Applicability of Clubbing Provisions on remuneration income of Spouse from a Concern in which other Spouse has Substantial Interest
‘Substantial Interest’ by an Individual – Meaning
The following are the two cases where it can be said that an individual has a “substantial interest”—
In the case of a company – Where an individual beneficially holds (whether individually or along with his relatives) 20 percent or more of equity shares at any time during the previous year in the company.
In the case of concern other than a company – Where an individual is entitled to receive 20 percent or more share in profit in the concern (whether individually or along with his relatives) at any time during the previous year.
Section 64(1)(ii)of the Income Tax Act is applicable only if the following conditions are satisfied—
1st Condition: The assessee (taxpayer) is an individual.
2nd Condition: He/she holds a substantial interest in the concern.
3rd Condition: The spouse of the assessee (taxpayer) is serving as an employee in the above-mentioned concern.
4th Condition: The spouse of the assessee (taxpayer) is employed in the concern without any technical or professional knowledge or experience.
If the above-specified conditions are satisfied, then income by the way of remuneration of the spouse will be clubbed in the hands of the taxpayer and will be taxed as per normal rates.
While computing the Gross Total Income (GTI) of an individual, all such sums as arise directly or indirectly to the spouse shall be included, of such individual by way of salary, fees, commission or any other form of remuneration, whether in cash or in-kind from a concern in which such individual holds a substantial interest.
Thus, any remuneration by the way of salary, fees, commission or any other form of remuneration received by a spouse from a concern in which the other spouse holds a substantial interest, shall be clubbed together in the hands of the spouse having substantial interest in that concern.
In addition to this, any other income accrued to the spouse of the assessee, not specified above, is outside the ambit of this section 64(1)(ii) of the Income-tax Act and will not the clubbed in the hands of the assessee (other spouse having the substantial interest in the concern).
No Clubbing if Remuneration is due to Technical or Professional Qualifications:
The provisions contained U/s 64(1)(ii) of the Income Tax Act shall not apply to any income arising to the spouse:
Where the spouse is being employed on the account of technical or professional qualifications possessed by him/her, and
The income derived from the concern in which his/her spouse has a substantial interest and such income solely attributable to the application of his/her technical or professional knowledge or experience.
For example,
Amit is a partner in XYZ Associates and is entitled to 50% of the profit of the firm. Mrs Amit is employed as the Manager of the XYZ Associates and is getting a salary of Rupees. 50,000 per month. Therefore, the taxable salary of Mrs Amit will be clubbed together with the total income of Mr Amit under the head ‘Income from salaries’. However, if Mrs Amit is deriving the salary on account of her professional or technical knowledge or experience, then the salary would not be clubbed in the hands of Mr Amit.
Where both Husband and Wife have Substantial Interest and both are getting Remuneration from the concern:
Where both the husband and the wife have a substantial interest in concern and both are in receipt of remuneration from the said concern, then the remuneration of both shall be clubbed together in the hands of that spouse whose gross total income, before including such remuneration, is higher. In this scenario, the clubbing of income will be done for the first time in the previous year in which the following conditions are satisfied:
- The husband and the wife both are having a substantial interest in the concern.
- The husband and wife both are getting remuneration from such a concern.
- The husband and wife relationship subsists at the time of accrual of such income.
Where such income is once clubbed in the hands of either spouse (husband or wife as the case may be), any such income arising in any subsequent year shall not be clubbed in the total income of other spouse unless the A.O. (Assessing Officer) is satisfied, after giving that spouse an opportunity of being heard, that it is necessary so to do.
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