Jigar M. Patel
International Tax Attorney
Clubbing of Remuneration to Spouse
Section 64 provides that where salary, commission, fees or any other form of remuneration is received by the spouse of an individual from ‘a concern in which the individual has substantial interest,’ such amount 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 along with specified 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 the purposes of this provision, a relative would mean, the husband, wife, brother or sister or any lineal ascendant or descendant of the individual.
Remuneration when justified?
The above provision carries an important exception too, which provides that no clubbing would be attracted where 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. 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.
Liberal Judicial Interpretations
In a number of settled judicial pronouncements, 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 educational institution. The term ‘qualification’ must be given a wide meaning as referring to the qualities which are required to be possessed by the spouse performing the work. In fact, if the spouse, though not formally qualified, but possessing necessary skill, knowledge or experience required for performing the work, is paid reasonable remuneration for actual services rendered, no clubbing provisions can be invoked.
Gifted Funds in Tax-free Investments
Section 64 also provides for clubbing of income arising to the spouse from assets gifted by the individual. The impact of the clubbing provisions can be effectively blunted by investing the gifted funds in investments such as Public Provident Fund, Tax-Free Bonds and the like, income of which is totally free from income-tax under Section 10.
Income from Accumulated Income
Moreover, the accumulated income from such tax-free investments can be reinvested even in taxable investments, since such ‘income from accumulated income’ would be outside the purview of Section 64.
Illustration: Mr. Mehta, who is in the maximum bracket of 30% gives a gift of Rs. 50,00,000 to his wife, who invests the same in tax-free bonds yielding 7% interest per annum. At the end of the first year, the interest of Rs. 3,50,000 received by Mrs. Mehta would not invite any adverse impact since this income would be effectively tax exempt. If this interest of Rs. 3,50,000 comes to be invested by Mrs. Mehta in deposit with a private firm, yielding interest at 12% per annum, the income of Rs. 42,000, would still not be taxable for clubbing with her husband’s income, since it does not represent income from the gifted asset, but is in the nature of ‘income from accumulated income’.
