Portuguese Civil Code & Income Tax Return Forms
Income is normally taxed in the hands of the person who is earning it. However, there is a general exception in respect of the clubbing provision wherein income is taxed in the hands of the person other than the recipient. There is one more exception. It is section 5A.
Before knowing about section 5A, one may recall that Portuguese come to India for business of spices & other items. They remained for a longer period of time in India. Even after independence, they get mingled with the Indians like salt with water continue to stay in India after Independence. There are still lot many Portuguese who are residing in Goa & Daman.
Section 5A in the Income Tax Act, 1961 was inserted in the Income-tax Act with a view to recognize the customer of Portuguese & to give special treatment to the persons residing in the State of Goa and Union Territories of Dadra and Nagar Haveli and Daman and Diu in view of the customs of Portuguese. Majority of the citizens residing in the State of Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu are governed by the Portuguese Civil Code of 1860. These special provisions for persons who are governed by Portuguese Civil Law vide Section 5A was inserted into the Income Tax Act, 1961 by Finance Act, 1994 but with retrospective effect from AY 1963-64.
Section 5A provides for apportionment of income between spouses governed by the Portuguese Civil Code. It is applicable to the persons residing in the State of Goa and Union Territories of Dadra and Nagar Haveli and Daman and Diu. It provides that any assessee who is residing in the territories of the State of Goa and Union territories mentioned above will be governed by the Portuguese Civil Code of 1860. As per this code, when a person gets married, the property of the spouses gets blended and resultantly each spouse gets entitled to a 50& share in the consolidated assets. Not only this, each spouse is also legally entitled to a 50% share in the income of the other spouse. The provision contained in the portugues code is take care by section 5A of the I.T. Act- 1961. Section 5A of the Income Tax Act – 1961 reads as under:
5A. (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.
Section 5A is a beneficial provision which allows apportionment of income equally between the spouses governed by the Portuguese Civil Code and benefiting them in reducing their tax incidence. This system of apportionment of income and assets between spouse after marriage is often referred to as community of property (in Portuguese language “COMMUNIAO DOS BENS”). Resultantly, section 5A even overrides the clubbing provisions contained in section 64 of the I.T. Act – 1961. Section 5A clearly provides that income from all sources except from salary should be apportioned equally between the husband and wife and such income shall not be assessed as income of the community of property (whether treated as an association of persons or as a body of individuals).
Even before the insertion of section 5A, there was a judicial pronouncements by the Bombay High Court in Additional Commissioner of Income-tax vs. Mr. and Mrs. Velentino F. Pinto [1984] 150 ITR 408 in which, after referring to the relevant provisions of the Portuguese Civil Code held that income from the house property which is the property of the communion of the husband and wife married according to the custom of Goa, had already held that income under the heads “Income from house property”, “Profits and gains of business or profession” and “Income from other sources” should be allocated in the ratio of 50:50 between spouse & taxed be levied separately in the hands of each spouse. Even it was held that no separate assessments need to be done in the hands of the community of property. Similar findings were given by Bombay High Court in the case of CIT vs. Purushotam Gangadhar Bhende [1977] 106 ITR 932 wherein court held that income in such case should be assessed separately in equal shares in the hands of each of them and not in the hands of “the body of individuals”.
However, later a contrary view was expressed in Commissioner of Income-tax vs. Modu Timblo (206 ITR 647) vide order dated 23-4-1993 wherein Bombay High Court has held that income under the head “Profits and gains of business or profession” earned by the husband and wife should be combined and the combined income should be assessed in the hands of the single entity of community of property, in the status of association of persons or body of individuals. It was held that salary income shall be taxed in the hands of the person who earns it and shall not be required to be apportioned between the spouses. This judgment has created harshness on the residents of Goa who are governed by the Portuguese Civil Code as tax impact is lower if assessed in individual hands vis a vis Body of Individuals (BoI). This judgment has derecognized the concept of the Principle of Community of the Property under the Portuguese Civil Code.
Section 5A insertion was a result of the representation done to the then Finance Minister to recognize it under the Income Tax Act to tax the income of persons governed by the Portuguese Civil Code after apportioning the same between the spouses equally. In the Union Budget for 1994-95, the following statement made by then Finance Minister was as under:
“The system of Community of Property (communiao Dos Bens) is peculiar to the people living in Goa, Daman, Diu Dadra & Nagar Haveli. Recently, certain judicial decision has been handed down according to which business income of a Goanese family becomes taxable entirely in the hands of a single entity. The decisions affect the time honoured method of dividing such income equally and assessing such income separately in the hands of the husband and wife. This I understand has given rise to unnecessary tensions and anxiety amongst Goan couples. To set at rest all controversies in this area, I proposed to make suitable amendments in Income Tax act to ensure that expecting for salaries to any other income arising to the citizens governed by the system of Community of Property in Goa, will be divided equally and assessed separately in the hands of the husband and wife”.
This amendment has nullified the decision of the Bombay High Court rendered in the case of Commissioner of Income-tax vs. Modu Timblo(supra) except for salary income which is followed. New section 5A was inserted in the Income-tax Act so as to settle the controversy arisen out of court pronouncements. Salary income will, however, continue to be assessed in the hands of the spouse who has actually earned it. The husband and the wife can claim deduction under the provisions of Chapter VI-A separately.
The constitutional validity of section 5A was challenged before the Bombay High Court by the salaried class of taxpayers of Goa on the ground that it is per se discriminatory and violative of Article 14 of the Constitution of India. The upheld the constitutional validity of section 5A in Goa Salaried Taxpayers Association & Others vs. Union of India (2001) 249 ITR 195 (Bom)]
Probably, unified civil code will end all such concept in years to come. It may result in abolition of the concept of Hindu Undivided Family (HUF) as a separate taxable unit as well.
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