35. Mr. Madhu is practicing advocating his wife ‘Roja’ to work in his law firm and draws a salary of 25000Rs. /- While computing the total income for Mr. Madhu the assessing officer clubbed the salary of his wife. Discuss.

1. Facts of the Case

• Mr. Madhu is a practicing advocate.
• He has engaged his wife, Mrs. Roja, to work in his law firm.
• Mrs. Roja receives a monthly salary of ₹25,000 for the services rendered.
• While assessing the income, the Assessing Officer (AO) has clubbed the salary income of Mrs. Roja with Mr. Madhu’s income.
• Mr. Madhu is contesting the clubbing, arguing that his wife actively works and earns the salary through legitimate services.

2. Issues in the Case [Questions]

1. Is the salary of ₹25,000 received by Mrs. Roja from her husband’s firm taxable in her own hands?
2. Can the Assessing Officer club the income of the spouse under the provisions of the Income Tax Act?
3. What are the conditions under which clubbing provisions apply in such cases?
4. How can one prove that the income is not liable to clubbing?

3. Legal Principles Covered

A. Section 64(1)(iv) – Clubbing of Income

Under Section 64(1)(iv) of the Income Tax Act, 1961:

“In computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.”

Key point: If the spouse receives income solely because of the relationship, and not due to services rendered, then such income is liable to be clubbed.

B. Exceptions to Clubbing

• If the spouse receives income from employment or services rendered and the payment is commensurate with qualification and work done, then clubbing provisions do not apply.
• The Supreme Court in Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (2020) clarified that remuneration must be for actual services rendered to avoid clubbing.

C. Supporting Judgement: CIT v. P. N. Sitalakshmi (1981)

• Held that remuneration paid to spouse for genuine services rendered and where qualification is proven, is not clubbed.

4. Possible Judgement / Advisory

If Mrs. Roja has the qualification and actually renders professional or clerical services in Mr. Madhu’s law firm, then:

• The salary paid to her is legitimate consideration for work done.
• Section 64(1)(iv) does not apply, and income should not be clubbed with Mr. Madhu’s income.
• Mr. Madhu can defend the assessment by producing:
  • Appointment letter
  • Salary slips or bank statements
  • Proof of work/role/attendance
  • Educational qualifications of Mrs. Roja