Income transferred to another person without transfer of asset – Clubbing of income under Income tax
Mr. A owns a house in Jaipur and is also employed with a company in Bangalore. He wishes to rent out the house in Jaipur, however he is already in the 30% tax bracket and hence does not wants to earn any income in his name as he would attract 30% tax.
Thus, he decides to make his mother power of attorney holder and asks her to sign rent agreement and asks tenant to deposit the rent amount every month in his mother’s account. The total rent is around Rs.4.8 lakh. He files return of income of his mother by showing the above rent under Income from house property and does not disclose such income in his return of income.
Someone told him that what he is doing is not correct and could attract scrutiny, so he books online consultation of a Chartered Accountant to check if what he is doing is correct or not and get a proper consultation.
There are two points kept before the Chartered Accountant:
- Whether his mother can show this amount under Income from house property.
- Whether he can transfer such income to his mother.
With regard to the first question as to whether mother can show such rental income under income from house property, we need to check section 22 of the Income Tax Act which is as under:
“The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house property”.
The important line in section 22 which is highlighted above is that the assessee is an owner of the property and if that is the case then only, he or she can show such receipt under income from house property otherwise not.
Hence in the given case since mother is not the owner such income cannot be shown under the head income from house property.
The inference which we can draw here is that if any person is giving on rent any property of which he or she is not an owner then such income cannot be shown under Income under Income from house property. They need to show it either under Income from business or profession if it is their business or under income from other sources.
Now let’s discuss the second question as to whether the son can transfer such income to the mother without transferring the asset?
Section 60 of the Income Tax Act deals with such situation and relevant extract of the section is as under:
“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.”
By virtue of section 60, it can be said that in the above case since the income is transferred by the son without transfer of the asset i.e. the house and thus such income shall be added or clubbed to the total income of the son and will not be taxed in the hands of mother.
Further, son can show this income under income from house property as he is the owner of the house and claim benefits available under the head income from house property.
Thus, son should rather not get the rent agreement in the name of mother and should show such income in his own income tax return otherwise it could attract notice in mother’s name as the tenant might be reporting such rental expense in name of mother or son should transfer such property in name of mother.
Guidance on above article by:
Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo
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