Know about Portuguese Civil Code Column in ITR Forms

Know about the Portuguese Civil Code Column in ITR Forms: While filing ITR forms for Individuals many have come across the column ‘Are you governed by Portuguese Civil Code under section 5A’. In most of the cases option- ‘No’ is selected either knowingly or unknowingly. But it is always not the case that this option needs to be selected as ‘No’. In the applicable cases, one needs to select the option ‘Yes’.

Under the Income Tax Act, 1961 income is taxable in the hands of the person who earns it. However, section 5A is an exception to this rule. Section 5A covers apportionment of income between spouses governed by the Portuguese Civil Code and applicable to the persons residing in the State of Goa and Union Territories of Dadra and Nagar Haveli and Daman and Diu.

The provisions of Section 5A of the Income Tax Act, 1961 were inserted in the Income-tax Act with a view to give some special treatment to the persons residing in the State of Goa and Union Territories of Dadra and Nagar Haveli and Daman and Diu. 

An assessee residing in the territories of the State of Goa and Union territories mentioned above are governed by the Portuguese Civil Code of 1860. According to this law, when a person gets married, the property of the spouses gets blended and each spouse becomes a 50 per cent shareholder in the combined property. Similarly, each spouse is legally entitled to 50 per cent of the income of the other spouse. Such a system referred to as a community of property has been dealt with by the provisions of Section 5A.

Section 5A governs the apportionment of income between spouses governed by Portuguese Civil Code, 1860 as applicable in the State of Goa and Union Territories of Dadra and Nagar Haveli and Daman and Diu and 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.

Special provisions for persons 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.

A large number of persons 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.  According to this Law, when a person gets married, the property of the spouses gets blended and each spouse becomes a 50 per cent shareholder in the combined property. Similarly, each spouse is legally entitled to 50 per cent of the income of the other spouse. Such a system referred to as community of property (in Portuguese language "COMMUNIAO DOS BENS") had been posing problems in the assessment of income as there were doubts whether the income was to be assessed in the hands of the community of property or in the hands of husband and wife separately.

Prior to this amendment, the Income-tax Department was following the decision of the Bombay High Court rendered in the case of Additional Commissioner of Income-tax vs. Mr. and Mrs. Velentino F. Pinto [1984] 150 ITR 408, in which it had been 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 and taxed separately in the hands of each spouse and no separate assessments should be made in the hands of the community of property. 

A similar decision was taken by the Bombay High Court in the case of CIT vs. Purushotam Gangadhar Bhende [1977] 106 ITR 932 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 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, in the case of Commissioner of Income-tax vs. Modu Timblo (206 ITR 647), decided on 23-4-1993, the 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 further 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 spouse. This decision was contrary to the decisions taken in the aforesaid two cases.

The decision not only created considerable administrative problems for the Income-tax Department but also was very harsh to the assessees inasmuch as the combined assessment deprives them of two separate exemption limits as also of other incentives and deductions which otherwise would have been allowable to each spouse if they were to be assessed separately as individuals.

This decision has created harshness on the residents of Goa who are governed by the Portuguese Civil Code. If the income is apportioned between the spouses the tax incidence gets lesser in the individual hands contrary to if assessed as a body of individuals (BoI). Further, taxing the spouses who are governed by the Portuguese Civil Code as BoI disregard the Principle of Community of the Property under the Portuguese Civil Code.

To mitigate the hardships, a representation was made before the then Finance Minister to amend the Income Tax Act, 1961 by incorporating special provisions into the Income Tax Act to tax the income of persons governed by the Portuguese Civil Code after apportioning the same between the spouses equally.

The Finance Minister while presenting the Union Budget for 1994-95 made the following statement in his speech on the matter:

“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”.

The Finance Act, 1994, therefore, had incorporated in the Income-tax Act the principle which has all along been accepted for the determination of the income of persons residing in the State of Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu and governed by the Portuguese Civil Code of 1860. 

A new section 5A was inserted in the Income-tax Act so as to set at rest the controversy. Section 5A 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 the income from profession will be apportioned equally between the husband and the wife. The income so apportioned will be included separately in the total income of the husband and of the wife and the remaining provisions of the Income-tax Act shall apply accordingly. 

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 implications of this section on an individual, governed under the Portuguese Civil Code of 1860 is that income from any source earned by either spouse, not being salary, is to be clubbed together and apportioned equally between each spouse. The said income could be in the nature of professional income, business income, income from capital gains, rental income from house property, income from interest on bank deposits, dividend income, etc chargeable under ‘Income from other sources’. However, salary income will not be apportioned equally between both the spouses and will be taxed in the hands of the spouse who earns it.

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.

The constitutional validity of section 5A was challenged before the Bombay High Court by the aggrieved salaried class of taxpayers of Goa. The petitioners contended that the said section excluded in its operation salaried persons which has no legal justification. All other citizens who are domiciled in Goa and to whom the Portuguese Civil Code of 1860 was applicable are governed by the system of community of property. Under this system, each spouse is entitled to inherit half the share of the property of the other spouse and income therefrom is also liable to be shared equally among the spouses and they are always assessed separately in the total income of the husband and wife, respectively. Under Section 5A, the statute has recognised the system of community of property for the purpose of assessment in respect of all the income other than salary. Under Section 14 of the Income-tax Act, it is stated that the income has to be computed and classified under the five heads, namely, salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. The petitioners' grievance, in a nutshell, is that in the matter of assessment, the principle of the community of property as envisaged under the common civil code applicable to the people of the State of Goa is in respect of all the heads of income shown in Section 14 except salary. According to them, this exclusion of salaried persons or that group of persons for the purpose of assessment is per se discriminatory and violative of Article 14 of the Constitution of India.

However, the court has dismissed the writ petition and upheld the constitutional validity of section 5A. [Goa Salaried Taxpayers Association & Others vs. Union of India (2001) 249 ITR 195 (Bom)]

At the end, 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.

In the ITR Form, one needs to fill Schedule-5A if the option ‘Are you governed by Portuguese Civil Code under section 5A’ is selected as ‘Yes’. Schedule 5A captures the apportioned income to the spouse.