38. No Clubbing of Incomes - when Husband Pays Remuneration to a Professionally Qualified Spouse
Under the general provisions of the Income Tax Act, as provided in Section 64(1)(ii), if an assessee pays any salary, commission, fees or any other form of remuneration, whether in cash or kind to his spouse, from a concern in which he has substantial interest, it would be clubbed with his total income. Thus, generally speaking, a husband cannot pay any remuneration from his proprietorship or partnership firm to his wife. A person could be said to be substantially interested in a concern where he and his relatives are entitled to 20% of the profits or have 20% of the voting power. This makes it very difficult for the husband to pay remuneration to his wife or vice versa.
However, there is an exception to this general rule. Where remuneration is paid to the spouse because of certain technical or professional qualifications possessed by her or him and the remuneration is solely attributable to the application of professional knowledge or experience, the remuneration so paid to the spouse would not be added to the income of the other spouse making the payment. Thus, there is no clubbing of remuneration paid to the professional wife of a person with his own income. For example, a doctor who maintains a nursing home and employs his wife, also a qualified doctor, and pays her a remuneration, the lady doctor’s remuneration would not be clubbed with the income of the doctor husband. Hence, whenever any remuneration is paid to ladies in particular, from concerns where the husbands are substantially interested it should be ascertained that the ladies possess appropriable technical and professional qualification. The remuneration can then be attributable solely to their professional knowledge and experience. Professionals who wish to employ their wives should see that they are professionally qualified. It is not necessary that the lady concerned must undergo academic education; it would suffice if she acquires professional or technical knowledge through a Postal Diploma Course, which may or may not be recognised by the Government but is sufficient to impart professional or technical skill for a job.
Thus, it is very clear from the above mentioned provisions of the law that the addition to the income of the other spouse would be made only if the spouse does not possesse technical or professional qualification. A reading of the said Section 64(1)(ii) makes it very clear that the provisions of clubbing of income would be attracted only if two conditions are not satisfied, namely (1) that the spouse must definitely possess technical or professional qualification and that such technical or professional qualifications must relate to the post which is occupied by the said spouse and (2) that the salary or fees which are being paid to the spouse must be attributable to the application of his or her technical or professional knowledge. Hence, there may be situations when the wife happens to possess technical and professional qualification and thus receives salary from the business organisation of the husband but still such salary or remuneration might get clubbed with the income of the husband because the technical or professional qualification so possessed by the wife might be such which cannot be put to use in the business of the husband. For example, if a husband who runs a small SSI unit manufacturing scooter parts makes payment of salary to his wife who possesses technical and professional qualification of a Doctor having completed her MBBS, then in this case the salary paid to his wife having MBBS degree cannot be allowed as a deduction while computing the income of the husband because the wife, though possessing technical/professional qualification of a doctor cannot be put to use in the small business of the husband, hence the remuneration would be clubbed.
In the case of CIT v. D. Rajagopal 154 ITR 375 the Kerala High Court held that a mere graduate degree would not be treated as a technical or professional qualification. Similarly, in yet another case it has been held that matriculation is neither a technical or professional qualification so as to meet the requirements of the above section. If a “Computer Diploma” is obtained by the spouse and then she is paid salary/remuneration the question of clubbing of income would not arise.
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