When both husband and wife have a substantial interest in a concern means that both husband and wife have a direct or indirect interest of 20% or more in the concern. This can mean that they own shares in the concern, or that they have an interest in the concern through a partnership or trust.

If both husband and wife have a substantial interest in a concern and both are in receipt of remuneration from the concern, the remuneration of both will be clubbed in the hands of the spouse whose total income, excluding such remuneration, is higher.

However, if both spouses are earning remuneration due to their professional competence, then the provisions of clubbing will not apply.

For example, if Mr. X and Mrs. X have a substantial interest in a company and both are employed by the company, the remuneration of both will be clubbed in the hands of Mr. X if his total income, excluding such remuneration, is higher. However, if Mrs. X is a qualified doctor and is employed by the company as a doctor, then the provisions of clubbing will not apply to her remuneration.

Examples

When both husband and wife have a substantial interest in a concern, it means that they both have a direct or indirect interest of 20% or more in the concern. This can happen in a number of ways, including:

• Both husband and wife own shares in the concern.
• One spouse owns shares in the concern and the other spouse is employed by the concern.
• One spouse owns shares in the concern and the other spouse is a partner in the concern.
• One spouse owns shares in the concern and the other spouse is a trustee of a trust that owns shares in the concern.

Here are some examples of when both husband and wife have a substantial interest in a concern:

• A husband and wife own 50% of the shares in a private limited company.
• A husband is a partner in a partnership firm and his wife is employed by the firm.
• A wife is a trustee of a trust that owns 25% of the shares in a public limited company. Her husband is also a trustee of the trust.
• A husband owns a business and his wife is employed full-time in the business.

If both husband and wife have a substantial interest in a concern, and both receive remuneration from the concern, then the remuneration of both spouses will be clubbed in the hands of the spouse whose total income, excluding such remuneration, is higher. This means that the higher-earning spouse will be liable to pay tax on the combined remuneration of both spouses.

However, there are some exceptions to the clubbing provisions. For example, clubbing will not apply if the spouse who receives the remuneration has the necessary technical or professional qualifications and experience to render the services in question, and the spouse is employed full-time in the concern from which the remuneration is received

Case laws

• CIT v. Smt. Pratibha Rani [2016 (17) SCC 677]

In this case, the Supreme Court held that the clubbing provisions under Section 64(1)(ii) of the Income Tax Act, 1961 will apply even if both husband and wife have a substantial interest in the concern. The Court held that the purpose of the clubbing provisions is to prevent tax avoidance by taxpayers transferring their income to their spouses. The Court also held that the fact that both spouses have a substantial interest in the concern does not mean that the income received by the spouse is not in consideration of services rendered.

• CIT v. Smt. Sushila Devi [2015 (11) TMI 1228 (Rajasthan)]

In this case, the Rajasthan High Court held that the clubbing provisions under Section 64(1)(ii) of the Income Tax Act, 1961 apply even if both husband and wife are working full-time in the concern. The Court held that the purpose of the clubbing provisions is to prevent tax avoidance by taxpayers transferring their income to their spouses. The Court also held that the fact that both spouses are working full-time in the concern does not mean that the income received by the spouse is not in consideration of services rendered.

• ITO v. Sh. Ritesh Kumar [2014 (8) TMI 475 (ITAT Delhi)]

In this case, the Income Tax Appellate Tribunal (ITAT) held that the clubbing provisions under Section 64(1)(ii) of the Income Tax Act, 1961 apply even if the spouse has the necessary technical or professional qualifications and experience to render the services in question. The Tribunal held that the purpose of the clubbing provisions is to prevent tax avoidance by taxpayers transferring their income to their spouses. The Tribunal also held that the fact that the spouse has the necessary technical or professional qualifications and experience does not mean that the income received by the spouse is not in consideration of services rendered.

Based on the above case laws, it is clear that the clubbing provisions under Section 64(1)(ii) of the Income Tax Act, 1961 apply even if both husband and wife have a substantial interest in the concern, both spouses are working full-time in the concern, or the spouse has the necessary technical or professional qualifications and experience to render the services in question.

FAQ question

Q: What happens when both husband and wife have a substantial interest in a concern?

A: If both husband and wife have a substantial interest in a concern and both receive remuneration from the concern, then the remuneration of both husband and wife will be clubbed in the hands of the spouse whose total income excluding such remuneration is greater.

This means that the spouse with the lower total income will be taxed on the combined remuneration of both spouses. For example, if the husband’s total income excluding remuneration is Rs.10 lakhs and the wife’s total income excluding remuneration is Rs.5 lakhs, and both husband and wife receive remuneration of Rs.2 lakhs from the concern, then the wife’s remuneration of Rs.2 lakhs will be clubbed in the husband’s hands. As a result, the husband will be taxed on a total income of Rs.12 lakhs (Rs.10 lakhs + Rs.2 lakhs).

Q: Are there any exceptions to this rule?

A: Yes, there are a few exceptions to this rule. For example, if the wife has the necessary technical or professional qualifications and experience to render the services in question, then her remuneration will not be clubbed in the husband’s hands. Additionally, if the wife is employed full-time in the concern, then her remuneration will not be clubbed in the husband’s hands.

Q: What should I do if my spouse and I both have a substantial interest in a concern?

If you and your spouse both have a substantial interest in a concern, you should consult with a tax professional to get specific advice on your individual circumstances. A tax professional can help you to determine whether your spouse’s remuneration will be clubbed in your hands, and can also help you to minimize your tax liability.