CHAPTER V

INCOME OF OTHER PERSONS, INCLUDED IN TOTAL INCOME OF ASSESSEE

Transfer of income without transfer of assets.

96

All income arising to any person by virtue of transfer,––

• (a) whether revocable or not, and whether effected before or after the commencement of this Act; and
• (b) where there is no transfer of assets from which such income arises, shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.

Explanation

Section Summary:

Section 96 of the Income Tax Act deals with the taxation of income that arises from a transfer of income without the transfer of the underlying asset. This section ensures that if a person transfers the right to receive income (e.g., rent, interest, or dividends) but retains ownership of the asset generating that income, the income will still be taxed in the hands of the transferor (the original owner of the asset). This prevents tax avoidance through arrangements where income is shifted to another person while retaining control over the asset.

Key Changes:

This section is not a new provision but has been carried forward from the previous Income Tax Act. It continues to apply the same principle: income from a transfer of income rights (without transferring the asset) is taxable in the hands of the transferor. The language has been updated to align with the new law, but the core concept remains unchanged.

Practical Implications:

1. For Individuals and Businesses: If you transfer the right to receive income (e.g., assigning rental income to a family member) but retain ownership of the property, the income will still be taxed in your hands. This prevents tax avoidance through such arrangements.
2. For Tax Authorities: This section simplifies enforcement by ensuring that income cannot be artificially shifted to another person to reduce tax liability.

Critical Concepts:

• Transfer of Income: This refers to the assignment or transfer of the right to receive income (e.g., rent, interest, or dividends) without transferring the ownership of the underlying asset (e.g., property, shares, or bonds).
• Revocable or Irrevocable Transfer: Whether the transfer of income rights can be reversed (revocable) or not (irrevocable), the income will still be taxed in the hands of the transferor.
• No Transfer of Assets: The section applies only when the ownership of the asset generating the income is not transferred. If the asset itself is transferred, different tax rules may apply.

Compliance Steps:

1. Reporting Income: If you have transferred income rights but retained the asset, ensure that the income is reported in your tax return as your own income.
2. Documentation: Maintain records of any agreements or arrangements related to the transfer of income rights to substantiate your tax filings if required.

Examples:

• Scenario 1: Mr. A owns a rental property but transfers the right to receive rent to his son, Mr. B, while retaining ownership of the property. Under Section 96, the rental income will still be taxable in Mr. A’s hands, not Mr. B’s.
• Scenario 2: Ms. C assigns her right to receive interest from a fixed deposit to her friend, Ms. D, but keeps the fixed deposit in her name. The interest income will be taxed as Ms. C’s income, not Ms. D’s.

This section ensures that taxpayers cannot reduce their tax liability by merely transferring income rights without transferring the underlying asset.