Mukesh Patel.in
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TAX IMPLICATIONS OF REMUNERATION TO WIFE

Clubbing of income is not attracted where remuneration is paid to spouse possessing professional or technical qualifications!

        Keeping in view the family system prevailing in India where the financial affairs of the family are generally managed and controlled by the male head of the family, it is common to come across situations where the husband plans deriving income in the hands of his wife, thus aiming to reduce his income-tax tax liability.

CLUBBING PROVISIONS UNDER INCOME TAX

        However the ‘clubbing provisions’ under the Income-tax Act, seek to guard against tax-avoidance by an individual through shifting of income via payment of remuneration to his or her spouse. In this context, Section 64 of the Income-tax Act provides that where remuneration is received by the spouse of an individual from ‘a concern in which the individual has substantial interest,’ such remuneration would be liable to be clubbed with the income of the individual.

        ‘Substantial interest’ has been defined to mean holding of equity shares either individually or alongwith the relatives, carrying 20% or more of the voting power in the case of a company and deriving 20% or more of the profit in the case of a concern, other than a company. For this purpose, a relative would mean, the husband, wife, brother or sister or any lineal ascendant or descendant of the individual.

         Accordingly, if remuneration is given to the spouse from a concern in which the individual does not have substantial interest, the clubbing provisions would not be attracted.

         However, an exception in this regard also provides that if the spouse possesses professional or technical qualifications, and the remuneration concerned is solely attributable to the application of his/her technical or professional knowledge and experience, the clubbing provisions would not be attracted.

REMUNERATION TO SPOUSE WHEN JUSTIFIED?

          In the above context, it needs to be borne in mind that if the spouse is professionally or technically qualified, there would be no clubbing if the remuneration is paid from a concern even where the individual does have a substantial interest. It is common to come across cases where remuneration is paid to a professional spouse such as a Lawyer, Engineer, Architect, Chartered Accountant, Doctor, etc.

          However, in a host of judicial pronouncements, various High Courts have held that the words ‘technical or professional qualifications’ do not necessarily relate to such qualification acquired by obtaining a certificate, diploma or degree or in any other form, from a recognized body like university or an institute.

          The term ‘qualification’ must be given a wide meaning as referring to the qualities which are required to be possessed by a person performing the work that he/she does. In fact if a person though not formally qualified, but possessing the necessary skill, knowledge or experience required for performing the work, is paid reasonable remuneration for the genuine services rendered by him/her, he/she can very well be paid remuneration, without attracting the clubbing provisions of Section 64(1)(ii) of the Income-tax Act.

          To cite a few important cases where the above ratio has been propounded, they are — ‘CIT vs. Smt. R. Bharti’ 240 ITR 697(Mad.), ‘CIT vs. R. Jayalaxmi’ 240 ITR 773(Mad.),   ‘CIT vs. Madhubala Shrenikkumar’ 181 ITR 180(MP) and ‘Batta Kalyani vs. CIT’ 154 ITR 59(AP).

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