GENERAL CLUBING PROVISIONS

Sec. 62: Irrevocable transfer

Transfer which is not revocable
During lifetime of Transferee &
Transferor derives no benefit from such income

Sec. 63: Revocable Transfer

A transfer which
Contains any provision for transfer of whole/part of the Income or Asset to transferor during life time of transferee or
In any way, gives transferor the right to re-assume power over whole/part of Income or Asset during life time of
transferee

SPECIFIC CLUBING PROVISIONS

Sec. 64(1)(ii): Clubbing of Spouse Remuneration
If an individual has
Substantial interest in a Concern,
then Salary, Fees, Commission, or other remuneration
In cash or Kind
drawn by Spouse of such individual
from that concern
shall be Clubbed
With Income of the Individual

Special Points :
1. Substantial Interest :
a) Company :If individual himself or with relative hold atleast 20% of equity shares beneficially at any time during p/y
b) Other Concern :If individual himself or with relative entitled to atleast 20% profits at any time during p/y
Sec 2(41): Relative in relation to an individual, means Husband, Wife, Brother or Sister or any Lineal ascendant or
Descendant of that individual
2. If spouse has Technical or Professional qualifications or experience & getting the remuneration solely on application
of such technical or professional knowledge, No clubbing shall be done
3. Husband & Wife both have Substantial interest in concern and both getting remuneration from concern, then
remuneration of both shall be clubbed with that Spouse, whose Total income is greater, before clubbing that income.
(Once income is clubbed with either spouse, Next year income shall be clubbed with that spouse
only unless AO satisfied, it is not necessary to do so)

4. Income to be clubbed = Income taxable under head Salary

64(1)(iv): Income from Asset transferred to Spouse
If an individual transfers
Any asset (other than house property)
directly/indirectly to Spouse
For Inadequate consideration
then income from such asset arising to spouse
shall be clubbed
With Individuals income

Clubbing will not be done in the following cases

1. Transfer of Asset is under any agreement to live apart or
2. Husband & wife relationship does not exist either at the time of transfer of asset or at time of accrual of Income.

Sec. 64(1)(vi) : Income from Asset transferred to Son’s wife

If an individual transfers
Any asset
directly/indirectly to son’s wife
for Inadequate consideration
then income arising out of such asset arising to Sons wife
shall be clubbed
With Individual’s income
Clubbing will not be done if
The relationship father/mother in law and daughter in law does not exist either at the time of transfer of asset
or at time of accrual of income

Sec. 64(1)(vii): Indirect Benefit to spouse

If an Individual transfers
Any asset to any Person/AOP
For inadequate consideration
for the benefit of his spouse
then any income arising out of transferred asset
Shall be Clubbed with Individual’s income.

Sec. 64(1)(viii) : Indirect Benefit to sons wife

If an individual transfers
Any asset to any Person/AOP
For inadequate consideration
for the benefit of his sons wife
then any income arising out of transferred asset
shall be Clubbed with Individual’s income.

Sec. 64(1A): Clubbing of Minor’s Income

All incomes
arising to the Minor child
shall be clubbed
with income of that Parent
whose Total Income (excluding minor income) is Greater

Special Point:
1. If marriage of parents does not exist, minor income will be clubbed with that parent who maintains the minor in the
previous year
2. Once income is clubbed with either parent, Income of next previous year will also be clubbed with that
parent only, unless AO is satisfied it is not necessary to do so because child is maintained by the other parent
3. Minor income will be taxable in the hands of minor only
i. Minor suffering from disability specified in Sec.80U.
ii. Income of minor arising due to Manual work done by him.
iii. Income of minor arising due to application of his skills, talent or specialized knowledge and experience.
Special Points:
Where minor’s income is clubbed, that parent can claim exemption u/s. 10(32) subject to Max. ` 1500/-
per minor child
If Minor attains majority during P/Y, income till date of majority to be clubbed.
Minor child includes step and adopted child.
Where minor income taxable in his hands, Income on such income shall be clubbed with parent.

Set Off and Carry Forward of Losses

Concept of set-off and carry forward of losses

“Set-off” means adjustment of losses against the profits from another source/head of income in the same
assessment year. If losses cannot be set-off in the same year due to inadequacy of eligible profits, then such
losses are carried forward to the next assessment year for adjustment against the eligible profits of that year.

Inter source adjustment [Section 70]

Under this section, the losses incurred by the assessee in respect of one source shall be set-off against income
from any other source under the same head of income.

Example 1: Loss from one house property can be set off against the income from another house property.
Example 2: Loss from one business, say textiles, can be set off against income from any other business, say
printing, in the same year as both these sources of income fall under one head of income. Therefore, the loss in
one business may be set-off against the profits from another business in the same year.

Inter-source set-off, however, is not permissible in the following cases:

(a) Long-term capital loss: Short-term capital loss is allowed to be set off against both short-term capital gain
and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain
and not short-term capital gain.

(b) Speculation loss: A loss in speculation business can be set-off only against the profits of any other
speculation business and not against any other business or professional income. However, losses from other
business can be adjusted against profits from speculation business.

(c) Loss from the activity of owning and maintaining race horses: Such loss can be set-off only against income
from the activity of owning and maintaining race horses.

(d) Losses from specified business: A loss in any specified business referred to in Section 35AD can be set-off
only against any other specified business.

Note: It must be noted that loss from an exempt source cannot be set-off against profits from a taxable source
of income.

Inter head adjustment [Section 71]

Loss under one head of income can be adjusted or set off against income under another head. However, the
following points should be considered:

(a) Where the net result of the computation under any head of income (other than ‘Capital Gains’) is a loss, the
assessee can set-off such loss against his income assessable for that assessment year under any other head,
including ‘Capital Gains’.

(b) Where the net result of the computation under the head “Profits and gains of business or profession” is a
loss, such loss cannot be set off against income under the head “Salaries”.

(c) Where the net result of computation under the head ‘Capital Gains’ is a loss, such capital loss cannot be set-
off against income under any other head.

(d) Where the net result of computation under the head ‘Income from House Property’ is a loss and the assesse
has income assessable under any other head of income, the amount of such loss exceeding Rs. 2,00,000 would
not be allowed to be set-off against income under any other head i.e. the maximum loss from house property
which can be set-off against income from any other head is Rs. 2,00,000.

(e) Speculation loss, loss from the activity of owning and maintaining race horses and loss from specified
business referred to in section 35AD cannot be set-off against income under any other head.

Set-off and carry forward of loss from house property [Section 71B]

(a) In any assessment year, if there is a loss under the head ‘Income from house property’, such loss will first
be set-off against income from any other head to the extent of Rs. 2,00,000 during the same year.
(b) If such loss cannot be so set-off, wholly or partly, the unabsorbed loss will be carried forward to the
following assessment year to be set-off against income under the head ‘Income from house property’.

(c) The loss under this head is allowed to be carried forward upto 8 assessment years immediately succeeding
the assessment year in which the loss was first computed.

(d) For example, loss from one house property can be adjusted against the profits from another house property
in the same assessment year. Any loss under the head ‘Income from house property’ can be set off against any
income under any other head to the extent of Rs. 2,00,000 in the same assessment year. However, if after such
set off, there is still any loss under the head “Income from house property”, then the same shall be carried
forward to the next year.

Note: It is to be remembered that once a particular loss is carried forward, it can be set off only against the
income from the same head in the forthcoming assessment years.

Carry forward and set-off of business losses [Sections 72]

The assessee’s right to carry forward business losses under this section is subject to the following conditions:

(a) The loss should have been incurred in business, profession or vocation.

(b) The loss should not be in the nature of a loss in the business of speculation.

(c) The loss may be carried forward and set-off against the income from business or profession though not
necessarily against the profits and gains of the same business or profession in which the loss was incurred.
However, a loss carried forward cannot, under any circumstances, be set-off against the income from any head
other than “Profits and gains of business or profession”.

(d) The loss can be carried forward and set off only against the profits of the assessee who incurred the loss.
That is, only the person who has incurred the loss is entitled to carry forward or set off the same. Consequently,
the successor of a business cannot carry forward or set off the losses of his predecessor except in the case of
succession by inheritance.

(e) A business loss can be carried forward for a maximum period of 8 assessment years immediately
succeeding the assessment year in which the loss was incurred.

Note: As per section 80, the assessee must have filed a return of loss under section 139(3) in order to carry
forward and set off a loss. In other words, the non-filing of a return of loss disentitles the assessee from carrying
forward the loss sustained by him. Such a return should be filed within the time allowed under section 139(1).
However, this condition does not apply to a loss from house property carried forward under section 71B and
unabsorbed depreciation carried forward under section 32(2).

Losses in Speculation Business [Section 73]

(a) Speculation is considered as business distinct & separate from any other business carried by the assesse,
therefore the losses incurred in speculation can be neither set off in the same year against any other non-
speculation income nor be carried forward & set-off against other income in the subsequent years.

(b) If the losses sustained by an assesse in a speculation business cannot be set-off in the same year against any
other speculation profit, they can be carried forward to subsequent years & set-off only against income from
any speculation business carried on by the assesse.
(c) The loss in speculation business can be carried forward only for a maximum period of 4 years from the end
of the relevant assessment year in respect of which the loss was computed.

Note: Loss from the activity of trading in derivatives is not to be treated as speculative loss.

Losses under the head Capital Gains [Section 74]

Section 74 provides that where for any assessment year, the net result under the head ‘Capital gains’ is short
term capital loss or long term capital loss, the loss shall be carried forward to the following assessment year to
be set off in the following manner:

(a) Where the loss so carried forward is a short term capital loss, it shall be set off against any capital gains,
short term or long term, arising in that year.

(b) Where the loss so carried forward is a long term capital loss, it shall be set off only against long term capital
gain arising in that year.

(c) Net loss under the head capital gains cannot be set off against income under any other head.

(d) Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8
assessment years immediately succeeding the assessment year for which the loss was first computed.

Loss from the Activity of Owning & Maintaining Race Horses [Section 74A]

(a) The losses incurred by an assesse from the activity of owning & maintaining of race horses cannot be set-off
against the income from any other source than the activity of owning & maintaining of race horses

(b) Such loss can be carried forward for a maximum period of 4 assessment years immediately succeeding the
assessment year for which the loss was first computed & can be set-off only against the income from the
activity of owning & maintaining of race horses.

ORDER OF SET-OFF OF LOSSES

As per the provisions of section 72(2), brought forward business loss is to be set-off before setting off
unabsorbed depreciation. Therefore, the order in which set-off will be effected is as follows -

(a) Current year depreciation / Current year capital expenditure on scientific research and current year
expenditure on family planning, to the extent allowed.
(b) Brought forward loss from business/profession [Section 72(1)]
(c) Unabsorbed depreciation [Section 32(2)]
(d) Unabsorbed capital expenditure on scientific research [Section 35(4)].
(e) Unabsorbed expenditure on family planning [Section 36(1)(ix)]
 Summary of provisions
Set off and carry forward of losses

Nature of income Set off Carry forward & set off

Intra head & Intra head & Inter head Allowed to be Can be set off
same source inter source carried forward from
for no. of years
Salary NA NA NA NA NA
House property* Yes Yes Yes 8 Same head
PGBP (Non speculative) Yes Yes Yes (Except 8 Same head
from salary)
PGBP (Speculative) Yes No No 4 Same source only
Capital gains: STCG Yes Yes No 8 Same head
Capital gains: LTCG Yes No No 8 Same source only
Owning & maintaining Yes No No 4 Same source only
race horses

* Maximum amount allowed to be set off from other heads of income during any assessment year is restricted
to Rs. 2,00,000.

In New Tax Regime: Loss from House property cannot be set off from
any other head