Clubbing Income of Spouse – A Practical Approach

A lot of misunderstanding persists among the taxpayers about the clubbing of income and pattern of clubbing of income. There is a chance of cut the tax burden by circulating the income to various family members. To control such practices, certain provisions have been made for clubbing of income of wife, son’s wife and minor children. However, in this article I will point only the provisions of clubbing of income comes under section 64 1(ii), 64(iv) about clubbing of income of spouse.

As per Section 64(1) of the Income-tax Act, the following income of individual (wife/husband) can be clubbed with spouse’s income-
(i) Any income from assets transferred directly or indirectly by the spouse, otherwise than for adequate consideration or in connection with an agreement to live apart. Such assets may be immovable property as well as movable property like cash, shares, debentures etc.
(ii) Salary, Commission, fee or any other form of remuneration whether in cash or in kind from a concern in which the husband has a substantial interest.
However, no clubbing will be made in case the wife/husband possesses technical or professional qualification and the income is solely attributable to the application of her technical or professional knowledge and experience-Section 64(1)(ii)
It may be noted that the above provisions are also applicable in case of transfer or any asset or in case of above referred payments by a wife to her husband or vice-versa.
Clubbing of Income in respect of remuneration of spouse
The income of spouse is clubbed with his/her income if the following conditions are satisfied.
The taxpayer is an individual
He/She has a substantial interest in a concern.
Spouse of the taxpayer (i.e. husband/wife of the taxpayer) is employed in the above-mentioned concern.
Spouse is employed in the concern without any technical or professional knowledge or experience.
To come out of the clutches of this clause, two conditions are to be satisfied cumulatively:

The spouse should possess technical or professional qualifications; and
The income received by the spouse should be solely attributable to the application of his/her such technical or professional qualification.

The term ‘technical or professional qualification’ is not defined and, therefore, it has to be given the general meaning depending upon the fact of the case. This term does not mean a qualification conferred by any educational institution after undergoing a course of study in technical subject or for a profession. It cannot be the intention of the Parliament to confine the scope of the proviso only to the professions such as medicine, law, engineering or accountancy. A large number of occupations that are being practised and which form a source of livelihood are capable of being regarded as profession as long as they require a degree of skill. In a nutshell, a person having skill, experience and competence in the line of work in which he is engaged, could be regarded as professionally qualified.

So remuneration which is solely attributable to the application of technical or professional knowledge and experience of the spouse will not be clubbed. Some of the examples and case are given below.

Examples and cases related thereto clubbing of income.

The husband was rendering services on the basis of his long experience as manager of press and the business was largely dependent on his capability. Salary was paid to husband of the wife (assessee) for working as a manager of printing press business of a firm wherein assessee was a partner. But Salary will not clubbed in wife’s income because husband has experience and knowledge about that business although he has not any degree regarding the business.

However, the Court has also observed that a person can be said to be in possession of requisite technical qualification when by virtue thereof, he is eligible to perform that function; and that qualification must mean qualification which is necessary for carrying on the particular profession. It was also explained that if the job is of a technical nature requiring a degree or diploma, possession of such degree or diploma would be essential; and in the case of professional qualification it varies from profession to profession.

The salary and other such income is to be clubbed in the hands of spouse as per clause (ii) of section 64(1) of the Act. The question that arises is as to in whose hands such income is to be clubbed. Whether it is to be clubbed in the hands of the spouse receiving the income in the nature of salary, commission etc. or in the hands of the spouse having substantial interest in the concern making such payment? As per Explanation 1 to section 64(1), clubbing shall be made in the hands of that spouse whose total income (excluding the income which is to be clubbed) is greater. Further, once the income has been clubbed in the hands of one spouse in one assessment year, the same income arising in all the subsequent years has to be clubbed in the hands of that spouse only. That would mean that the criteria of higher income is not to be applied in all the years to find out answer to the question as to in whose hands the income is to be clubbed. However, if in any of the subsequent year, if the assessing officer is satisfied that ‘it is necessary to do so’, he may club the income in the hands of other spouse after giving an opportunity to the assessee. The question arises as to what constitutes ‘necessary to do so’. In this connection, the decision of the Tribunal in Viswanath S. Sapre vs. First ITO [3 ITD 520 (Bom)] may be taken note of. In this decision, following an earlier order of the Tribunal, it is stated that ‘once the Department has fixed one spouse as the subject matter of clubbing they should not change the person unless substantial reasons such as tax evasion, deliberate concealment etc. warrant it.’
Clubbing of income in respect of income from assets transferred to spouse
The income from asset shall be deemed to be the income of the taxpayer who has transferred the asset according to the following conditions.
The taxpayer is an individual
The asset is transferred to his/her spouse.
The transfer may be direct or indirect
He/she has transferred an asset (Other than a house property)
The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an agreement to live apart.
Conditions When Clubbing of income is not attracted :

1) Income arising from accretions to transferred assets
For instance, Mr Sharma invests Rs 10 lakh in a fixed deposit (FD) at a bank, in his wife’s name.
Now Interest income on FD will be clubbed with his (Mr. Sharma) income.
Investment made by Mrs. Sharma out of such Interest income will be taxed on her own income.
Where the assesse transferred a flat to his spouse, and the spouse inversted the rental income in fexed deposits, thre rental income alone is clubbed in the hands of the assessee, while the interest income from the fixed deposit is clubbed in the hands of the spouse only.

2) If property is acquired by the spouse out of pin money
Example: An allowance give to the wife by her husband for her livelihood and other household expenses.

3) When assets are transferred before marriage.

Meaning of substantial Interest :
If a concern is a company where 20% shares are beneficially held by an individual along with his relatives any time during the previous year.
In other cases, where the individual alongwith his relative is entitled to receive 20% of the profit of such concern, at any time during the previous year.