2009 (4) TMI 801 - AT - Income Tax

Tribunal upholds decision: Wife's partnership income not clubbed under Income-tax Act

Deputy Commissioner of Income-tax Versus AV Jose

Deputy Commissioner of Income-tax Versus AV Jose - [2010] 1 ITR 88 Issues:- Whether the allowance received by the assessee's wife from a partnership firm is liable to be clubbed under section 64(1)(ii) of the Income-tax Act, 1961Rs.Analysis:The appeal before the Appellate Tribunal ITAT Cochin pertained to the assessment year 2004-05 and was filed by the Revenue against the order of the Commissioner of Income-tax (Appeals)-I at Kochi. The dispute revolved around the addition of an allowance of Rs. 13 lakhs received by the assessee's wife from a partnership firm, M/s. Alukkas Jewellery, in which the assessee was also a partner. The Assessing Officer had added this amount in the hands of the assessee under section 64(1)(ii) of the Income-tax Act, 1961.Upon the first appeal, the Commissioner of Income-tax (Appeals) found that the wife of the assessee, Mrs. Annie Jose, had received the allowance as per the terms of the partnership deed for services rendered as a working partner. He noted that Mrs. Annie Jose had returned the amount of Rs. 13 lakhs for assessment as income from business under section 28(v) of the Act. Consequently, the Commissioner set aside the clubbing and excluded the amount from the assessment of the assessee.The Revenue contended in the second appeal that the addition of the wife's remuneration should not have been deleted, invoking section 64(1)(ii) which covers income received by the spouse from a concern in which the individual has a substantial interest. The Tribunal analyzed the provision of section 64(1)(ii) and emphasized that the remuneration liable for clubbing should be in the nature of salary, commission, fees, or similar forms of remuneration. The Tribunal applied the principle of ejusdem generis, stating that the remuneration must be in the context of an employer-employee or professional relationship between the firm and the spouse.In this case, it was established that Mrs. Annie Jose received the allowance as a partner of the firm, not as an employee or consultant. The law permits payment of salary and allowances to working partners, which are deemed as profits and gains of business under section 28(v). As Mrs. Annie Jose had complied with the law by returning the allowances as income from business, there was no additional amount left to be clubbed under section 64(1)(ii). The Tribunal concluded that the remuneration received by a partner from a firm is in the nature of business income and not subject to clubbing under section 64(1)(ii). Therefore, the appeal filed by the Revenue was dismissed, upholding the decision of the Commissioner of Income-tax (Appeals).