & Penalty Risks
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Misreporting Income: Non-disclosure or wrong head may trigger penalty u/s 270A (200% of tax for misreporting).
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Double Taxation Risk: Declaring in wrong hands → later clubbing → both could be taxed until clarified.
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Documentation: Always execute registered gift deeds; maintain family settlement records.
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AIS / 26AS Mismatch: Spousal or minor income may appear in transferee’s AIS; must reconcile during filing.
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Advance Tax: Transferor must consider clubbing income while estimating advance tax, else liable for interest u/s 234B/C.
Judicial Support & Interpretations
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CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC): Clubbing not attracted if income not from transferred asset.
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CIT v. R. Ponnammal (Madras HC): Clubbing ceases on transferor’s death.
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Sushama Rajesh Rao v. DCIT (2025): Assessee may herself request AO to apply clubbing.
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ITO v. N.K. Saran (1987) 30 TTJ 565 (Del.): Attainment of majority mid-year — income apportioned.
Practical Solutions & Taxpayer Guidance
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Gift Documentation: Execute and disclose in ITR schedules.
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Apportionment: For majority/deceased cases, apportion income with calculation notes.
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Capital Gains: Always examine section 50C and FMV valuation separately.
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Tax Planning: Instead of direct gifts, consider trusts or family arrangements for cleaner compliance.
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Audit Trail: Keep board resolutions (for HUF/companies) and declarations intact.
FAQs
Q1. If a wife invests her own salary into FD, will interest be clubbed?
No. Section 64(1)(iv) applies only to income from assets gifted by husband.
Q2. If father gifts shares to minor son, dividends taxable in whose hands?
In father’s hands (being higher-income parent) until son attains majority.
Q3. If husband dies, will wife’s future income from gifted property be clubbed with husband’s HUF?
No. Clubbing ends with death of transferor.
Q4. Can assessee request AO to apply clubbing even if not claimed in return?
Yes, as clarified in Sushama Rajesh Rao (2025).
Q5. What if clubbing income not offered by transferor?
AO can add it, and penalty may follow unless bona fide disclosure shown.
Conclusion
Clubbing provisions under Section 64 are deceptively simple but fraught with ifs, buts, and grey zones — especially in cases of:
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Minor attaining majority mid-year,
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Death of transferor mid-year,
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Spousal transfers with subsequent capital gains, and
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HUF property settlements.
A taxpayer must not only declare income correctly but also maintain documentation, compute apportionments, and disclose in the right schedules. Professional advice is indispensable, since failure leads to not only tax liability but also penalty, interest, and litigation.
In essence, clubbing ensures equity, but careless handling can turn it into a compliance trap.
