Liability of Person in respect of Income Included in the Income of Another Person [Section 65]

Section 65 clarifies the tax liability of the transferee (recipient of income/assets) when income is clubbed in the transferor’s hands under Sections 60-64.

Key Rules Under Section 65

1.   No Double Taxation

• If income is taxed in the transferor’s hands(due to clubbing), the transferee is not taxed again on the same income.
• Ensures no double taxationof the same income.

2.  Transferee’s Reporting Obligation

• The transferee must disclosethe clubbed income in their tax return (if filing one).
• Must mention:
  • Nature of income(e.g., rent, interest, dividends)
  • That it is already taxed in transferor’s hands(to avoid reassessment)

3.  Exceptions Where Transferee May Be Taxed

• If the transferor fails to reportclubbed income in their return, the ITO can recover tax from the transferee.
• If the clubbing provisions are later invalidated(e.g., court rules transfer was genuine), the transferee may have to pay tax.

Examples

✅ Case 1: FD Interest Clubbed in Father’s Income

• Father (transferor)gifts FD to minor son (transferee) → Interest clubbed in father’s income.
• Tax Liability:
  • Father pays tax on interest.
  • Son does notpay tax again.

✅ Case 2: Property Rent Taxed in Husband’s Hands

• Husband (transferor)gifts property to wife (transferee) → Rent clubbed in husband’s income.
• Tax Liability:
  • Husband pays tax on rent.
  • Wife does notinclude rent in her taxable income.

❌ Case 3: Transferor Avoids Tax (Transferee Liable)

• Agifts shares to his brother but does not disclose dividends in his return.
• Tax Liability:
  • ITO can demand tax from the brother (transferee)if clubbing applies.

Comparison: Transferor vs. Transferee Liability

Key Takeaways

✔ Income clubbed under Sections 60-64 is taxed only once (in transferor’s hands).

✔ Transferee must disclose income but does not pay tax again.

✔ If transferor avoids tax, IT Dept. can recover from transferee.

Practical Tip:

• Maintain proof of clubbing(gift deed, transfer documents) to avoid disputes.
• Transferees should file ITR(if applicable) with proper disclosures.