CLUBBING OF SPOUSE REMUNERATION. |
Partnership Firms ID – 08 (JBC-104) |
64(1)(ii) provide that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience.
The law would tackle any attempt to divert the income of a person to others to avoid proper tax liability at the progressive rate of taxation by disallowing any payment which is excessive or unreasonable, if paid to a relative or a related concern under section 40A(2). This provision should itself be sufficient for tackling tax avoidance. However, there are many redundant provisions in our law with the result that section 64(1)(ii) would club any payment of salary, commission, fees or any other form of remuneration to a spouse of an individual by himself or from a concern in which he has substantial interest, in such individual's hands, unless such spouse has technical or professional knowledge and experience.
Section 64(1)(ii) would require salary paid to a spouse to be included in the hands of the husband, if the spouse does not have technical or professional qualification. In a number of cases, courts have held that the expertise acquired during past experience would have to be treated as such qualification as would make the clubbing provision inapplicable. It has been so held in Batta Kalyani v. CIT [1985] 154 ITR 59 (AP); Dr. J.M. Mokashi v. CIT [1994] 207 ITR 252 (Bom) and CIT v. Smt. R. Bharathi [1999] 240 ITR 697 (Mad). There is a decision to the same effect in CIT v. R.Jaya-lakshmi [1999] 240 ITR 773 (Mad), where the husband had several decades of experience in managing the business though he did not have any academic qualification. In most of these decisions, it would appear that the provision is being applied without considering the purpose for which it was enacted.
In one such instance in CIT v. Smt. Pratima Saha [1999] 239 ITR 570 (Gauhati), salary paid by a medical practitioner to his wife, who was serving as a nurse in her husband's clinic, was clubbed in the hands of the husband on the ground that she did not have formal professional qualification by way of a degree or a diploma from a university or any other recog- nised institute as required under the Indian Nursing Council Act, 1947, overlooking the fact that trained and competent nurses in many private nursing homes are not having any such qualification, but all the same function as staff nurses and get paid for the same. In this case also, it was not that the Assessing officer found that she was not working as a nurse or that the reward was excessive. Because of such disallowances in such cases the taxpayer is worse off by engaging his wife for his business or profession.
In R. S. Kini v. CIT [1993] 71 Taxman 71 (Bom), the assessee's wife was a matriculate who attended to the business of the firm in which her husband was having substantial interest by looking after the correspondence and bank matters. All the same it was found that she did not have technical or professional qualification so that it had to be taxed in her husband's hands. It is necessary that the test that should be substituted should be one of genuineness and reasonableness of payment with reference to services rendered; a test, which is already a part of our law in section 40A(2) of the Act.
In case of 168 ITR 598 Commissioner of Income-tax Vs. Sorabji Dorabji, court noted that “We find considerable force in the submission of the learned counsel for the assessee that the words 'technical or professional qualifications , occurring in the first part of the proviso do not necessarily relate to the technical or professional qualifications acquired by obtaining a certificate, diploma or a degree or in any other form from a recognised body like a university or an institute. That this was not the intention of the Legislature is clear from the use of the expression 'knowledge and experience' in the latter part of the proviso, as otherwise it would have been perfectly permissible for the Legislature to use the same expression as occurring in the first part. The harmonious construction of the two parts of the proviso, in our opinion, would be that if a person possesses technical or professional knowledge and the income is solely attributable to the application of such technical or professional knowledge and experience, the requirement for the application of the proviso is satisfied, although the person concerned may not possess any qualification issued by a recognised body. In our opinion, the Tribunal erred in coming to the conclusion that unless a recognised body conferred a qualification, it should not be considered that a person possessed technical or professional qualifications. It is enough, in our opinion, for the purpose of the proviso, if the recipient of the salary possesses the attributes of technical or professional qualifications, in the sense that he has got expertise in such profession or technique. If by the use of that expertise in the profession or technique, the person concerned earns salary, then the latter part of the proviso is also satisfied.”