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CMA Intermediate · Direct and Indirect Taxation · Clubbing of Income

Mr. Suresh Iyer holds bonds that yield interest of Rs 60,000 per year. He executes a deed assigning the interest for the next three years to his brother, but keeps ownership of the bonds. Interest of Rs 60,000 is paid to the brother in the tax year. Under section 96, this interest is:

The Rs 60,000 interest is taxed in Mr. Iyer's hands. Under section 96, income transferred without transferring the underlying assets is chargeable to the transferor whether the transfer is revocable or not. He kept the bonds, so the brother is not taxed on it.

  1. ATaxable in the brother's hands since the income was assigned to him
  2. BTaxable in Mr. Iyer's hands, because income was transferred without transferring the bonds that produce itCorrect
  3. CTaxable in Mr. Iyer's hands only if the assignment is revocable
  4. DNot taxable in either hand during the assignment period

Explanation

Section 96 covers income arising to any person by virtue of a transfer where there is no transfer of the assets from which the income arises. It applies whether the transfer is revocable or not. Mr. Iyer kept the bonds, so the Rs 60,000 is his income. The option linking clubbing to revocability confuses section 96 with section 97.

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