Taxation - DT Ch 08: Clubbing Setoff - Test 1: answer key

Question 1 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Scenario. Mr. Vikramaditya Sen, a resident individual, holds 22% of the equity shares carrying voting power in Nandini Tech Labs Pvt. Ltd. His wife, Smt. Anuradha Sen, works in that company as General Manager (Operations). Her salary computed after standard deduction for FY 2026-27 is ₹10,90,000, and she received commission of ₹1,80,000 from the same company. She does not hold any technical or professional qualification. On 1 April 2026, Mr. Sen transferred 500 listed shares, acquired by him on 1 May 2024 for ₹8,00,000, to Smt. Sen without consideration. Dividend of ₹40,000 was received on these shares in September 2026. Smt. Sen sold the shares in January 2027 for ₹11,50,000; securities transaction tax was paid. Smt. Sen also invested ₹3,00,000 received as a gift from Mr. Sen in her proprietary boutique on 1 April 2026. Her total capital in the boutique on that date was ₹10,00,000. The boutique earned profit of ₹4,00,000 during FY 2026-27. Mr. Sen's income before clubbing is ₹18,00,000, while Smt. Sen's income before clubbing is ₹7,00,000. Both pay tax under the default tax regime under section 115BAC. Mr. Sen wants to know the clubbing implications and whether any amount can escape clubbing due to qualification or source.

What amount of salary and commission received by Smt. Anuradha Sen from Nandini Tech Labs Pvt. Ltd. is includible in Mr. Sen's total income under section 64(1)(ii)?

1. ₹10,90,000
2. ₹12,70,000 (correct answer)
3. ₹1,80,000
4. ₹11,40,000

Answer: B — ₹12,70,000

Explanation. Mr. Sen holds 22% voting power, so he has substantial interest in the company. Smt. Sen lacks the specified technical or professional qualification, so the exception does not apply. Clubbed amount = salary ₹10,90,000 + commission ₹1,80,000 = ₹12,70,000. The whole remuneration is included in Mr. Sen's total income under section 64(1)(ii).

Where it goes wrong. Students club only salary or only commission, or apply the qualification exception despite Smt. Sen having no specified qualification.

Authority. Section 64(1)(ii) of the Income-tax Act, 1961

Question 2 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

If Smt. Sen had held a prescribed technical qualification and her entire salary of ₹10,90,000 was solely attributable to application of that knowledge, while commission of ₹1,80,000 was not so attributable, what amount would be clubbed under section 64(1)(ii)?

1. ₹12,70,000
2. ₹10,90,000
3. ₹1,80,000 (correct answer)
4. Nil

Answer: C — ₹1,80,000

Explanation. The exception applies only to remuneration solely attributable to the spouse's technical or professional knowledge, experience and qualification. Salary of ₹10,90,000 would be outside clubbing. Commission of ₹1,80,000 is not solely attributable, so only ₹1,80,000 is clubbed in Mr. Sen's total income under section 64(1)(ii).

Where it goes wrong. Assuming that possession of a qualification exempts the entire remuneration, including commission for sales promotion.

Authority. Section 64(1)(ii) of the Income-tax Act, 1961

Question 3 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

What amount is clubbed in Mr. Sen's total income in respect of ₹3,00,000 gifted by him and invested by Smt. Sen in her boutique?

1. ₹40,000
2. ₹4,00,000
3. ₹3,00,000
4. ₹1,20,000 (correct answer)

Answer: D — ₹1,20,000

Explanation. Where a transferred asset is invested in business, proportionate income is clubbed. Formula: B × C/D = ₹4,00,000 × ₹3,00,000/₹10,00,000 = ₹1,20,000. Here B is business profit, C is gifted amount invested on 1 April 2026, and D is total capital on that date. Thus ₹1,20,000 is included in Mr. Sen's total income.

Where it goes wrong. Clubbing the full business profit of ₹4,00,000 or the gift amount of ₹3,00,000 instead of applying the proportionate formula.

Authority. Section 64(1)(iv) of the Income-tax Act, 1961

Question 4 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Suppose both Mr. and Smt. Sen had substantial interest in Nandini Tech Labs Pvt. Ltd. and both received remuneration from it. Mr. Sen's total income before including such remuneration is ₹18,00,000 and Smt. Sen's is ₹19,50,000. In whose total income will the remuneration be included?

1. Smt. Sen, as her total income before inclusion is higher (correct answer)
2. Mr. Sen, because he holds voting power
3. Equally in both spouses
4. In the company's hands

Answer: A — Smt. Sen, as her total income before inclusion is higher

Explanation. The proviso to section 64(1)(ii) provides that where both spouses have substantial interest in a concern and both receive remuneration, the remuneration is included in the total income of the spouse whose total income before such inclusion is greater. Smt. Sen's pre-inclusion income of ₹19,50,000 exceeds Mr. Sen's ₹18,00,000, so the remuneration is clubbed in her hands.

Where it goes wrong. Clubbing in the husband's hands merely because he holds shares, or splitting the remuneration equally.

Authority. Section 64(1)(ii) proviso of the Income-tax Act, 1961

Question 5 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. Mr. Aryan Mehta, a resident individual, gifted ₹18,00,000 to his daughter-in-law, Mrs. Riya Mehta, on 1 July 2026. On 1 August 2026, Mrs. Riya Mehta started a proprietary trading business. She invested the gifted ₹18,00,000 and her own funds of ₹6,00,000 in that business. The business earned profit of ₹7,20,000 during FY 2026-27. On 10 August 2026, Mr. Mehta gifted 1,200 listed shares of Aryan Steels Ltd. to Mrs. Kavita Rao, the wife of his brother Mr. Rohit Rao, without consideration. On the same date, Mr. Rohit Rao gifted ₹15,00,000 to Mrs. Meera Mehta, Mr. Mehta's wife. Both gifts were treated as part of one arrangement. Mrs. Meera Mehta invested the ₹15,00,000 in a bank fixed deposit on 1 September 2026 at 8% per annum; interest for FY 2026-27 was ₹1,20,000. Mrs. Kavita Rao received dividend of ₹36,000 on the shares transferred by Mr. Mehta. Mr. Mehta's income before clubbing is ₹25,00,000; Mrs. Meera Mehta's income before clubbing is ₹9,00,000. Mr. Rohit Rao's income before clubbing is ₹14,00,000. All individuals are resident and pay tax under the default tax regime. Mr. Mehta seeks to determine the amounts clubbed under section 64 and the cross-transfer principle.

What amount is clubbed in Mr. Mehta's total income from the profit of Mrs. Riya Mehta's business under section 64(1)(vi)?

1. ₹7,20,000
2. ₹18,00,000
3. ₹5,40,000 (correct answer)
4. ₹6,00,000

Answer: C — ₹5,40,000

Explanation. The gift to the daughter-in-law was without adequate consideration. Since the gifted amount was invested in business, proportionate profit is clubbed: ₹7,20,000 × ₹18,00,000/₹24,00,000 = ₹5,40,000. The denominator includes the gifted ₹18,00,000 and her own ₹6,00,000. Only ₹5,40,000 is included in Mr. Mehta's total income.

Where it goes wrong. Clubbing the entire business profit of ₹7,20,000, or using only the gifted amount in the denominator.

Authority. Section 64(1)(vi) of the Income-tax Act, 1961

Question 6 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

If Mr. Mehta had given ₹18,00,000 to his daughter-in-law as a genuine loan carrying market interest, what amount of her business profit would be clubbed under section 64(1)(vi)?

1. ₹5,40,000
2. Nil (correct answer)
3. ₹7,20,000
4. Only the interest paid on loan

Answer: B — Nil

Explanation. Section 64(1)(vi) applies where an asset is transferred to the son's wife otherwise than for adequate consideration. A genuine loan is not a transfer without consideration; it creates a debt. Hence, business profit attributable to the loan amount is not clubbed in Mr. Mehta's hands. The interest received by Mr. Mehta would be taxable as his income.

Where it goes wrong. Treating a genuine loan as a gift and applying the proportionate clubbing formula.

Authority. Section 64(1)(vi) of the Income-tax Act, 1961

Question 7 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Under the cross-transfer principle, what amount of interest on the fixed deposit in Mrs. Meera Mehta's hands is clubbed in Mr. Mehta's total income?

1. ₹1,20,000 (correct answer)
2. ₹36,000
3. ₹15,00,000
4. Nil

Answer: A — ₹1,20,000

Explanation. The two gifts form one arrangement: Mr. Mehta's shares go to Mrs. Kavita Rao, and Mr. Rohit Rao's cash goes to Mrs. Meera Mehta. Interest of ₹1,20,000 on ₹15,00,000 in Mrs. Meera Mehta's hands is treated as arising from an indirect transfer by Mr. Mehta to his wife. It is clubbed in Mr. Mehta's total income to the extent of ₹15,00,000. The dividend is dealt with separately.

Where it goes wrong. Ignoring the cross-transfer principle, or clubbing the entire ₹15,00,000 principal instead of the interest income.

Authority. Section 64(1)(iv) of the Income-tax Act, 1961; Cross-transfer principle

Question 8 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

What is the correct treatment of the dividend of ₹36,000 received by Mrs. Kavita Rao on the shares gifted by Mr. Mehta?

1. Clubbed in Mr. Mehta under section 64(1)(vi)
2. Clubbed in Mr. Rohit Rao under the cross-transfer principle (correct answer)
3. Taxable only in Mrs. Kavita Rao's hands
4. Exempt as dividend from listed shares

Answer: B — Clubbed in Mr. Rohit Rao under the cross-transfer principle

Explanation. Mrs. Kavita Rao is the brother's wife, not the son's wife, so section 64(1)(vi) does not directly apply. However, the simultaneous gifts are inter-connected. Mr. Rohit Rao's gift to Mrs. Meera Mehta is consideration for Mr. Mehta's shares to Mrs. Kavita Rao. Thus, Mr. Rohit Rao is treated as the deemed transferor to his wife, and the dividend of ₹36,000 is clubbed in his total income.

Where it goes wrong. Applying the daughter-in-law clause to a brother's wife, or treating the dividend as exempt.

Authority. Section 64(1)(vi) of the Income-tax Act, 1961; Cross-transfer principle

Question 9 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Raghav owns a shop in Jaipur. On 1 April 2026, he executes a registered deed assigning to his brother the right to receive rent from the shop for five years. The shop itself remains owned by Mr. Raghav. Rent of ₹4,20,000 is received by the brother during FY 2026-27. The deed is irrevocable. In whose total income is the rent taxable?

1. Mr. Raghav, since only income was transferred and not the asset (correct answer)
2. Mr. Raghav's brother, since the deed is irrevocable
3. Both in equal share
4. Brother, but exempt up to ₹1,50,000

Answer: A — Mr. Raghav, since only income was transferred and not the asset

Explanation. Section 60 covers transfer of income without transfer of the asset producing that income. Mr. Raghav transferred only the right to receive rent; the shop remains with him. The rent of ₹4,20,000 is therefore included in Mr. Raghav's total income. Irrevocability of the deed does not change the result because the asset itself was not transferred.

Where it goes wrong. Clubbing in the brother's hands because the assignment deed is irrevocable.

Authority. Section 60 of the Income-tax Act, 1961

Question 10 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mrs. Nalini transferred her commercial plot to a trust for the benefit of her nephew for his life. The trust deed cannot be revoked during the nephew's life, and Mrs. Nalini does not receive any direct or indirect benefit. In December 2026, she acquires a right to revoke the trust. Income of FY 2026-27 before revocation is ₹6,00,000; after revocation ₹1,50,000. What amount is clubbed under section 61?

1. ₹7,50,000
2. ₹6,00,000
3. Nil
4. ₹1,50,000 (correct answer)

Answer: D — ₹1,50,000

Explanation. Section 62 excludes a transfer that is not revocable during the beneficiary's life where the transferor derives no direct or indirect benefit. Until December 2026, the exception applies, so ₹6,00,000 is not clubbed. As and when the power to revoke arises, income from that point is included in the transferor's total income. Therefore, only ₹1,50,000 arising after revocation is clubbed.

Where it goes wrong. Clubbing the whole year's income of ₹7,50,000, or concluding that no amount is clubbed after revocation.

Authority. Sections 61 and 62 of the Income-tax Act, 1961

Question 11 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Devansh holds 22% equity shares carrying voting power in X Ltd. and is entitled to 15% of profits in Y LLP. His wife receives salary of ₹8,00,000 from X Ltd. and commission of ₹3,00,000 from Y LLP. She has no technical or professional qualification. What amount is clubbed under section 64(1)(ii)?

1. ₹11,00,000
2. ₹3,00,000
3. ₹8,00,000 (correct answer)
4. Nil

Answer: C — ₹8,00,000

Explanation. Substantial interest in a company means beneficial ownership of shares carrying at least 20% voting power. Mr. Devansh holds 22% in X Ltd., so salary from X Ltd. is clubbed. His 15% profit share in Y LLP is below 20%, so commission from Y LLP is not clubbed. Thus, ₹8,00,000 salary is included in Mr. Devansh's total income.

Where it goes wrong. Treating 15% profit share as substantial interest and clubbing both salary and commission.

Authority. Section 64(1)(ii) of the Income-tax Act, 1961

Question 12 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Smt. Ishita, spouse of Mr. Pranav, is a qualified cost accountant. She receives ₹12,00,000 as salary from a firm in which Mr. Pranav has 30% profit share. The firm states that the salary is solely attributable to her cost accounting knowledge. She also receives ₹2,00,000 as commission for promoting sales, which is not attributable to such knowledge. What amount is clubbed under section 64(1)(ii)?

1. ₹14,00,000
2. ₹2,00,000 (correct answer)
3. Nil
4. ₹12,00,000

Answer: B — ₹2,00,000

Explanation. Mr. Pranav has substantial interest in the firm with 30% profit share. The salary of ₹12,00,000 is solely attributable to Smt. Ishita's professional qualification, so it is outside clubbing. The commission of ₹2,00,000 is not attributable to such qualification and is therefore clubbed in Mr. Pranav's total income under section 64(1)(ii).

Where it goes wrong. Clubbing the full ₹14,00,000 because the spouse holds a professional qualification, without checking the commission component.

Authority. Section 64(1)(ii) of the Income-tax Act, 1961

Question 13 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. and Mrs. Karan both have substantial interest in Karan Motors LLP and both receive remuneration. For FY 2026-27, remuneration is first included in Mrs. Karan's total income as her other income is higher. In FY 2027-28, Mr. Karan's other income becomes higher. Can the remuneration be shifted to Mr. Karan's total income for FY 2027-28?

1. Yes, automatically because his income is higher
2. Yes, with consent of both spouses
3. No, once included in one spouse, it cannot change
4. No, unless the Assessing Officer, after hearing the other spouse, is satisfied (correct answer)

Answer: D — No, unless the Assessing Officer, after hearing the other spouse, is satisfied

Explanation. Once remuneration is included in one spouse's total income for a year, the proviso prevents inclusion in the other spouse's income for a succeeding year unless the Assessing Officer is satisfied, after giving the other spouse an opportunity of being heard. A mere change in relative income does not permit automatic shifting. Hence, Mr. Karan cannot claim automatic inclusion.

Where it goes wrong. Assuming automatic shifting of clubbing to the spouse with higher income in a later year.

Authority. Section 64(1)(ii) proviso of the Income-tax Act, 1961

Question 14 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Sameer transferred a let-out house property to his wife on 1 April 2026 without adequate consideration, not under an agreement to live apart. Annual value is ₹4,80,000; municipal taxes paid by the wife are ₹20,000; interest on loan is ₹1,20,000. Who is taxable and for what amount?

1. Mr. Sameer is deemed owner; ₹2,02,000 taxable in his hands (correct answer)
2. Mrs. Sameer; ₹2,02,000 taxable in her hands
3. Mr. Sameer; ₹4,60,000 taxable
4. Mrs. Sameer; ₹3,22,000 taxable

Answer: A — Mr. Sameer is deemed owner; ₹2,02,000 taxable in his hands

Explanation. For house property transferred to a spouse without adequate consideration, section 27 treats the transferor as deemed owner. Income is computed in Mr. Sameer's hands: annual value ₹4,80,000 less municipal taxes ₹20,000 = ₹4,60,000; less 30% standard deduction ₹1,38,000 = ₹3,22,000; less interest ₹1,20,000 = ₹2,02,000. The amount is taxable directly as house property income.

Where it goes wrong. Applying section 64(1)(iv) clubbing instead of the deemed ownership rule in section 27.

Authority. Section 27 of the Income-tax Act, 1961

Question 15 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Harsh gifted debentures of face value ₹5,00,000 carrying 10% interest to his wife on 1 April 2026 without consideration out of natural love. Interest of ₹50,000 was received. She deposited the interest in a bank fixed deposit and earned ₹4,000. What amount is clubbed under section 64(1)(iv)?

1. ₹54,000
2. ₹4,000
3. ₹50,000 (correct answer)
4. Nil

Answer: C — ₹50,000

Explanation. Natural love and affection do not amount to adequate consideration. Interest of ₹50,000 on the transferred debentures is income from the transferred asset and is clubbed in Mr. Harsh's total income. The ₹4,000 earned by investing that interest is income from an accretion of the transferred asset, not from the transferred asset itself, so it is not clubbed in his hands.

Where it goes wrong. Clubbing interest earned on the reinvested interest, or treating natural love as adequate consideration.

Authority. Section 64(1)(iv) of the Income-tax Act, 1961

Question 16 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Mahesh gifted ₹8,00,000 to his daughter-in-law on 1 April 2026. She contributed it as capital in a partnership firm on the same date. Her total capital in the firm on 1 April 2026 was ₹20,00,000. Firm's profit for FY 2026-27 is ₹5,00,000 and interest on capital is ₹1,00,000. What amount is clubbed in Mr. Mahesh under section 64(1)(vi)?

1. ₹2,00,000
2. ₹1,00,000
3. ₹5,00,000
4. ₹2,40,000 (correct answer)

Answer: D — ₹2,40,000

Explanation. Where the gifted amount is contributed as capital to a firm, proportionate income is clubbed. B includes profit and interest on capital: ₹5,00,000 + ₹1,00,000 = ₹6,00,000. C is ₹8,00,000 and D is ₹20,00,000. Clubbed amount = ₹6,00,000 × ₹8,00,000/₹20,00,000 = ₹2,40,000. This is included in Mr. Mahesh's total income.

Where it goes wrong. Using only profit of ₹5,00,000 as B, or ignoring interest on capital in the numerator.

Authority. Section 64(1)(vi) of the Income-tax Act, 1961

Question 17 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Nitin transferred ₹20,00,000 to an AOP without consideration with a direction that ₹80,000 of the AOP's income be used for his wife's benefit. The AOP earned ₹2,00,000 during FY 2026-27. What amount is clubbed in Mr. Nitin's total income under section 64(1)(vii)?

1. ₹80,000 (correct answer)
2. ₹2,00,000
3. ₹20,00,000
4. Nil

Answer: A — ₹80,000

Explanation. Section 64(1)(vii) covers income from assets transferred to any person or AOP without adequate consideration, to the extent the income is for the immediate or deferred benefit of the transferor's spouse. The AOP earned ₹2,00,000, but only ₹80,000 was directed for the wife's benefit. Therefore, ₹80,000 is clubbed in Mr. Nitin's total income.

Where it goes wrong. Clubbing the whole AOP income of ₹2,00,000 or the entire transferred amount of ₹20,00,000.

Authority. Section 64(1)(vii) of the Income-tax Act, 1961

Question 18 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Pankaj transferred listed shares acquired in May 2022 for ₹6,00,000 to his wife in June 2026 without consideration. She sold them in January 2027 for ₹9,50,000; STT was paid. Holding period includes the previous owner, and long-term capital gain is ₹3,50,000. What amount is clubbed under section 64(1)(iv)?

1. Nil
2. ₹9,50,000
3. ₹6,00,000
4. ₹3,50,000 (correct answer)

Answer: D — ₹3,50,000

Explanation. Income arising from an asset transferred to the spouse without adequate consideration is clubbed in the transferor's hands. The capital gain of ₹3,50,000 on sale of the transferred shares is income from the transferred asset. The spouse's cost is the previous owner's cost under section 49(1), and the holding period includes the previous owner's period, so the gain is long-term. It is clubbed in Mr. Pankaj's total income.

Where it goes wrong. Treating the gain as short-term due to the wife's short holding, or assuming sale ends clubbing.

Authority. Section 64(1)(iv) of the Income-tax Act, 1961; Section 49(1) of the Income-tax Act, 1961

Question 19 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Yash transferred a rental property to a trust under a deed that allows him to re-assume power over 40% of the income after three years. Income of FY 2026-27 is ₹12,00,000 before the power arises. What amount is clubbed under section 61?

1. ₹4,80,000
2. Nil
3. ₹12,00,000 (correct answer)
4. ₹7,20,000

Answer: C — ₹12,00,000

Explanation. A transfer is revocable if it contains any provision for re-transfer of the whole or part of income or assets, or gives the transferor a right to re-assume power over the whole or part. Since the deed allows power over 40% of income, the transfer is revocable. Once revocable, the entire income from the transferred asset is included in the transferor's total income. Hence ₹12,00,000 is clubbed.

Where it goes wrong. Clubbing only 40% of income, or treating the transfer as irrevocable because the power arises after three years.

Authority. Section 61 of the Income-tax Act, 1961

Question 20 · 2 marks · Taxation - DT Ch 08: Clubbing Setoff · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Nikhil gifted ₹10,00,000 to his wife on 1 April 2026. She invested the entire amount in her proprietary business on the same date. Her total capital in the business on 1 April 2026 was ₹10,00,000. The business suffered a loss of ₹2,00,000 in FY 2026-27. What amount is clubbed in Mr. Nikhil's total income under section 64(1)(iv)?

1. Nil, as loss cannot be clubbed
2. Loss of ₹2,00,000 (correct answer)
3. Loss of ₹10,00,000
4. Loss restricted to ₹1,50,000

Answer: B — Loss of ₹2,00,000

Explanation. The entire capital of the wife's business came from the gift by Mr. Nikhil. The proportionate formula gives loss of ₹2,00,000 × ₹10,00,000/₹10,00,000 = ₹2,00,000. Clubbing applies to income, and income includes loss. Therefore, the loss of ₹2,00,000 is included while computing Mr. Nikhil's total income. The ₹1,50,000 threshold is not relevant here.

Where it goes wrong. Assuming that clubbing applies only to positive income, or applying a ₹1,50,000 exemption to business loss.

Authority. Section 64(1)(iv) of the Income-tax Act, 1961