Remuneration of Spouse from a Concern in which the other Spouse has Substantial Interest [Section 64(1)(ii)]:

1. No Clubbing if Remuneration is due to Technical or Professional Qualifications:

2. Where both Husband and Wife have Substantial Interest and both are getting Remuneration from the concern:

3. 'Substantial Interest' by an Individual - Meaning

4. When both Husband and Wife have Substantial Interest :

Section 64(1)(ii) is applicable if the following conditions are satisfied—

1. Condition 1 : The taxpayer is an individual.

2. Condition 2 : He/she has a substantial interest in a concern.

3. Condition 3 : Spouse of the taxpayer (i.e., husband/wife of the taxpayer) is employed in the above-mentioned concern.

4. Condition 4 : Spouse is employed in the concern without any technical or professional knowledge or experience.

If the aforesaid conditions are satisfied, then salary income of the spouse will be taxable in the hands of the taxpayer.

In computing the total income of an individual, there shall be included all such sums as arise directly or indirectly to the spouse, of such individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind from a concern in which such individual has a substantial interest.

Therefore, any remuneration derived by a spouse from a concern in which the other spouse has a substantial interest, shall be clubbed in the hands of the spouse who has a substantial interest in that concern.

Any other income, not specified above, is outside the scope of this section and will not the clubbed even if it accrues to the spouse from a concern in which the individual has a substantial interest.

(A) No Clubbing if Remuneration is due to Technical or Professional Qualifications:

The provisions of this clause shall not apply to any income arising to the spouse:

1. on account of technical or professional qualifications possessed by the spouse, and

2. the income is solely attributable to the application of his/her technical or professional knowledge or experience.

For example,

X is a partner in a partnership concern and is entitled to 50% share of the profit of the firm. Mrs. X is employed as the General Manager of the firm and is getting a salary of Rs.25,000 per month. The taxable salary of Mrs. X will be clubbed with the total income of X under the head 'Income from salaries'. However, if Mrs. X is receiving the salary on account of her technical or professional knowledge or experience, then the salary would not be clubbed.

(B) Where both Husband and Wife have Substantial Interest and both are getting Remuneration from the concern:

If the husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income, before including such remuneration, is greater. In this case, the clubbing will be done for the first time in the previous year in which the following three conditions are satisfied:

1. Both the husband and wife have a substantial interest in the concern.

2. Both the husband and wife get remuneration from such a concern.

3. The relationship of husband and wife subsists at the time of accrual of such income.

Where such income is once included in the hands of either spouse, any such income arising in any succeeding year shall not be included in the total income of other spouse unless the Assessing Officer is satisfied, after giving that spouse an opportunity of being heard, that it is necessary so to do.

(C) 'Substantial Interest' by an Individual - Meaning

An individual has a “substantial interest” in any of the following two situations—

1. In the case of a company - If an individual beneficially holds (individually or along with his relatives) 20 per cent (or more) of equity shares in the company at any time during the previous year.

2. In the case of a concern other than company - If an individual is entitled to 20 per cent (or more) share in profit in the concern (individually or along with his relatives) at any time during the previous year.

(D) When both Husband and Wife have Substantial Interest :

If once clubbing is done in the hands of X, salary of X and Mrs. X will be included in the income of X (in the subsequent years), even if income of X is lower than that of Mrs. X in that year. In such a case, the Assessing Officer can club the income of X and Mrs. X in the hands of Mrs. X only if the Assessing Officer is satisfied that it is necessary to do so. The Assessing Officer can take such action only after giving Mrs. X an opportunity of being heard.