28 December 2012
Ms.A has transferred her house property to her brother(Mr.B), without consideration and property is registered in the name of Mr.B. Subsequently Mr.B wants to let out the property to third party and rental income thereon shall be directly received by Ms.A. Separate return are filed for both.
Kindly advise who will be assessed in respect of rental income along with the relevant section of the income tax Act.
28 December 2012
The transfer of property by Ms.A to Mr B without consideration is a gift. The same will however not be taxable in the hands of B, u/s 56(vii)(b) since the second proviso states that the provisions does not apply to property received from any relative. The term "relative" is defined in Explanation to Sec 56(vii) and includes brother of individual. I understand this was not asked but have included it in reply
I am assuming that the transfer of property is not "Revocable" as defined u/s 63. Transfers are deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of whole or part of income or assets to the transferor or if it gives in any way the transferor the rights to reasusme power directly or indirectly over the whole or any part of the income or assets. In revocable transfer, Section 61 applies and all income arising on such asset will be taxed in hands of Ms A the transferor.
I think if there is no such condition precedent, the clubbing provisions will not apply. This will then be considered a case of application of income as against diversion of income by way of overriding title Hence, the rental income is taxable in hands of Mr B. MR B will be the person entering into agreement with the lessee & income from let out will accrue and arise in his hands. the payment of rent directly to Ms. A will be considered to be an arrangement for application of income. Note that, if at the time of transfer, Ms.A has made a condition that the transfer is subject to Mr B , giving the rent to Ms. A then in my view the provisions of Section 61 will be applicable and the income will be taxed in hands of Ms A and Mr B will be spared by virtue of diversion by overriding title.
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