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Example of Tax Planning

-ex-

Suppose a person has business income of 350000

Tax Applicable on it is 6180 as shown below

Particulars Amount
Income 350000
Tax  8000
Rebate 2000
Net Tax 6000
Cess 180
Total Tax 6180

 

He does tax planning and shows salary of his wife working in his office at Rs 120000

Hence his net business income =350000-120000=230000

 

 

Income of wife-120000 which is also tax free

 

Mr A     Mrs A  
Particulars Amount   Particulars Amount
Income 230000   Income 1200000
Tax  0   Tax  0
Rebate 0   Rebate 0
Net Tax 0   Net Tax 0
Cess 0   Cess 0
Total Tax 0   Total Tax 0

 

Tax Saved=6180

To prevent such tax planning,this section has been introduced

 and now income of spouse will be clubbed with income of person as shown below

Particulars Amount
Income of Mr A 230000
Add  
Income of Mrs B Clubbed 120000
Total Income 350000
Tax  8000
Rebate 2000
Net Tax 6000
Cess 180
Total Tax 6180

 -eex-

As per Section 64(!)

If a person has substantial interest in a concern and spouse receives salary/ remuneration from it, then salary/remuneration of spouse will be clubbed in hands of person having substantial interest.

Exception

No clubbing done if

the spouse has required technical professional qualification

And

Income solely attributed to such technical professional qualification 

 

Salary/Remuneration received from Spouse’s concern - Different types of Clubbing

 

What is Substantial Interest

It means

In Case of Meaning of Substantial Interest

Company

(Private Limited/Limited Company)

Person Holds

20% or more voting power

Other than Company

(Proprietorship/partnership)

Person entitled for

20% or more profit share

 Note:-

  1. Beneficial Ownership is Important [Not Actual Ownership]

          i.e. person in whose name shares are registered

  1. Share of wife & relatives also included while calculating 20% limit
  1. Relative means Wife / Brother/ Sister / linear ascendant( parents)/ Linear Descendants (Children )
  • (Brother in Law / Sister in Law Not Covered)

 

EXAM QUESTION

During the previous year 2015-16, the following transactions occurred in respect of Mr. A.

Mr. A holds 75% share in a partnership firm. Mrs. A received a commission of Rs 25,000 from the firm for promoting the sales of the firm. Mrs. A possesses no technical or professional qualification

View Answer
  1. Income Tax
  2. Clubbing of Income of Other Persons
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About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 8 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
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