Section 5A of Income Tax Act 1961

Section 5A of Income Tax Act 1961 – Apportionment of income between spouses governed by Portu­guese Civil Code

Section 5(1) of Income Tax Act 1961

Where the husband and wife are governed by the system of community of property (known under the Portuguese Civil Code of 1860 as “COMMUNIAO DOS BENS”) in force in the State of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu, the income of the husband and of the wife under any head of income shall not be assessed as that of such community of proper­ty (whether treated as an association of persons or a body of individuals), but such income of the husband and of the wife under each head of income (other than under the head “Salaries”) shall be apportioned equally between the husband and the wife and the income so apportioned shall be included separately in the total income of the husband and of the wife respectively, and the remaining provisions of this Act shall apply accordingly.

Section 5(2) of Income Tax Act 1961

Where the husband or, as the case may be, the wife governed by the aforesaid system of community of property has any income under the head “Salaries”, such income shall be included in the total income of the spouse who has actually earned it.

Explanation of Section 5A of the Income Tax Act, 1961

Section 5A is a special tax rule for married couples in Goa, Dadra and Nagar Haveli, and Daman and Diu who follow the Portuguese Civil Code’s community of property system. This means all property and income during marriage are shared. Under this section, introduced in 1994 and effective from April 1, 1963:

• Non-salary income (like business profits, rental income, or interest) is split equally between spouses and taxed separately.
• Salary income stays with the spouse who earns it, not divided.
• This aims to simplify tax filing and reduce burdens compared to treating couples as a single tax entity, which was common before.

Key Provisions of Section 5A:

1. Apportionment of Income (Other than Salaries):
   • Income under all heads (except “Salaries”) earned by either spouse is split equally (50:50) between the husband and wife.
   • This apportioned income is then included in the individual total income of each spouse for taxation.
2. Income from Salaries:
   • Salary income is not split. It is taxed entirely in the hands of the spouse who earns it.
3. Objective:
   • Prevents double taxation or taxation as a single entity under the community property system while ensuring fair tax treatment.

Key Exceptions

1. Income from personal skill, talent, knowledge, or professional work is NOT split.
2. Income under Section 64 (Clubbing provisions) are treated separately.
3. Section 5A applies only if they are governed by Portuguese Civil Code.

Background and Legal Framework

Section 5A, inserted by the Finance Act, 1994, and effective retrospectively from April 1, 1963, addresses the unique tax situation of couples governed by the “Communiao Dos Bens” system under the Portuguese Civil Code of 1860. This system, prevalent in Goa, Dadra and Nagar Haveli, and Daman and Diu, treats all property and income earned during marriage as jointly owned. Prior to Section 5A, such couples were often assessed as a “body of individuals” (BOI) or “association of persons” (AOP), leading to administrative complexities and potentially higher tax liabilities. Section 5A aims to simplify this by apportioning income equally between spouses, except for salary income, which remains with the earning spouse.

The provision falls under Chapter II (Sections 4 to 9A) of the Income Tax Act 1961, which deals with the basis of charge. Its introduction was a response to judicial interpretations, such as those in CIT v Modu Timblo (1994), which highlighted the inequity of assessing Goan couples as BOI, prompting legislative action to ensure fairer taxation.

The constitutional validity of Section 5A was challenged but upheld by the Bombay High Court in Goa Salary Taxpayers v Union of India (2001, 249 ITR 195 Bom), ruling that it does not violate Article 14 (right to equality) of the Indian Constitution.

Filing Tax Returns Under Section 5A

🔍 Who needs to file returns?

Both spouses need to file individual tax returns, even if one of them doesn’t earn directly. Because of the income split, their respective 50% share is taxable in their own hands.

📝 Steps to file correctly:

1. Declare only 50% of eligible income in your return.
2. Ensure consistency in reporting by both spouses.
3. File using ITR-2 or ITR-3, depending on the source of income.

⚠️ Pro Tip: If only one spouse files correctly under Section 5A, and the other doesn’t, it can lead to mismatches or notices from the IT Department.

📌 Important Notes

📂 Documents to Keep Handy

To avoid future legal/tax hassles, keep these ready:

• Proof of domicile in Goa/Daman/Diu
• Marriage certificate
• Rental agreements, interest certificates, investment proof (for joint income)
• Bank statements showing ownership and transactions

🧮 Tax Planning Tip

Income splitting can lower total tax significantly!

✨ Example:

Without 5A: Mr. Silva earns ₹24,00,000 → Tax approx ₹4,36,500 (as per slabs for FY 2024-25)

With 5A: Mr. & Mrs. Silva each show ₹12,00,000
Tax per person = ₹1,17,000
Combined tax = ₹2,34,000
✅ Savings = ₹2,02,500!

Infographics

(1) Where the husband and wife are governed by the system of community of property (known under the Portuguese Civil Code of 1860 as “COMMUNIAO DOS BENS”) in force in the State of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu, the income of the husband and of the wife under any head of income shall not be assessed as that of such community of proper­ty (whether treated as an association of persons or a body of individuals), but such income of the husband and of the wife under each head of income (other than under the head “Salaries”) shall be apportioned equally between the husband and the wife and the income so apportioned shall be included separately in the total income of the husband and of the wife respectively, and the remaining provisions of this Act shall apply accordingly.

2) Where the husband or, as the case may be, the wife governed by the aforesaid system of community of property has any income under the head “Salaries”, such income shall be included in the total income of the spouse who has actually earned it.

Examples

Example 1: Rental Income

• Scenario: Mr. A and Mrs. A, a married couple in Goa governed by the Portuguese Civil Code, own a property jointly. They earn ₹4,00,000 as rental income annually. Mr. A also earns ₹6,00,000 as salary.
• Application of Section 5A:
  • Rental Income: ₹4,00,000 is split equally.
    • Mr. A: ₹2,00,000
    • Mrs. A: ₹2,00,000
  • Salary Income: ₹6,00,000 is taxed entirely in Mr. A’s hands (no split).
• Taxable Income:
  • Mr. A: ₹2,00,000 (rental) + ₹6,00,000 (salary) = ₹8,00,000
  • Mrs. A: ₹2,00,000 (rental)

Example 2: Business and Interest Income

• Scenario: Mr. B and Mrs. B, also under the Portuguese Civil Code, run a joint business earning ₹10,00,000 profit annually. Mrs. B earns ₹3,00,000 as interest from a fixed deposit.
• Application of Section 5A:
  • Business Income: ₹10,00,000 is split equally.
    • Mr. B: ₹5,00,000
    • Mrs. B: ₹5,00,000
  • Interest Income: ₹3,00,000 is split equally (not salary).
    • Mr. B: ₹1,50,000
    • Mrs. B: ₹1,50,000
• Taxable Income:
  • Mr. B: ₹5,00,000 (business) + ₹1,50,000 (interest) = ₹6,50,000
  • Mrs. B: ₹5,00,000 (business) + ₹1,50,000 (interest) = ₹6,50,000

Practical Examples

To illustrate, consider the following scenario, based on a hypothetical Goan couple, Mr. and Mrs. Fernandes, with the following income for the assessment year 2025-26:

Calculation of Total Income:

• Mr. Fernandes: Salary ₹9,00,000 + Business Income ₹3,75,000 + Interest on FD ₹2,50,000 + Interest on Savings ₹10,000 = ₹15,35,000.
• Mrs. Fernandes: Salary ₹6,00,000 + Business Income ₹3,75,000 + Interest on FD ₹2,50,000 + Interest on Savings ₹10,000 = ₹12,35,000.

Deductions: Assume deductions under Section 80C (PPF) of ₹3,00,000 and Section 80TTA (interest on savings) of ₹20,000, totaling ₹3,20,000. These are apportioned equally for non-salary income, so each gets ₹1,60,000 in deductions.

Net Taxable Income:

• Mr. Fernandes: ₹15,35,000 – ₹1,60,000 = ₹13,75,000.
• Mrs. Fernandes: ₹12,35,000 – ₹1,60,000 = ₹10,75,000.

Each spouse files separately, applying the applicable tax slabs for the assessment year 2025-26, as outlined in Income Tax Department – Individual Returns.

This example demonstrates how Section 5A ensures equitable tax treatment while respecting the communal nature of income under the Portuguese Civil Code.

Comparative Analysis: With and Without Section 5A

To highlight the impact, consider the same couple without Section 5A, where all income might be assessed as BOI:

• Without apportionment, Mr. might be taxed on ₹10,42,000 (including more of the joint income), and Mrs. on ₹11,28,000, potentially leading to higher tax due to progressive slabs. Section 5A reduces this by splitting non-salary income, as shown in the earlier table.

Case Study: CIT vs. Valentino A. Rebello (2012)

Background:

• Parties Involved: The Commissioner of Income Tax (CIT) and Valentino A. Rebello, a resident of Goa.
• Facts: Valentino and his wife, governed by the Portuguese Civil Code, earned income from a jointly owned property (rental income of ₹3,00,000) and a business (profit of ₹5,00,000). Valentino also earned ₹4,00,000 as salary. The couple filed separate returns, splitting the rental and business income equally, but the Assessing Officer (AO) argued that the income should be taxed as a single entity under the “community of property” system.

Issue:

• Whether the income should be taxed as a single unit (community of property) or apportioned between the spouses under Section 5A.

Judgment:

• The Income Tax Appellate Tribunal (ITAT) ruled in favor of the taxpayers, citing Section 5A.
• Reasoning:
  • Section 5A explicitly overrides the community of property concept for tax purposes.
  • Rental income (₹3,00,000) and business profit (₹5,00,000) were split equally:
    • Valentino: ₹1,50,000 (rental) + ₹2,50,000 (business) + ₹4,00,000 (salary) = ₹8,00,000
    • Wife: ₹1,50,000 (rental) + ₹2,50,000 (business) = ₹4,00,000
  • Salary income was taxed only in Valentino’s hands as he earned it.
• Outcome: The AO’s attempt to tax the income as a single entity was rejected, affirming the applicability of Section 5A.

Significance:

• This case clarified that Section 5A ensures equitable tax treatment for couples under the Portuguese Civil Code, preventing the income from being clubbed as a single taxable entity.

Section 5A’s application has been shaped by several landmark cases, providing clarity for taxpayers and tax authorities:

These cases, detailed in Section 5A Research Paper, underscore the shift from collective to individual assessment, reducing tax disparities for Goan couples.

Summary

• Section 5A simplifies taxation for couples under the Portuguese Civil Code by splitting non-salary income equally and taxing salary income with the earner.
• Infographics can visually represent this split and the process flow.
• Examples illustrate practical application, while the case study demonstrates judicial interpretation and enforcement of the section.

Frequently Asked Questions (FAQs)