Tax Planning for Spouse

OLD VERSION REPUBLISHED.

NEW TAX REBATE FOR WOMEN :

The Finance Act, 2000 has introduced a new section 88C (w.e.f. assessment year 2001-02) which confers tax rebate upto Rs.5000 for resident women assessees below the age of 65 years at any time during the relevant previous year. This rebate is available to women irrespective of their source of income. Even, this rebate is available against tax on Long Term Capital Gains. Thus, all women assessees should take full benefit of the rebate. [It may also be noted that in case of assessees (both male and female), having attained the age of 65 years during the relevant previous year, a tax rebate of Rs.15,000 (w.e.f. Assessment Year 2001-02) is available under section 88B, which is popularly known as Rebate for senior citizens.]

CLUBBING PROVISIONS :

As per sections 64(1)(ii) and 64(1)(iv) of The Income Tax Act , the income of the spouse is clubbed in the hands of an individual in the following circumstances:-

1.    Assets transferred to spouse without adequate consideration:- By virtue of the provisions of section 64(1)(iv) where an asset (other than house property) is transferred by an individual to his or her spouse , directly or indirectly, without adequate consideration or except in connection with an agreement to live apart , any income from such asset will be deemed to be the income of the transferor. In case of income from House Property, it shall be treated as income of the transferor under section 27. For the application of the provisions of section 64(1)(iv) it is imperative that an individual must have transferred the income-yielding asset to his spouse. It is only then that in computing the individual's total income, the income arising from such asset can be included. When an assessee creates a charge upon his share in property in respect of his obligation to pay his wife an annual sum, section 64(1)(iv) does not apply- CIT v. P.R. Thakkar 170 ITR 224 (Bom.) Provisions of section 64(1)(iv) is not applicable to sham or nominal transactions or to benami transactions. It applies to real transactions - O.N. Mohindroo v. CIT 99 ITR 583 (Del.).

2.    Remuneration received by spouse from specified concern:- An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has a substantial interest. However, where the spouse possesses professional or technical qualification and the remuneration is solely attributable to the application of his or her technical or professional knowledge and experience, no clubbing under section 64(1)(ii) will take place. Where, both the husband and wife have a substantial interest in the concern and both are in receipt of the remuneration from such concern, remuneration will be included in the total income of husband or wife, whose total income excluding such remuneration is greater . Meaning of “substantial interest” - In this connection “substantial interest“ means, if an individual, individually or alongwith his relatives beneficially holds equity shares carrying not less than 20% voting power in a company or if he is entitled to, not less than 20% of profits in a concern other than a company at any time during the previous year. Definition of “relative”:- “relative” in relation to an individual means the husband , wife, brother or sister or any lineal ascendant or descendant of that individual [section 2(41)]

BASIC INGREDIENTS OF CLUBBING :

The basic ingredients of clubbing provisions under section 64(1)(ii) are as under :-

(i)            It is applicable to individuals only and not to HUF, Company etc.

(ii)          It is applicable in respect of the income arising to the spouse of such individual from payments made to him/her by way of salary, commission, fees or any other form of remuneration from a concern as specified above.

(iii)         Application limited:- In view of the applicability of this provision being expressly limited to the above categories of payments, section 64(1)(ii) cannot be extended to any other categories of payments, say rent, interest, or payments made for the supply of other materials used by the concern

IDEAS FOR PLANNING :

1.    Planning to avoid “substantial interest” : An individual may avoid the provisions by arranging the holding of shares in such a way that he may not be said to have substantial interest. For this purpose, the shares can be diverted in the name of his brother-in-law , sister-in-law, father-in-law, or mother-in-law, cousin, nephew, niece, aunt, uncle etc. who are not regarded as relatives as per section 2(41). Further such individual can avoid substantial interest by holding interest in a representative capacity like Karta of a HUF, or Trustee of a Trust.

2.    Overcoming the controversy regarding professional or technical qualification : Whether the word “professional“ or “technical” necessarily requires degree or diploma of university or other professional institutes is a debatable point. Therefore where only one spouse is professionally qualified, unqualified spouse should become the proprietor or substantial interest holder of the concern and the professionally qualified spouse should be paid remuneration. Some important decisions regarding this controversy are discussed hereunder : The Andhra Pradesh High Court in Batta Kalyani v. C.I.T. 154 ITR 59 (AP) held that the words “technical or professional” qualification occurring in the first part of the proviso do not necessarily relate to technical or professional qualifications acquired by obtaining certificate, diploma or degree from a recognised body like a University or an Institute. The Kerala High Court in the case of C.I.T. v. Sorabji Dorabji 168 ITR 598 (Ker.) expressing the similar view has held that the expression “technical or professional” qualification does not contemplate degree or diploma of a University or an Institute. Even if the employee spouse possesses practical experience in the line of employment for such a long period as is sufficient to hold the technical or professional qualifications, the requirements of section 64(1)(ii) are satisfied. Similar views were expressed by the Madhya Pradesh High Court in C.I.T. v. Smt. Madhubala Shrenik Kumar 181 ITR 180 (MP). In Ch.Suryakumar v. ITO 31 CTR 29 (Bombay Tribunal), experience as clerk was held to be technical or professional qualification. Ahmedabad, Calcutta and Madras Tribunals have expressed similar views in the following cases:-

3.    Planning by way of transferring assets to would-be-wife without adequate consideration : If the asset is transferred to the would-be-wife before marriage the clubbing provisions of section 64(1)(ii) will not be attracted. As per the traditions prevailing in Indian society, jewellery and cash gifts are given on engagement ceremony also. Such transfers on engagements will also be outside the purview of section 64(1)(ii). In this respect one can rely on the following decisions - According to the Calcutta High Court in P.J.P. Thomas v. CIT 44 ITR 897 (Cal.) and the Kerala High Court in T.V.Krishna Iyer v. CIT  38 ITR 144 (Ker.) "wife" means a legally wedded wife. According to the Supreme Court in Philip John Plasket Thomas v. C.I.T. 49 ITR 97 (SC) where a transfer of assets was made when the woman was not a wife, the clubbing provisions of section 64(1) were not attracted. For the purposes of this section, the relationship of husband and wife should be at both the points of time, i.e., at the time of transfer of assets as well as at the time of accrual of the income. If anything is gifted by an assessee to the spouse, only then the income derived from that amount can be added to the income of the assessee. If the gift is made prior to the date of marriage by no stretch of imagination, can it be said that it is a gift to the spouse. In such circumstances, the income derived from the gifted amount is not covered by section 64(1)(iv) of the Act - CIT v. Ashok Kumar 217 ITR 251 (All.).

4.    Even the gifts from spouse after marriage may not attract clubbing on proper investment : To avoid the clubbing implications, the money received from the spouse after marriage may be invested in the assets, the income of which is exempt or no income is generated from such asset, for example-

(a)   The money received from the husband may be invested by the wife in house property for self-occupation or may be utilised in purchasing jewellery and silver utensils etc.  

(b)   The money may be deposited in her Public Provident Fund Account, or Tax-free bonds and securities or in any other asset, income of which is exempt. It may be noted that w.e.f. assessment year 1998-99, the dividend from Indian Companies referred to in section 115-O, is totally exempt under section 10(33), so investment can also be made in shares of such companies. The Income from UTI and specified Mutual Funds is also exempt under section 10(33) w.e.f. Assessment Year 2000-01.   

5.    Business in the name of wife : For independent income in the hands of wife, planning may be done by way of starting a proprietorship concern or making her a partner in a firm. The wife can take loan from outsiders or even from husband if she herself does not have enough capital for the business.

6.    Planning through inter-exchange of assets : A spouse having higher income can transfer his high income yielding asset to other spouse and purchase assets which yield no income or less income. For example husband may purchase jewelleries and self occupied residential house from his wife in exchange of high income yielding asset or even for money. Further, assets on which fast accretion is expected may be transferred to wife with or even without consideration. If shares on which bonus shares are expected are transferred to wife without consideration, income from the bonus shares shall not be clubbed with the income of the transferor

CONCLUSION :

Though various provisions have been made in the Income Tax Act to club the income of husband and wife in the circumstances discussed in this chapter , yet there remains ample scope for planning independent income in the hands of wife if the ideas given above are properly implemented. It becomes more useful in view of the rebate of Rs.5,000 for women under section 88C and rebate of Rs.15,000 for all senior citizens under section 88B, with effect from Assessment Year 2001-02