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  Tax Planning

 
home > Tax Planning > Nuts & Bolts of IT > Clubbing provisions
logo   CLUBBING PROVISIONS, SET OFF & CARRY FORWARDS
   
bullet Clubbing provisions
 
The clubbing provisions under the Income Tax Act refers to instances where an assessee transfers income without transferring ownership of the asset the income will be includable in the hands of the transferor and not the transferee.
All income arising to any person by virtue of transfer of assets will be includable in the hands of the transferor if the following conditions are fulfilled:
  • If the transfer is revocable
  • If the transfer contains any provision of re-transfer whole or any part of the income or asset directly or indirectly to the transferor
  • If the transfer gives the transferee power to reassume power directly or indirectly over the whole or any part of the income or assets

The following are the instances where the clubbing is not applicable

  • If the assets are transferred for adequate consideration
  • If the assets are transferred before marriage
  • If the assets are transferred with an agreement to live apart
  • If on the date of accrual of income the transferee is not the spouse of the transferor
  • If the property is transferred by a Karta of the HUF gifting his co-parcenery property to his wife

Clubbing provisions will also be applicable in the following instances:

  • Income from assets transferred to a son’s wife
  • Where an individual being a member of a HUF transfers a self acquired property to the HUF without adequate consideration OR impresses the property into the common stock of the HUF the income accruing thereon will be included in the hands of the transferor.
  • Assets transferred to a person for the benefit of spouse
  • Income earned by a minor child will be includable in the income of that parent whose total income (excluding income of the minor child) is higher.

In the following cases income of the minor child is not clubbed in the hands of the parent:

  • Where the minor child is suffering from any disability
  • Income of the minor child on account of any manual work
  • Income of the minor child on account of any activity involving the exercise of special skill, knowledge, talent or expertise
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bullet Provisions relating to set off
 

The provisions relating to Set-off and Carry forward can be illustrated in the following steps:

  • STEP 01 - Inter source adjustment within the same head of Income
  • STEP 02 - Inter head adjustment in the same assessment year. This is resorted to only if loss cannot be fully or partly set off under Step 01
  • STEP 03 - Carry forward of losses. This is applicable only if a loss cannot be set off fully or partly under Step 02.
Under the Income Tax law loss incurred under any source the same can be set off against gain from any other source under the same head. This is called INTER SOURCE ADJUSTMENT Where the net result under any head is a loss then the same can be set off against income under other heads, if the loss cannot be set off partially or completely under the same head. This is called INTER HEAD ADJUSTMENT.

Generally losses arising from different sources of income under the same head can be set off against each other. However, there are exceptions to this rule:

  • Loss from a speculation business can be set off ONLY against gain from a speculation business.
  • Loss from the activity of owning and maintaining race horses can be set off ONLY against gain from owing and maintaining race horses
  • Long term capital loss can be set off ONLY against long term capital gains
  • Loss incurred on winnings from lotteries, crossword puzzles etc cannot be set off.

Generally losses arising from one head can be set off against the other head. However, there are exceptions to this rule:

  • Long term capital loss can be set off ONLY against long term capital gain and not against other heads
  • Short term capital loss can be set off only against STCG or LTCG and not against income from other heads
  • Losses from owning ands maintaining race horses cannot be set off against income under other heads
  • Speculation loss cannot be set off against income from other heads of income
  • Loss from gambling, betting, race horses etc cannot be set off under income from any source whether the same head or a different head.
  • Business Loss cannot be set off against Salary Income

Tax treatment of derivative transactions:

  • It has been decided by the finance minister that derivative transactions will not be treated as speculative transactions. They will be treated as capital loss or capital gains as the case may be.
  • This means that the loss arising on derivative transactions can be set-off against long term capital gains if it is a long term capital loss and against short term capital gain if it is a short term capital loss.
  • In case the assessee is carrying on the business of buying and selling of securities, any gain or loss arising thereon will be taxed under the head "Income from Business or profession". In other words, the loss (if any) will be treated as a business loss and not as a capital loss.
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bullet Provisions relating to carry forward of losses
 
If the loss cannot be set off either from any income in the same head or within any income from a different head within the same assessment year, then the same can be carried forward to the subsequent assessment years. The relevant provisions are:
  • Once a loss is carried forward the benefit of inter head adjustment is lost

The following losses can be carried forward for the next 8 assessment years:

  • Losses incurred in income from house property can be carried forward for the next 8 assessment years
  • Business loss can also be carried forward for the next 8 assessment years
  • Loss under the head Capital Gains
  • Loss under the head Income from Other Sources only from the activity owning and maintaining race horses
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