Clubbing of Spouse Salary, Minor Income, Lottery and Business Loss Set-Off
Mr. Rao runs a proprietary business. For FY 2024-25 he had a business loss of ₹6,00,000 before adjusting the following items. He earned interest of ₹80,000 on a bank fixed deposit and received a gift of ₹1,00,000 from a friend. His minor daughter earned interest of ₹40,000 on a fixed deposit gifted by her grandfather. Mr. Rao won ₹5,00,000 from a State lottery; tax of ₹1,50,000 was deducted at source. Mrs. Rao received salary of ₹4,80,000 from a private company in which Mr. Rao holds 25% of the equity shares. She is a graduate but has no technical or professional qualification, and her salary is for administrative work. Mr. Rao wants to set off the business loss against all the above income and claims that the minor's income should be taxed in Mrs. Rao's hands because the deposit came from her father. Examine.
1. Discuss the clubbing of Mrs. Rao's salary and the minor daughter's interest. In whose hands are they taxable?
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Mrs. Rao's salary. Under section 64(1)(ii), salary paid to a spouse by a concern in which the individual has a substantial interest is clubbed in the individual's income, unless the spouse possesses technical or professional qualifications and the salary is solely attributable to the application of those qualifications. Mr. Rao holds 25% equity, which is substantial interest (20% or more). Mrs. Rao is only a graduate with no technical or professional qualification, and her salary is for administrative work. Therefore the salary of ₹4,80,000 is clubbed in Mr. Rao's income.
Minor daughter's interest. Under section 64(1A), a minor child's income is clubbed with the parent whose total income (excluding the minor's income) is greater. Mr. Rao's income is higher, so the interest is clubbed in his hands. The source of the gifted deposit is irrelevant. Section 10(32) gives an exemption of up to ₹1,500 per child, so ₹40,000 − ₹1,500 = ₹38,500 is clubbed.
2. Compute Mr. Rao's total income for AY 2025-26 and the amount of business loss to be carried forward. Show the set-off.
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Income available before set-off:
- Clubbed salary: ₹4,80,000
- Bank interest: ₹80,000
- Gift from friend: ₹1,00,000 (non-relative gift exceeding ₹50,000 is taxable)
- Clubbed minor interest: ₹38,500
- Lottery winning: ₹5,00,000
- Business loss: ₹6,00,000
Business loss cannot be set off against salary under section 71(4). It also cannot be set off against lottery winnings because section 115BB bars any set-off of loss against winnings from lotteries. It can be set off against bank interest, gift and clubbed minor interest: ₹80,000 + ₹1,00,000 + ₹38,500 = ₹2,18,500. Remaining business loss = ₹6,00,000 − ₹2,18,500 = ₹3,81,500 to be carried forward.
Total income = salary ₹4,80,000 + lottery ₹5,00,000 = ₹9,80,000. The lottery winning is taxed at the special rate of 30% under section 115BB, with no deduction for expenses and no set-off of losses.
3. What would change if Mrs. Rao were a qualified chartered accountant and her salary were solely attributable to her professional qualification? What if the ₹1,00,000 gift had been received from Mr. Rao's brother?
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If Mrs. Rao were a qualified chartered accountant and her salary were solely attributable to the application of her professional qualification, section 64(1)(ii) would not apply. Her salary of ₹4,80,000 would be taxed in her own hands, not clubbed in Mr. Rao's income. Mr. Rao's business loss could then be set off against his other income, but not against her salary.
A gift from Mr. Rao's brother is a gift from a relative for section 56(2)(x). It would be fully exempt, so the ₹1,00,000 would not be taxable in Mr. Rao's hands. The business loss set-off would then be limited to the remaining other-source income.