THOUGH LENGTHY IMPORTANT INFORMATION
Do you transfer money to your spouse's account so he/she can meet personal expenses, does that money earn an income. Or do you consider it loaned. Let's understand today, how the income from such transfer is treated from income tax standpoint.
How gifts are taxed in IndiaMoney is Invested in Shares or Fixed Deposits or other Assets– The shares may have been purchased in your wife's name or fixed deposits made in her account – but the income from such fixed deposits or gains from the wife's shares transactions shall be clubbed with your income. As per clubbing provisions of Income Tax, this is considered as your own income and taxed at slab ratesapplicable to you. Even if there are capital losses from sale, those get added too.
Money is considered Loaned – There could be a situation where you have genuinely transferred money to your wife's account to meet her financial needs, for e.g. to help her start a business. The amount is considers loaned and is planned to be returned and interest is charged as well. In case you are charging a reasonable interest and also showing the interest as your income in your return, income earned by your wife may not be clubbed. However, in cases where amount is shown as loaned to your wife and she is investing that money in shares to earn an income, and thereby you end up saving significant tax by avoiding clubbing of income (gains) on shares, it may be hard to convince the tax authorities about the lender borrower arrangement, given the close relationship of the parties and the tax save involved. Usually in most cases - it's misused as a tax saving avenue and that is what the tax authorities want to be careful of.
Only to meet Personal Expenses – When one of a couple is a home keeper and is not earning an income, it is commonplace this person receives some money to take care of personal expenses. This has no income tax implication and is not considered an income in the receiver's hands. However, any interest earned in the bank account may still be clubbed.
Clubbing of Income Under Income Tax Act
'Its all in the family' It may seem ordinary to invest money for a non earning spouse by way of fixed deposits, or other income earning assets or to set up bank accounts, mutual funds or other investments for children to provide for their needs in future. Usually, you are only taxed for your own income, but under certain special circumstances some incomes are 'clubbed' along with your income and you may be liable to pay tax on such clubbed income.
The intention here is to make sure there is no tax that escapes, in case an individual is moving assets or incomes in the family. In a situation where you have incurred a loss, such loss (wherever allowed to be adjusted against an income) is also not allowed to be transferred to anyone and will be 'clubbed' to your income.
Let's understand in what circumstances you may attract this 'clubbing' of income –
In the case of Assets Transfer to Anyone
Transfer of Income – no transfer of assets: When you retain the ownership of an asset but decide to transfer its income by doing an agreement or any other way, the Act will still consider that income as your income and it will be added to your total income for taxation purposes.
Transfer of Asset – which is revocable: When you transfer the ownership of an asset and make such transfer revocable, income from such an asset will continue to be added to your income.
Clubbing of Spouse's Income
Here are some situations when your spouse's income will get clubbed to your income and you'll have to pay tax on it-
(1) Your spouse receives a salary from a company or a firm in which you have a substantial interest, then such salary will be clubbed with your income. Substantial Interest means you alone or with your relatives (husband, wife, brother, sister or your lineal ascendant or descendant) hold equity or voting power of a company which is 20% or more. Or in case of a firm you are entitled to 20% or more of the profits. Also, if both of your receive an income from such a firm or company, it will get taxed in the hands of the person whose taxable income is higher. There is one exception to this – if your spouse receives the salary due to his/her application of technical or professional knowledge & experience then such salary will be taxed in the hands of the person receiving it and not clubbed.
(2) You transfer an asset to your spouse directly or indirectly without receiving adequate consideration (does not include where asset is transferred as part of a divorce settlement) – income from this asset will be clubbed with your income. For example – where the husband to reduce his tax liability transfers an asset worth Rs 1,00,000 to his wife for Rs 25,000 .3/4th of the income from this asset will be taxed in the hands of the husband. If he receives no consideration, in that case the entire income from this asset will be clubbed with the husband's income. Although the clubbing provisions here exclude house property – but in case you transfer a house property to your wife and do not receive adequate consideration, as per the Act, you will still be considered the 'deemed owner' and the income from the asset will be clubbed with your income.
(3) You transfer an asset to a person or an association of persons, directly or indirectly, without adequate consideration, so that the benefit arises to your spouse either now or on a deferred basis, income from such an asset will be clubbed with your income.
(4) Assume a situation where you provide money to your spouse (who is non working) and that money is invested by the spouse and a certain income is generated (from such money that you gave your spouse).The income that arises from such investment done by her can be clubbed to your income. However, if your spouse reinvests the income portion and earns further income then such income may not be clubbed with your taxable income.
Clubbing of Income of Minor Child (less than 18 years old)
(1) Some families make fixed deposits in the name of a minor child. Income of a minor is taxable in the hands of the parent whose total income is higher (before including the minor's income). If the parents are divorced it is clubbed with the person who is maintaining the child. There is one exception to this rule – if the minor has earned an income because of his own manual work, or used his talent or specialized knowledge & experience OR in case of a minor who is disabled (based on definition of disability in Section 80U) and earns an income, such income will not be clubbed.
(2) When your minor child's income is clubbed to your income – exemption is available up to Rs 1500 for each such minor child. Which means if clubbed income is more than Rs 1500, Rs 1500 is the maximum exemption, however if clubbed income is say Rs 800 (less than Rs 1500) exemption is limited up to such lesser amount, Rs 800 in this case.
Clubbing of Income of a Major Child (18 or more than 18 years old)
You may be giving over some money to your major child (who may not be earning), in this case if the major child invests that money – any income from these investments will not be taxable in your hands but will be taxed in the hands of the major child. So therefore, there will be no clubbing of income in case of a major child.
Clubbing of Income of a Son's Wife
You transfer an asset to your son's wife directly or indirectly without receiving adequate consideration – income from this asset will be clubbed with your income. Or you transfer an asset to a person or AOP, for the immediate or deferred benefit of your son's wife, without adequate consideration, directly or indirectly – income from this asset will be clubbed with your income
What about Gifts
On one hand are the clubbing provisions that club income that you may be trying to move within family and there are some provisions that allow certain gifts. Even though Gift Tax Act was abolished effective 1st October 1998, certain provisions in the Income Tax Act can tax the money or assets you gift. In our next post we will look at what are the provisions that can tax the gifts that you may be giving or receiving. Keep watching out for more! And reach out to us if you have any queries.
S. 57(iii): Interest paid on a loan taken to avoid premature encashment of a fixed deposit is deductible against the interest earned on the fixed deposit On these facts, in order to protect the interest earnings from fixed deposits and to meet her financial needs, when an assessee raises a loan against the fixed deposits, so as to keep the source of earning intact, the expenditure so incurred in wholly and exclusively to earn the fixed deposit interest income. The authorities below were apparently swayed by the fact that the borrowings were triggered by assessee's financial needs for personal purposes and, by that logic, the borrowing cannot be said to be wholly and exclusively for the purposes of earning interest income, but what this approach overlooks is whether the expenditure is incurred for directly contributing to the beginning of or triggering the source of income or whether the expenditure is for protecting, and thus keeping alive, that source of income, in either case it is expenditure incurred wholly and exclusively for the purpose of earning that income. The assessee indeed required that money, so raised by borrowing against the fixed deposits, for her personal purposes but that's not relevant for the present purposes. The assessee could have gone for premature encashment of bank deposits, and thus ended the source of income itself, as well, but instead of doing so, she resorted to borrowings against the fixed deposit and thus preserved the source of earning. The expenditure so incurred is an expenditure incurred wholly and exclusively for earning from interest on fixed deposits. We are alive to the fact that in the case of a business assessee, and in a situation in which the borrowings against fixed deposits were resorted to for use in business, consideration for end use of funds so borrowed would be relevant because the interest deduction is claimed as a business deduction u/s 36(1)(iii). That aspect of the matter, however, is academic in the present context as the limited issue for our consideration is whether or not, on the facts before us, the interest on borrowings against the fixed deposits could be said to protect the interest income from fixed deposit interest and thus, incurred wholly and exclusively for the purposes of earning such income Read more of this post Santosh Kumar Agarwal | December 29, 2014 at 10:15 AM | Tags: Raj Kumari Agarwal vs. DCIT (ITAT Agra), S. 57(iii): Interest paid on a loan taken to avoid premature encashment of a fixed deposit is deductible against the interest earned on the fixed deposit | Categories: Case Law | URL: http://wp.me/p2e8mQ-1a4
|
S. 80-IB: If the undertaking satisfies the conditions for eligibility in the initial year, it must get deduction for 10 years & non-compliance in a subsequent year is irrelevant There is no indication in s. 80-IB that the conditions stipulated therein has to be fulfilled by the assessee in all the 10 years. When once the benefit of 10 years, commencing from the initial year, is granted, if the undertaking satisfy all these conditions initially, the undertaking is entitled to the benefit of 10 consecutive years. The argument that, in the course of 10 years, if the growth of the industry is fast and it acquires machinery and the total value of the machinery exceeds Rs.1 crore, it ceases to have the said benefit, do not follow from any of the provisions. It is true that there is no express provision indicating either way, what would be the position if the small scale industry ceases to be a small scale industry during the said period of 10 years. Because of that ambiguity, a need for interpretation arises. If we keep in mind the object of the Legislature providing for these incentives and when a period of 10 years is prescribed, that is the period, probably, which is required for any industry to stabilize itself. During that period the industry not only manufactures products, it generates employment and it adds to the wealth of the country. Merely because an industry stabilizes early, makes profits, makes future investment in the said business, and it goes out of the definition of the small scale industry, the benefit u/s 80IB cannot be denied. If such a literal interpretation is placed on the said provion, it would run counter to the very object of granting incentives. It would kill the industry. Therefore keeping in mind the object with which these provisions are enacted, keeping in mind the industrial growth which is required to be achieved, if two interpretations are possible, the courts have to lean in favour of extending the benefit of deduction to an assessee who has availed the opportunity given to him under law and has grown in his business. Therefore we are of the view, if a small scale industry, in the course of 10 years, stabilizes early, makes further investments in the business and it results in it's going outside the purview of the definition of a small scale industry, that should not come in the way of its claiming benefit u/s 80IB for 10 consecutive years, from the initial assessment year Read more of this post Santosh Kumar Agarwal | December 29, 2014 at 10:17 AM | Tags: Ace Multi Axes Systems Ltd vs. DCIT (Karnataka High Court), it must get deduction for 10 years & non-compliance in a subsequent year is irrelevant, S. 80-IB: If the undertaking satisfies the conditions for eligibility in the initial year | Categories: Case Law | URL: http://wp.me/p2e8mQ-1a7
|
S. 269SS/ 269T is not attracted to book entries not involving cash transactions
As the transactions of loans & advances were not cash transactions and were merely book entries by way of adjustment entries, there is no violation of Section 269SS/269T of the Act and no question of levy of penalty u/s 271D/ 271E__._,_.___
No comments:
Post a Comment