employment of son in father's company

[Asish Kumar Nath]

Sir,

I want to know if an individuals have a proprietorship company and he is willing to join his son as an employee , is it possible?

 Is the income of son will club with the income of his father?

Please help me out in this regard.

[Guest]

If i am not wrong, the proprietorship company is concerned on liability and no way concern the son or daughter or wife. However if the business wind up or liability issue arises then the property may be attached, then family issues may come up for repaying the debts or liability, other wise son or daughter can be employee and income tax dept. may treat Son or daughter a seperate assesse unless the family is HUF.

Rgds

Gangadhar

 

[abhi parakh]

Dear Mr. Nath,

As far as a son joining his father's sole propreitorship firm as an employee is concerned, there could be no issues whatsoever, as far as the employer-employee relationship sustains.

Under Income tax the following implications may arise - 

CASE 1 - Son is a minor (i.e. below 18 yrs. of age) -

(i) As per Section 64(1A) of the IT Act since the income (i.e. salary) earned by him would be on application of his skill/talent/specialised knowledge & experience (assumed) same would not be clubbed and would be taxable as such in the hands of the son. 

(ii) Salary may be claimed as business expenditure by the sole propreitor, subject to disallowance u/s 40A of the Act

CASE 2 - Son is a major 

(i) Clubbing provisions do not apply with respect to a major son hence same would be taxable in the hands of the son. 

(ii) Salary may be claimed as business expenditure by the sole propreitor, subject to disallowance u/s 40A of the Act

Hope the aforesaid settles the issue. In case of any further clarifications kindly let me know

Thanks & Regards,

CA Abhi Parakh

[Asish Kumar Nath]

Abhi Sir, 

Thanks for your help.

AI Summary

Income clubbing rules: salary paid by a sole proprietor to his son taxed in son's hands, minor exception applies. A sole proprietor may employ his son and, where a genuine employer-employee relationship exists, the son's salary is taxable in the son's hands rather than being clubbed with the proprietor's income. Salary paid may be claimed as a business expense by the proprietor but is subject to disallowance rules limiting unreasonable or non-commercial payments between related parties.