Under the provisions of Section 64(1) of the Income Tax Act there are various situations under which the income of a wife is not considered for tax purposes in her own hand but is liable to be clubbed or added with the income of her husband. In certain situations the income of the husband could be clubbed with the income of the wife under the provisions of Section 64(1). Hence, a non-resident should adopt proper tax planning with a view to avoiding such clubbing of income. For doing so, it is necessary to understand the relevant provisions of Section 64(1) as given below so that such clubbing can be avoided altogether by non-resident Indians.
(a) Under the provision of Section 64(l)(iii) the salary, commission, fees or other forms of remuneration, whether in cash or in kind, received by the wife of a non-resident Indian from a concern in which the non-resident Indian has a substantial interest would be liable to be added to the income of the non-resident Indian. However, this provision would not apply if the wife possesses technical or professional qualifications and the income is solely attributable to the application of her technical or professional knowledge and experience. In the case of a company, if equity share carrying 20% or more of voting power at any time during the previous year are owned beneficially by the non-resident Indian or by him along with one or more of his relatives, the non-resident Indian would be deemed to have a substantial interest in the company. In any other case, like an association of persons or a partnership firm, non-resident Indian would be considered to have a substantial interest in the concern if he, along with one or more of his relatives, is entitled in the aggregate at any time during the previous year to 20% or more of the profits of such a concern. Hence, whenever a non-resident and his relatives are substantially interested in a concern, he should avoid paying any remuneration to his wife, unless the wife is technically or professionally qualified. If this precaution is not taken, then the remuneration so paid to the wife would be added to the income of the non-resident. This is equally applicable in the case of the wife where she is substantially interested in the concern and pays some remuneration to her husband who is not technically or professionally qualified.
(b) Under the provisions of Section 64(1)(iv) if a husband makes any gift to his wife, the income from such gift would be liable to be added his income. Similarly, in the case of wife. Where, however, a transfer of money or funds or assets takes place from the husband to the wife or vice versa for an adequate consideration, this provision would not apply. Another situation in which this provision is not applicable is where the transfer of assets or gifts is made in connection with an agreement to live apart. Hence, a nonresident should never make any gift to his wife so that he can avoid the clubbing of income from gifted assets in his own hands. If, however, the gift is made by a husband to his wife before marriage, then this provision would not apply.
(c) Another provision in the matter of clubbing of income of the husband and wife is Section 64(l)(vii) under which a gift made to any other person or to the trustees of a trust for the benefit of the spouse of a non-resident Indian would be liable to be clubbed in the hands of the donor spouse. Hence, a non-resident Indian should not only refrain from making a gift directly to his wife but should also not make any gift indirectly in favour of the trustees f a trust for the benefit of his wife, so that the clubbing of income arising to the wife out of assets so gifted by the husband to the wife is avoided. This provision is equally applicable in the case of a gift by the wife to a trust for the benefit of the husband.