Clubbing of income

SBI will deduct TDS in X's PAN........ so X will have to declare that interest income in his own file......

Originally posted by : Pardeep Garg
	Mr.X have a 10% FD in SBI ₹5,00,000.He instructed the bank to credit the interest for 2017-2018 in a/c of son of Mr.Z(his friend).Now in whose income the interest₹50,000 shall be clubbed ??whether X or Z ??

You mentioned that Mr.X has FD, this implies that FD is in his own name and hence, the principal amount should be refunded to Mr.X. However, it is intended that interest income be accrued to Mr.Z (Son).[Edit: The treatment of the income in hands of Mr.Z s son is not dealt with since not asked)

Such a scenario would attract the clubbing provisions u/s 60 (Cited below)

§ .60. All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income.

Hence income will be clubbed in the income of Mr.X even if the interest amount is credited to Mr.Zs Account.

[Wondering what treatment does Mr.Z intends to give in respect of the above amount.]

Originally posted by : Dhirajlal Rambhia
	SBI will deduct TDS in X's PAN........ so X will have to declare that interest income in his own file......

Dhirajlal Rambhia Ji,

I respect you a lot and have read your replies to other queries.

I wish to mention that it matters less as to whose name/PAN the tax was deducted. The deduction and clubbing have to be as per the provisions of the Income Tax Act. If in some other case, income was to be clubbed in the name of the person other than the person in whose name the deposit has been made, then, tax deduction would be required in name of such other person and Income tax rules has specific provisions in this regards (Rule 37 BA). Further, even if tax was deducted in wrong name/PAN then TDS return would be required to be revised otherwise there could be even more issues.

Consider an example where the wife has made FD out of money provided by the husband.

It will attract clubbing provisions.

Now, unless the bank is made aware of this fact, it would be deducting tax in the name of the wife, whereas the income is to be clubbed in the hands of the husband.

Husband will not be able to claim the tax credit because it would be in the PAN of his wife.

The wife can not show it as income because it is not her real income. Further, let's suppose the amount of interest is 6 Lacs. She might receive notice for not showing the interest income whereas as per the tax records (26AS) department has proof that she has income.

Further, tax deducted cannot be shown more than the income. Therefore if she has to claim the refund then atleast so much of the amount of income which is equivalent to the tax credit must also be shown as income. [Which is absurd]

Please let me have inputs from you.

Originally posted by : Pardeep Garg
	But income is credited to Mr. Z's minor son.Should it not be clubbed in hands of his parent (Mr.Z) as per sec.64(1A).

§ 64(1A) is not applicable in this case.

Kindly re-confirm the facts.

You mentioned that -

Mr.X have a 10% FD in SBI ₹5,00,000. He instructed the bank to credit the interest for 2017-2018 in a/c of son of Mr.Z(his friend). Now in whose income the interest₹50,000 shall be clubbed ?? whether X or Z ??

 

Mr X is transferring the income in the hands of Son of Mr.Z and not in the name of Mr.Xs son.

Income would be clubbed in the hands of Mr.X only (unless there is a change in the circumstances).

I specifically mentioned in my 1st first post that I am not dealing with the income under the hand of Mr.Z or his son because the OP asked in whose income the interest income is to be clubbed.

The clubbing provisions (in this case) will be applicable at two stages.

1. In the hands of Mr.X. [§ 60]
2. In the hands of Mr.Z. [§ 64(1A)]

§ 64(1A) would be applied when we will be computing the income of Mr.Z. The OP asked in whose income the interest income is to be clubbed, where § 60 is applicable.]

Undoubtedly, the interest income would be clubbed in the hands of Mr.X only.

However, when the amount of interest is credited to Mr.Zs son. This transaction can be treated as in income of minor which would be clubbed in the hands of his parent, let's presume father in this case.

You might be thinking that on the same amount, the tax is being 2 times, once by Mr.X and another time by Mr.Z. However, it is pertinent to note that there are two assessees. And you can find such a treatment at multiple places in the Income Tax Act.

Here, the amount of interest is around 50k, which is the maximum amount not liable to be taxed if its a gift u/s 56(2)(X)(a) [as cited below]

[56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", ]namely :— 

(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

 (a)  any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;]

Hence, the said credit may be treated as a gift from Mr.X to his friend Mr.Z (or his son)

If Mr.Zs total income from under the said sub-clause exceeds more than 50,000 then the entire amount becomes taxable u/s 56(2)(x)(a). Otherwise, if the income under the said sub-clause is upto 50k, then nothing from that is taxable under the hands of Mr.Z

Let me know if there's any iota of doubt.