1. Facts of the Case
Mr. Madhu is a practicing advocate who runs his own law firm. He employed his wife, Roja, in the firm and pays her a monthly salary of ₹25,000. While computing Mr. Madhu’s total income, the Assessing Officer (AO) added Roja’s salary to Mr. Madhu’s income by invoking the clubbing provisions of the Income Tax Act, 1961. Mr. Madhu contends that his wife’s employment is genuine and that she renders services in return for the salary paid.
2. Issues in the Case
- Whether the salary paid by Mr. Madhu to his wife Roja is liable to be clubbed with his income?
- Under what circumstances is clubbing of spouse’s income valid under the Income Tax Act?
- What are the conditions for treating the spouse’s salary as independent income not subject to clubbing?
- Has Mr. Madhu provided sufficient grounds to justify that Roja’s income should be taxed in her hands alone?
3. Legal Principles Covered
Section 64(1)(ii) of the Income Tax Act, 1961 provides that income arising directly or indirectly to a spouse from a concern in which the individual has a substantial interest shall be included in the individual’s income, unless the spouse possesses technical or professional qualifications and the remuneration is solely attributable to the application of such qualifications.
A person is considered to have a “substantial interest” in a concern if he holds at least 20% equity shares or capital in the firm, or is a major contributor/proprietor. If the salary is not for real services rendered, the clubbing provision applies.
In various judicial decisions such as CIT v. Manmohan Das, the courts have observed that income of the spouse cannot be clubbed if it is clearly proved that the spouse is professionally qualified and provides actual services for which remuneration is paid.
Hence, the onus is on the assessee to establish:
- That the spouse is professionally or technically qualified;
- That the payment of salary is justified and not a mere diversion of income;
- That the services are actually rendered.
4. Possible Judgement
If Roja does not possess professional qualifications, or if no real services are rendered, the salary will be clubbed in Mr. Madhu’s income under Section 64(1)(ii). However, if she is qualified (e.g., holds a law degree or relevant credentials), and if it is proved that she renders genuine services, the income will be treated as her own and not clubbed.
Therefore, the action of the Assessing Officer is legally justified unless Mr. Madhu can produce concrete evidence of Roja’s qualifications and active professional involvement in the firm.
