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CMA Intermediate · Direct and Indirect Taxation · Clubbing of Income

Mr. Anand Verma transfers shares of an Indian company to his friend, Mr. Joshi, under a deed that allows Mr. Verma to cancel the transfer at any time. Dividend of Rs 40,000 on these shares is received by Mr. Joshi in the tax year. Under section 97, the dividend is:

The dividend of Rs 40,000 is taxed as Mr. Verma's income. Under section 97(1), income arising from a revocable transfer of assets is chargeable to the transferor. His power to cancel the transfer at any time makes it revocable, so Mr. Joshi is not taxed on it.

  1. ATaxable in Mr. Joshi's hands because he received it
  2. BTaxable in Mr. Verma's hands as income arising from a revocable transfer of assetsCorrect
  3. CExempt in both hands because the transfer is between friends
  4. DTaxable equally in the hands of both

Explanation

Section 97(1) says all income arising to any person by virtue of a revocable transfer of assets is chargeable as income of the transferor. The deed lets Mr. Verma cancel the transfer at any time, so the transfer is revocable. The Rs 40,000 dividend is therefore included in Mr. Verma's total income.

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