Commissioner of Income Tax vs R. Jayalakshmi

R. Jayasimha Babu, J.—The proviso to Section 64(1) of the Income Tax Act, 1961, has been invoked by the assessee. While the Revenue

contends that the assessee is not entitled to the benefit of that proviso. The Tribunal has found that the assessee along with a partner is in the

business of running a printing press wherein the husband of the assessee one Ramalingam was employed as manager on a salary of Rs. 8,400 for

the assessment year 1982-83 and which was Rs. 17,200 for the year 1983-84 ; that the business was carried on initially as a proprietary concern

of the assessee wherein her husband had been working as manager by receiving a salary and before his employment in the said business, he had

been working from the year 1965 in a similar business elsewhere, on salary. Ramalingam thus had a long experience in this line of business first

under others, later as a manager of his wife''s business and still later as the manager of the business run by the firm in which his wife, along with

another handicapped person, was a partner.

The Income Tax Officer sought to include the salary paid to the said Ramalingam in the computation of income of the assessee on the ground

that, that amount had been paid to the spouse of a partner, relying upon Section 64(1) of the Act. On appeal, the Appellate Assistant

Commissioner deleted the said, amount and the Tribunal has confirmed the order of the Appellate Assistant Commissioner. Learned counsel for

the Revenue contended as had been contended before the Tribunal, that the said Ramalingam does not possess a degree or diploma in printing or

management and, therefore, notwithstanding his undisputed long experience in the field and also the undisputed fact that the business in which he

worked was owned by a firm constituted of a lady and a handicapped person as partners, the salary paid to him is necessarily to be included in the

income of his wife. We are unable to agree with that submission.

The object of clubbing the income of spouses, when one has a substantial interest in the firm, is not to penalise the spouses who choose to

engage themselves in the same business, but to ensure that the income of one is not diverted as the income of the other, thereby escaping or

considerably reducing the amount of tax properly payable on the income of the spouse who has a substantial interest in the concern. In order to

prevent the spouse who has the substantial interest in the concern claiming to have incurred the expenditure by way of salary to his or her spouse

thereby reducing the taxable income of the spouse, the section provides that, the concern must have received a real benefit by the employment of

the spouse and if the salary paid is for the services actually rendered and as a result of which the concern has benefited the salary paid is not to be

artificially construed as the income of the spouse who has a substantial interest in the concern. The artificial income of the spouse to the extent of

inclusion of the salary paid to the spouse has to be limited to those circumstances which were in the view of Parliament when this section was

enacted. Interpretation of that provision must be with a view to promote the object and the artificiality of the income is not to be extended beyond

the limits contemplated by Parliament.

The proviso u/s 64(1) declares that the salary paid to the spouse will not be treated as the income of the spouse who has substantial interest in

the concern in cases where the employed spouse possessed technical or professional qualifications and the income is attributable to the application

of his or her technical of professional knowledge and experience. The fact that the spouse has a qualification is insufficient. What is much more

important is that the salary paid to that spouse has been paid for the application of the knowledge and experience of a technical or professional

nature possessed by the spouse for the purpose of the concern of which the other spouse is the holder of a substantial interest. In a given case, if

that concern has benefited from the professional or technical knowledge and experience of the employed spouse, the salary paid to that spouse is

not to be included in the income of the other. In interpreting the words, ""technical and professional qualifications"" regard must necessarily be had to

the persons to whom the Act is intended to apply. The Act is applicable to all persons who earn an income, which is taxable under the Act. The

Act does not make a distinction as between those who are educated and others who are uneducated, or, the level up to which they might have

been educated, for the purpose of making the income earned by them, liable to tax. The income earned by the individual, for and in consideration

of, the services rendered by him or her is ultimately his or her income and to the extent such income is in excess of the limits up to which the income

are exempt from tax, tax is payable by the persons who receive the income. There is no legal bar against a spouse being employed or rendering

services to a concern in which the other spouse has a substantial interest. Income earned by a spouse for the services rendered, such services

being real and not wholly artificial, is normally taxable in the hands of the receiver.

The words ""technical or professional"", therefore, must receive a liberal construction as that term is not defined in the section itself or elsewhere in

the Act. The word ""technical"" is a term of wide import and can apply to a variety of circumstances and situations and a wide range of subjects.

Any task required to be performed in an orderly and methodical manner which requires some skill and knowledge for performance and which also

involves some degree of complexity, can be regarded as ""technical"". The fact that ordinarily the term ""technical"" is used in relation to things

mechanical or electrical or anything associated with machinery does not warrant limiting the scope of the term having regard to the context in which

it has been used in Section 64. Similarly, the word ""professional"" is again a term of wide import. The varieties of professions are endless, the range

is as wide as the variety of activities that human beings undertake or are capable of undertaking. The number of professions grows with further

specialisations and sub-divisions of what were once regarded as professions. The term ""profession"" if understood in a general way, would apply to

any regular course of activity performed by a person which constitutes the source of his livelihood. To an unskilled labourer his profession is doing

manual work while to a nuclear physicist his profession is to carry out research or other work in his highly specialised field of activity. The range in

the kinds of profession is vast.

It is, therefore, necessary to consider the term ""technical and professional"" qualifications and experience in the context of the facts which are

required to be considered in a given case. The fact that the spouse of a person who has a substantial interest in a restaurant happened to be a

highly skilled physician, is neither here nor there, so far as Section 64 is concerned. But, if the spouse happens to be a person who has knowledge

of food and beverages and of the management of restaurants and he manages the restaurant for his spouse, the fact that he has not attended any

college in hotel management or received a diploma cannot stand in the way of the salary paid to him by the firm being treated as his own income

and not the income of the other spouse.

Regard must, therefore, be had to the nature of the business carried on by the concern, the nature of the technical or professional knowledge

and experience usable in that concern and the kind of technical or professional qualifications, knowledge and experience possessed by the spouse

to whom the payment is made from that concern for the services rendered by that person.

In this case, it is not disputed that the spouse here, the wife, who has an interest in the concern as a partner has no knowledge of the business of

running of the press. Her partner is a handicapped person. The partners being the owners of the concern and both of them not being in a position

to run the business directly by themselves, the employment of another person as a manager is fully justified. If, instead of employing the spouse of

the partner, another person had been employed and the same salary had been paid to that other person, Section 64 could not have been invoked

by the Revenue. The fact that the employee happens to be the spouse and not a third party should not make a difference so far as the taxability of

the amount paid as salary for the genuine services rendered by the spouse, is concerned.

The spouse in question here is admittedly a person who has several decades of experience in managing a printing press. He had been employed

as a manager in a press before he started managing the press which was initially owned by his wife and continued as manager of the press owned

by a firm in which his wife and a handicapped person are partners. The business of that firm apparently is wholly dependant on the efficient

management of the same by the husband of the assessee. The fact that he does not possess a diploma or degree in printing or in management from

an Institute of Printing Technology or of management or from a University does not make the value of his services to the business any less nor

make his working as a manager of the business, unreal. The salary paid to him, is therefore to be regarded as his own income and not the income

of his wife, merely on account of the fact that the two are spouses. So long as the spouse who is employed is qualified by his knowledge and

experience to render service by using that knowledge and experience, to the benefit of the business of the firm, the firm benefits from such service,

and the payment made to that spouse is genuine and bona fide, the benefit of the proviso is available to such a spouse. Section 64(1) cannot be

read as creating an irrebuttable presumption that spouses intend to avoid tax and that the employment of a spouse in a business in which the other

spouse has a substantial interest is only meant to be a device to deprive the State of its legitimate revenue.

We, therefore, do not find any error in the order of the Tribunal holding that the salary paid to the spouse is not to be included in the income of

the assessee.

We answer the question referred to us in favour of the assessee and against the Revenue. There will be no order as to costs.