Legality of tax savings using work arrangements

I am a professional (a cardiologist) who has got job offer from a private hospital( a cardiac centre). Their job offer is say 4.5 lakhs per month approximately given as professional fees. Their centre being a cardiac centre employs only cardiologists....If a need for other specialist doctors are required (for inpatient consultations in case of non-cardiac issues), these other specialist doctors are called in to have a look from nearby centres. These "outside" consultants are not full time employees. They are full time employees elsewhere. For the work they do at our centre, my centre gives them a remuneration . For most of these doctors, the money is given on a per-case basis. For a few though a fixed amount is given monthly (not a very high amount...say in the range of rs 5000 per month fixed irrespective of the number of consultations. The number of consultations would not be a very high number anyway!). Now my wife is a dentist. I told them that i am willing to work, if they pay me 4 lakhs per month and they keep my wife as an "outside" consultant in the field of dentistry with a fixed pay of rs 50000 per month. Now the owners are OK with the pay structure....(why wouldn't they?- its still 4.5 Lakhs either way)...they are OK with keeping my wife as an outside consultant in the field of dentistry as well....The only thing that they are worried about is whether this would be a legal or illegal arrangement......The doubt arises because , even though they need an outside consultant in the field of dentistry, the dentists so kept need not be paid this much.... As I said earlier in other specialties , outside consultants are paid a maximum of rs 5000/month. So their point is that rs 50000/month is way too high for a dentist....and even though they are ready to pay this , will some govt authority pull them or me for it? Is such an arrangement illegal?

To allay confusions...let me state outrightly: What they will be paying to my wife will be an unreasonable amount-thats for sure. But they are sort of forced to pay this unreasonable amount to rope in my wife. But is paying an unreasonably high amount as salary in anyway illegal. As for my part, i believe , i merely used the power of negotiation to my advantage-therefore i don't think , i am doing anything illegal either !

Let it also be noted that if at all such an arrangement is put in place, all payments would be in white....TDS and PAN and all that of both of us will come in play....nothing will be in black !

I am just an employee of the hospital and I have no investment in the hospital

I can understand that outwardly this will look like a "manipulation" done to decrease tax liabilities (as one of my friends pointed out). I also understand that. But it is to save on tax itself that i negotiated the way i did. Because i thought, if i stand firm on my demands, the hospital might agree in paying high salaries (professional fees to be exact) to my wife AND as far as i understand , i would not be violating any laws in India..

Someone please clarify!

NB: I did post a similar question an year back here. But certain points were left unanswered. And over this period certain factors have changed as well. Hence posting an edited question here! Last time someone here said that the amount paid to my wife would be unreasonable. What i really want to know is whether its illegal to pay or receive an unreasonably high amount. An AO may feel that , this is a technique to decrease tax burden. It is-but still would that be illegal?(thats the question). If it is-what laws would i be violating???

There are two set of sections dealing with these type of arrangements in Income tax act,1961 viz. 40A(2) for payer (being hospital in your case) and Clubbing provisions.

40A(2) disallows excess payment (compared to fair market value of goods or services) made to related parties. Related party to firm in your case means partners and relatives of partners of firm. Since you are not a partner and just a professional consultant of hospital, you are not a relative of firm and consequently 40A(2) shall not apply. Hence no problem on firm side.

Clubbing provisions deals with issues where an assessee is a partner or having substantial interest in others business and spouse of assessee is an employee then income of spouse clubbed in the hands of assessee. In your case, you don't have any interest in firm (Interest means having right to participate in more than 20% of profits of hospital), salary paid to your wife shall not be clubbed in your hands.

Remember, A.O can invoke those sections when you have control over payer and you intentionally made arrangements (using your control over payer) so that income tax could be avoided at higher rates. As you are professional and assume not having any substantial interest, A.O can not object in both hands (Payer and Assessee). Indeed, professionalism can not be accurately measured and hospital may claim that your wife professional capabilities are higher compared to other dentists, hence end up with paying higher sum compared to other dentists.