Same business line clubbing provision applicable

Question BankCategory: Income TaxSame business line clubbing provision applicable
Kollipara sundaraiah asked 4 months ago

Assessess running propertyship firm software development business same business line in the name  of huf pan software development business openings recently 
Question:
Any clubbing provision applicable above mentioned transaction in it act 

1 Answers
Ashok answered 4 months ago

In the provided scenario, the assessee is running a proprietorship firm in software development, and another software development business has been opened in the name of an HUF (Hindu Undivided Family) PAN. The query concerns whether clubbing provisions under the Income Tax Act, 1961, would apply to such a transaction.
As per Indian Income Tax provisions, clubbing of income occurs when the income of one person is added to the income of another person under specific conditions, primarily to prevent tax avoidance.
The relevant provisions that could apply are:
1. Section 64(2) – Clubbing of Income of HUF and Member:

  • This section deals with cases where an individual transfers their property or income to the HUF for the benefit of family members. If a business is transferred to an HUF without adequate consideration, and the assessee is a member of that HUF, the income from that business could be clubbed with the individual’s income.
  • However, if the HUF has genuinely set up a new software development business and the funds or resources of the individual’s proprietorship have not been transferred, the clubbing provisions may not apply.

2. Clubbing Provisions under Section 64:

  • Section 64(1)(ii) applies if a spouse is involved in the business without any substantial separate income or involvement. If income is diverted to a spouse through an HUF entity, this provision may be triggered.
  • If a spouse is a member of the HUF and the software development business is effectively being run by the individual through the HUF, this income could be clubbed with the individual’s income under this section.

3. Applicability:

  • Clubbing may apply if there is a direct or indirect diversion of income from the proprietorship to the HUF entity for tax avoidance purposes. For instance, if the new HUF business is essentially an extension of the proprietorship and designed to split income artificially, the provisions may apply.
  • If there is no direct transfer of assets or income from the individual’s proprietorship to the HUF, and the HUF is conducting an independent business, clubbing provisions may not be applicable.

In summary, if the HUF is genuinely running a separate business and there is no transfer of assets or diversion of income from the proprietorship, clubbing provisions under the Income Tax Act may not apply. However, if any part of the income or business assets has been transferred to avoid tax, Section 64(2) could potentially apply, leading to clubbing of income.

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