In India, individuals residing in Goa and the Union Territories of Dadra and Nagar Haveli, and Daman and Diu, are often governed by the Portuguese Civil Code of 1860. One of the key features of this law is the concept of Comunhão dos Bens, or community of property, where both spouses jointly own the property and are entitled to 50% of each other’s income. However, this unique legal system posed challenges when it came to taxation, particularly in apportioning the income derived from community property between spouses.
To address these complexities, Section 5A of the Income-tax Act, inserted by the Finance Act of 1994, provides a clear framework for the apportionment of income between spouses in such cases. Let’s delve into the key provisions of this section and how it works.
What is the System of Community of Property?
Under the Portuguese Civil Code, when a person gets married, all assets and income acquired during the marriage are considered jointly owned by both spouses. This means each spouse holds a 50% share in the combined property and is legally entitled to 50% of the other spouse’s income. This is known as the “community of property” system or Comunhão dos Bens.
While this system ensures equal ownership, it created challenges for income tax purposes. The Income-tax Department faced ambiguity in determining whether the income earned by the spouses from community property should be assessed as the income of the community (as a separate entity) or divided between the spouses.
The Solution: Section 5A of the Income-tax Act
Section 5A, introduced in 1994, was designed to resolve these issues and provide clarity on the tax treatment of income for couples governed by the community of property system. Here’s how the section addresses the apportionment of income:
1. Apportionment of Income (Other Than Salaries)
For income from sources other than salaries—such as income from house property, business, and other sources—the Income-tax Act mandates that such income should be divided equally between the husband and wife. This means that each spouse is treated as having earned 50% of the total income under these heads.
For example, if a husband and wife earn rental income from a jointly owned property, 50% of that income is attributed to the husband, and the other 50% to the wife. Both amounts are then included in their respective income tax returns, and each spouse is taxed separately for their share of the income.
2. Income from Salaries
Unlike other types of income, salary income is treated differently. The salary income is included in the tax returns of the spouse who actually earned it. For instance, if the husband is employed and receives a salary, that salary is included only in his income. The same rule applies if the wife is the one earning the salary.
This provision ensures that the income from salaries, which is earned directly by the individual, is not divided equally but instead remains with the earning spouse.
Judicial Precedents and Interpretations
While Section 5A provided clarity, there were several judicial decisions that further refined the application of this provision:
- Additional CIT v. Mr. and Mrs. Valentino F. Pinto: In this case, the Bombay High Court ruled that income from various heads, such as income from house property and business profits, should be divided equally between the spouses and taxed separately. This decision reinforced the concept of apportionment of income between the spouses.
- CIT v. Modu Timblo: Here, the court held that income from business or profession should be assessed as the combined income of the community of property, not separately in the hands of each spouse. This created administrative challenges but was an important decision in establishing how income from business was treated.
- CIT v. Ms. Maria Sylvia D’Souza: This case highlighted how the tax department should handle the death of one spouse. In the event of the death of a husband, the surviving wife is entitled to 50% of the income from joint assets, like Fixed Deposit Receipts (FDRs). This 50% share is included in her income for tax purposes.
- Other Cases: In cases like CIT v. Shri & Smt. Jose Filipe Alvares and CIT v. Datta V. Gaitonde, the courts remitted the matter back to the authorities for fresh consideration, especially when the facts of the case were unclear or when the application of Section 5A needed further review.
Key Takeaways from Section 5A
- Equal Apportionment of Income (Other Than Salaries): Income from sources like house property, business, and investments is equally divided between the spouses, and each spouse is taxed separately for their share.
- Salary Income is Excluded from Apportionment: Income earned as salary is included only in the tax return of the spouse who earned it.
- Tax Treatment in the Event of Death: If one spouse passes away, the surviving spouse is entitled to their share of the income from community property, and only that portion is included in their income for tax purposes.
- Judicial Interpretations Clarify Ambiguities: Several court rulings have clarified how income should be treated, especially in cases involving business income and the death of a spouse.
Frequently Asked Questions (FAQ) about Section 5A: Apportionment of Income Between Spouses
1. What is Section 5A of the Income-tax Act?
Section 5A of the Income-tax Act, inserted by the Finance Act of 1994, governs the apportionment of income between spouses who are governed by the community of property system under the Portuguese Civil Code. It ensures that the income earned by each spouse from joint property is divided equally for tax purposes, with income from salaries being treated separately.
2. How is income from property divided between spouses under Section 5A?
Under Section 5A, income from sources like house property, business, and other investments (other than salary) is divided equally between the husband and wife. Each spouse is taxed separately for their 50% share of the income.
3. Is salary income shared equally between spouses?
No, salary income is treated differently. The salary income earned by each spouse is included in the tax return of the spouse who actually earned it. It is not subject to the equal division rule that applies to other sources of income.
4. What happens if one spouse dies?
If one spouse dies, the surviving spouse is entitled to 50% of the income from joint assets, such as Fixed Deposit Receipts (FDRs), and this share is included in their income for tax purposes. The remaining 50% of the income will pass on to other legal heirs, such as children.
5. How does Section 5A affect business income?
Income from business or profession is generally considered the combined income of both spouses. However, depending on the case, some courts have ruled that such income should be treated as the income of the community of property, to be taxed as a single entity (an Association of Persons or Body of Individuals).
6. Can the income of the spouses be assessed under the community of property system?
No, under Section 5A, income is divided and taxed separately in the hands of each spouse. Income is not assessed in the hands of the community of property as a separate entity. Each spouse is treated individually for tax purposes.
7. Are there any judicial decisions that clarify the application of Section 5A?
Yes, there have been several judicial rulings that have helped clarify the application of Section 5A. Key decisions include:
- Additional CIT v. Mr. and Mrs. Valentino F. Pinto: The court clarified that income from various sources should be divided equally between the spouses.
- CIT v. Modu Timblo: The court held that business income should be treated as the combined income of the community, not separately for each spouse.
- CIT v. Ms. Maria Sylvia D’Souza: This case addressed the treatment of income after the death of one spouse, ensuring that the surviving spouse’s 50% share is included in their income.
8. What are the tax implications for spouses under the community of property system?
Spouses under the community of property system are taxed individually on their apportioned share of income. For income from house property, business, and other sources, 50% is allocated to each spouse, and they are taxed separately on their respective portions. Salary income, however, is included only in the tax return of the spouse who earned it.
9. Is the income from joint assets subject to equal distribution in all cases?
Yes, except for salary income, income from joint assets and investments like rental income, dividends, or interest is equally divided between the husband and wife, and each spouse is taxed separately. The allocation is based on the understanding that both spouses hold an equal share in the community property.
10. Do I need to file separate tax returns under the community of property system?
Yes, each spouse needs to file their own individual tax return, reporting their respective share of the apportioned income. However, income from joint property (other than salary) is split equally between the spouses and reported separately in their respective returns.
Conclusion
Section 5A of the Income-tax Act provides a clear framework for the apportionment of income between spouses governed by the Portuguese Civil Code. By mandating the equal division of income (other than salary) and specifying how income from salaries should be treated, the provision ensures fair taxation for couples under the Comunhão dos Bens system. Judicial decisions have further refined the application of this provision, ensuring that income from community property is appropriately divided and taxed. Understanding these provisions is crucial for individuals living under the Portuguese Civil Code in Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu to ensure compliance with tax laws.
