Вы находитесь на странице: 1из 10

PROJECT ON

LAW COMMISSION REPORT ON PROSPECTS OF EXEMPTING INCOME ARISING OUT OF


MAINTENANCE MONEY OF „MINOR‟

FOR

DIRECT TAX

Submitted to

Prof. Priyanka Anand

Submitted by

Agnish Aditya (14/BBA/006)

&

Siddharth Nigotia (14/BBA/048)

National Law University, Odisha


TABLE OF CONTENTS

Table of Contents I

Table of Authorities II

Introduction 1

Clubbing of Income under section 64 2

Payal Mehta v Sanjay Sarin 2

Background and Legislative Intent of Section 64 3

Arguments for clubbing of income arising out of maintenance money of minor 5

Arguments for granting the exemption 6

Conclusion 7

I|Page
TABLE OF AUTHORITIES

Cases

A. Renga Swamy Chettiar v. Mari Chettiyar, CRP. No. 500 of 2010 (Kerala HC). 5

Board of Revenue v Rai Saheb Sidhanth Mehrotra, AIR 1960 SC 1175 9

E. Palanisamy v. Palanisamy (Dead), (2003) 1 SCC 122 5

K.M. Vijayan v Union of India, 1995 215 ITR 371 Mad. 5, 7

Payal Mehta v Sanjay Sarin, 2016 SCC OnLine P&H 4989. 4, 7, 8, 9

Statutes

Income Tax Act, No. 43 of 1961, §64(1A). 3

Books & Treatises

1 KANGA AND PALKHIVALA, THE LAW AND PRACTICE OF INCOME TAX 191 (Lexis Nexis). 4

Reports

Law Commission of India, Report No. 265, available at


http://lawcommissionofindia.nic.in/reports/Report265.pdf (March, 2017). 3

Articles

FE bureau, Tax Evasion in India: Rs 1.4 lakh cr hunted down in 3 years, says CBDT,
FINANCIAL EXPRESS, http://www.financialexpress.com/economy/tax-evasion-in-india-rs-1-
4-lakh-cr-hunted-down-in-3-years-says-cbdt/620151/. 9

Shreeja Sen, Law panel opposes tax relief on interest on money deposited for maintenance of
minor child, LIVEMINT,

http://www.livemint.com/Politics/6ZPuXyW1Y6FLPE84WyiPiI/Law-panel-opposes-tax-
relief-on-interest-on-money-deposited.html. 9

II | P a g e
INTRODUCTION

Law commission of India recently submitted its report on „Prospects of exempting Income
arising out of Maintenance Money of „Minor‟1 to the Government. The commission
recommended that income earned by interest on maintenance money deposited in favour of
the child does not require to be exempted from being clubbed with Income of the
guardian/parent, as such exemption would leave room for tax evasion and would defeat the
very object of inserting the provision of section 64(1A)2. The said object of 64(1A) is to
prevent the avoidance of tax and to prevent substantial loss of revenue.

Section 64(1A) of the IT Act, provides that while computing total income of an individual, all
such income as arises or accrues to his minor child shall be included. Further the explanation
to the section provides that such income of the minor shall include, (a) were the marriage of
his parents subsists, in the income of that parent whose total income (excluding the income
includible under this sub- section) is greater; or (b) where the marriage of his parents does not
subsist, in the income of that parent who maintains the minor child in the previous year, and
where any such income is once included in the total income of either parent, any such income
arising in any succeeding year shall not be included in the total income of the other parent,
unless the Assessing Officer is satisfied.3

The present paper analyses the arguments raised for and against clubbing of income arising
out of Maintenance Money of minor.

1
Law Commission of India, Report No. 265, available at
http://lawcommissionofindia.nic.in/reports/Report265.pdf (March, 2017).
2
Income Tax Act, No. 43 of 1961, §64(1A).
3
Id.

1|Page
CLUBBING OF INCOME UNDER SECTION 64

A person is usually taxed on the income earned by him only. However, in certain cases
income of other person is clubbed or included in the taxable income of the taxpayer and
therefore, he becomes liable to pay tax on his income as well as the income of that other
person too.4 This is called clubbing of income. Section 60 to 64 of the IT Act deals with
clubbing of income. Section 64(1A) provides for clubbing of income for minor child.

Section 64(1) provides that income of minor child is to be clubbed with the income of his/her
guardian/parent. Income of minor child earned by manual work or income from knowledge,
skill, talent, experience is not clubbed with the income of his parents. But, the section
provides that accretion from such income is to be clubbed with the income of parent of such
minor.

The present matter arose when the Punjab & Haryana High Court referred the matter to the
Law Commission for consideration, as to whether section 64(1A) of the IT Act required an
amendment to provide for exemption from clubbing of minor‟s income accruing by interest
on amount deposited by parent/guardian, while considering the case of Payal Mehta v Sanjay
Sarin.5

PAYAL MEHTA V SANJAY SARIN6

Facts of the case are as follows. A matrimonial dispute arose between the parties which
resulted in dissolution of their marriage. The court directed the husband to settle a fixed
amount for maintenance of the minor children, which was placed in fixed deposits by the
wife as their guardian. The appellants urged that income tax should not be charged on interest
accruing on maintenance money deposited for the benefit of minors. The counsel for revenue
argued that section 64(1A) does not exempt the interest accrued on maintenance money
deposited in the name of minor.

The court observed that the IT Act does not exempt interest income accruing to a minor on an
amount deposited as maintenance and his/her income is to be clubbed with his

4
1 KANGA AND PALKHIVALA, THE LAW AND PRACTICE OF INCOME TAX 191 (Lexis Nexis).
5
Payal Mehta v Sanjay Sarin, 2016 SCC OnLine P&H 4989.
6
Id.

2|Page
parent‟s/guardian, and thus, requiring the minor apart from paying income tax to pay tax at
the rate paid by his guardian.

The parties pleaded that income tax should be exempted as the case involved minor‟s interest
and that the court must pay attention to equitable considerations. Such arguments were
rejected by the court. Law Commission noted that in interpretation of taxation statutes
equitable considerations are not relevant.7

BACKGROUND AND LEGISLATIVE INTENT OF SECTION 64

Section 64 aims at foiling an individual‟s attempt to avoid or reduce the incidence of tax by
transferring assets to the minor child. The Finance Act, 1992 provides that all income of a
minor is to be included in the income of his parent. Section 64(1A) clubs income of the minor
child irrespective of its source, with that of the parent having larger income.

The constitutional validity of Section 64 was challenged before the Supreme Court in the case
of KM Vijayan v Union of India8. The petitioner‟s income was clubbed with that of his
daughter who was earlier assessed independently. The petitioner alleged that by clubbing the
income of his daughter, his tax burden became higher and that the petitioner had no
connection with his daughter‟s income. The court took into the legislative history of section
64(1A) into account by looking at the speech of Finance Minister while introducing the
amendment.

“It is said that the child is the father of man, but some of our taxpayers have converted
children into tax shelters for their fathers. The tax law provides for clubbing of income from
gifts given by parents but this does not apply to other income, including income from other
gifted assets, and the practice of cross-gifting is widely used to evade clubbing. The Chelliah
Committee has recommended that in order to plug this loophole, which accounts for a
substantial leakage of revenue, the income of a minor child should be clubbed with that of the
parent. There is merit in this suggestion and I propose to accept it. Recognising, however, the
existence of a number of child prodigies, especially child artistes in our country, I propose to
exclude their professional income, as also any wage income of minors, from the purview of

7
See E. Palanisamy v. Palanisamy (Dead), (2003) 1 SCC 122; A. Renga Swamy Chettiar v. Mari Chettiyar,
CRP. No. 500 of 2010 (Kerala HC).
8
K.M. Vijayan v Union of India, 1995 215 ITR 371 Mad.

3|Page
such clubbing. The practice of clubbing the income of minor children with that of the parent
for tax purposes is in vogue in a number of countries.”

Further, the court noted the following recommendations of Dr. Raja J. Chelliah Committee
report:

“At present, in India the income of the minor admitted to the benefits of any partnership is
included in the income of the parent, irrespective of whether or not either parent is a partner
in the same firm. Further, any income accruing to a minor from any asset transferred to him
by the parents or the grandparents is included in the income of the parent or grandparent who
has transferred such income-generating asset. However, in respect of all other income
accruing to him, the minor is a separate taxable entity. Keeping in view the rationale for
aggregation of the minor's income with that of the parents, the Committee recommends that -

(a) All incomes of a minor, other than wage income, should be aggregated with the total
income of –

(i) any one of the parents at the option of the parents where the income of both the parents
exceeds the exemption limit;

(ii) the parent having the higher income, where the total income of one parent or of both the
parents happens to fall below the exemption limit for individuals;

(iii) if over time the income of the parent, with whom the income of the minor was
aggregated earlier, goes below the exemption limit, the parent having the higher income.

(b) It follows that the income of the minor arising from assets transferred to him or her by any
one including his grandparents should be aggregated with the income of the parent as
recommended above."

The court ultimately upheld the constitutional validity of section 64(1A)

The legislative intent behind the section is that all of minor‟s income should be clubbed with
his/her parents, except for cases specially excluded, as for all purposes, the parent generally
uses and treat the said minor‟s income as part of their income. The court further noted
Memorandum to the provisions in Finance Bill, 1992

4|Page
“In reality as well as in law, the minor children cannot administer their property nor can they
take decisions on the disposal of income arising therefrom. These responsibilities fall on the
parents, who, for all practical purposes, treat and use this income as part of their own income.
Exclusion of minor children's income from the income of their parents also leads to tax
avoidance. The existing provisions of Income Tax with regard to clubbing of minor's income
have also led to litigation between Income tax department and assesses.

The Bill, therefore, seeks to amend section 649 of the Income-tax Act to provide that all
income of a minor is to be included in the income of his parent. 10 However, the income
derived by the minor from manual work or from any activity involving his specialised
knowledge or experience will not be included in the income of his parent."

The legislative intent clearly indicates that the purpose of section 64(1A) is to prevent tax
avoidance.11 It logically follows that the interest arising out of maintenance money deposited
for minor must also be clubbed with that of parents.

ARGUMENTS FOR CLUBBING OF INCOME ARISING OUT OF MAINTENANCE MONEY OF MINOR

The court and law commission report has noted that for all practical purposes the income of
minor is effectively used by parent/guardian and therefore, it must be clubbed with the
income of minor or guardian. Therefore, it seems to follow that the interest arising out of
such money must also be clubbed with the income of minor‟s parent/guardian.

Any other interpretation will run contrary to legislative intent and lead to tax evasion.
Parent/Guardian will make use of this provision to transfer funds for minor‟s maintenance
and claim exemption on the interest accruing on such amount.12 The interest accrued on such
amount is effectively the interest that would have been accrued on their respective income.
Therefore, there seems no reason to exempt such interest.

Arguments against such an interpretation were raised by the plaintiff in Payal Mehta’s case.13
The plaintiff argued that court should take into account minor‟s interest and that the plaintiff
were compelled by the court to deposit such maintenance money. The court rejected such
arguments.
9
Income Tax Act, 1961, §64.
10
KANGA AND PALKHIVALA.
11
KANGA AND PALKHIVALA.
12
K.M. Vijayan v Union of India, 1995 215 ITR 371 Mad.
13
Payal Mehta v Sanjay Sarin, 2016 SCC OnLine P&H 4989.

5|Page
The court noted that public considerations of tax evasion outweigh the equitable
considerations in such case. Any contrary interpretation would lead to tax evasion and misuse
of the section. Public welfare by avoiding tax evasion are of greater consequence than
equitable considerations for individual parties. Further, this section was amended taking into
account the rampant tax evasion methods used by assesses.

While interpreting taxing or fiscal statutes, court cannot consider injustice or hardships unless
there is real ambiguity. Tax Statutes cannot be considered on any assumptions and it cannot
imply anything which is explicitly not expressed nor can presumed deficiency be supplied.14

ARGUMENTS FOR GRANTING THE EXEMPTION

As noted above, the arguments raised for granting the exemptions are based on equitable
consideration. The petitioners in Payal Mehta’s Case15 pleaded that the amount had been put
in fixed deposit by her husband on court‟s order and therefore minor‟s income should not be
clubbed. Since, the wife did not made any deposit in favour of such minor, rather she was
bound by the court order. The parent/guardian cannot use or derive any benefit from the
income of minor, and that includes the interest earned on such deposit as such, as such
income is deposited is made for minor‟s welfare on court‟s direction. 16 Therefore, it should
be treated as minor‟s income which would not be liable for taxation as parent‟s income.

Accretion of income arising out of maintenance money deposited or transferred for minor
will unduly affect parent/guardian as clubbing of income will lead to enhancement of tax
liability. Therefore, any accretion from maintenance money should not be clubbed with that
of parent‟s/guardian money.

14
CIT v Gwalior Rayon Silk Manufacturing Company Ltd., AIR 1999 SC 573
15
Payal Mehta v Sanjay Sarin, 2016 SCC OnLine P&H 4989.
16
KM Vijayan v Union of India. Similar arguments were raised by the petitioners in case which were eventually
rejected by the courts on public policy considerations and possibility of tax evasion.

6|Page
CONCLUSION

Tax evasion is rampant in India which calls for stricter taxing mechanisms.17 A number of
measures have been taken by the incumbent government; including limiting cash transactions
by penalising cash transactions of more than Rs. 2 lakhs.18 It is imperative that the Courts too
follow suit by interpreting the taxation statutes in a strict manner. While interpreting taxing
statutes, the courts have to keep in mind the need to balance individual‟s interest and the
larger public policy concerns. As has been correctly noted by the Law commission that
equitable considerations do not play a role in interpreting fiscal statutes.19 Parties cannot
plead or rely on hardships or equity when such interpretation will open the floodgates for tax
evasion.20

The Punjab & Haryana High Court and the Law Commission rightly concluded that interest
accrued on minor‟s maintenance money is to be clubbed with the income of parent‟s income
or guardian‟s income. Any other interpretation will lead to tax evasion. The legislative intent
behind Section 64(1A) was to avoid tax evasion as assesses used minor‟s status to evade tax.
Therefore, interest accrued on minor‟s maintenance money must be clubbed with the
parents‟/guardians‟ income.

17
FE bureau, Tax Evasion in India: Rs 1.4 lakh cr hunted down in 3 years, says CBDT, FINANCIAL EXPRESS,
http://www.financialexpress.com/economy/tax-evasion-in-india-rs-1-4-lakh-cr-hunted-down-in-3-years-says-
cbdt/620151/.
18
Id.
19
Payal Mehta v Sanjay Sarin, 2016 SCC OnLine P&H 4989.
20
Board of Revenue v Rai Saheb Sidhanth Mehrotra, AIR 1960 SC 1175. See also Shreeja Sen, Law panel
opposes tax relief on interest on money deposited for maintenance of minor child, LIVEMINT,
http://www.livemint.com/Politics/6ZPuXyW1Y6FLPE84WyiPiI/Law-panel-opposes-tax-relief-on-interest-on-
money-deposited.html.

7|Page

Вам также может понравиться