The Hindu Business Line : It's all in the family

A FAMILY consisting of a father, mother and son can be conveniently clubbed together as one unit and income earned in the names of the various members of the family can be totalled up and assessed instead of making several individual assessments.

This idea had attracted fiscal policy-framers for a long time. There are countries in the West which levy tax on the family as a unit.

When Mrs Indira Gandhi held the finance portfolio for a short while she came up with a proposal that the income of the husband and wife must always be clubbed on the premise that it is not for the Government to separate those whom the gods have united.

The idea, however, did not take off. We continue to have individual assessments for members of the family unless the wife earns the incomes out of assets transferred by the husband or under certain contingencies. Technical and professional qualification of the member concerned can take the income out of the clubbing provision of the law.

The Srivastava case

In this case (Dr K. P. Srivastava vs CIT — 262 ITR 299 Allahabad),

Dr Srivastava, a Reader in the Orthopaedics Department of S. N. Medical College, Agra, was also a practising orthopaedics surgeon.

His father, Bagwan Prasad, was running a nursing home for his patients, his wife, Shobha, a physiotherapy centre, and his son, Sanjay, was earning income from an X-ray machine belonging to him.

The income-tax officer (ITO), finding that none of the three persons had any professional or technical qualification, was of the view that income from the activities should be assessed in the hands of Dr Srivastava only.

The Income Tax Appellate Tribunal (ITAT) concurred with these findings. Dr Srivastava took up the matter in appeal to the High Court.

The Allahabad High Court found that Bagwan Prasad, the father, had employed doctors who were looking after the patients and doing necessary surgery.

Dr Srivastava, a whole-time Government servant, did not have the time to look after several of the activities, such as running of the nursing home, the physiotherapy centre and the X-ray clinic. It was for this reason that the father had engaged two whole-time doctors who were regularly paid for this purpose.

Dr Srivastava was paid operation charges. There were other professional doctors also on the job.

The investment in the nursing home was made by the father out of his personal resources accumulated when he retired from government service.

The hiring charges of the rooms in the nursing home and the account in the bank were all in the name of the father. Shobha was not professionally qualified but had some experience in physiotherapy. She had engaged a technical person and also a doctor for this purpose. She had made certain investments in the physiotherapy centre by sale of jewellery. And Sanjay had purchased the X-ray machine from his mother.

The Allahabad High Court observed that the Tribunal had overlooked the evidence let in by Dr Srivastava and the other family members and, therefore, the findings recorded by the Tribunal could not be sustained.

It will not be correct to hold that only qualified doctors can run the nursing home. It was not necessary that the father, the son and the wife should necessarily be professionals.

The court restored the matter to the Tribunal for fresh consideration of facts and evidences.

According to the proviso to Section 64 (1)(ii) of the Income-Tax Act, 1961, if the wife possesses technical or professional knowledge and the income is solely attributable to the application of such knowledge and experience, the clubbing provision will not be attracted even though she may not possess a recognised degree or certificate. Courts have ruled that the terms "technical or professional" should be interpreted in a liberal sense.

One will have to consider the contextual facts in each case. The Dr Srivastava case is significant because it takes the issue beyond the scope of Section 64. In fact, there is no reference to Section 64 at all in the judgment.

The High Court has given a finding that managerial experience and independent finance capital will all be considerations relevant for considering the issue of clubbing. The logic is irresistible.

Anybody can run a nursing home, a physiotherapy centre or an X-ray clinic employing qualified doctors and technicians. It is not necessary that the proprietor should himself be a doctor.

The Department itself had made independent assessment for several years and changed the mode of assessment and resorted to clubbing after a search at the premises of Dr Srivastava.

The family members were examined on oath. There was no material, other than the absence of recognised certificates, to show that the father, the wife, and the son were incapable of running independent clinics.

Probably, at the High Court level, reference could have been made to Section 64. That would have produced a more comprehensive judgment.

CLARIFICATION: In the article "Indian Railways: Time to improve standards" (Business Line, September 19), the reference to the CAG Audit Report No. 9A of 2002 (Railways), `Passenger Amenities on Indian Railways' was erroneously clubbed with the sentence that 2003-04 was declared the customer satisfaction year by the Railway Minister. The declaration was made during his Budget Speech 2003, as mentioned subsequently.

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