No need to Exempt interest on minor Maintenance deposit us 64 when the money is deposited in favour of child on the direction of the Court-Law Commission

No need to Exempt interest on minor Maintenance deposit us 64 when the money is deposited in favour of child on the direction of the Court-Law Commission 

interest income on minor Maintenance

Prospects of Exempting Income arising out of Maintenance Money of ‘Minor’

The Punjab and Haryana High Court, in the case Payal Mehta v. Sanjay Sarin referred the matter to the Law Commission of India for consideration as to whether the provisions of section 64(1A) of the Income Tax Act, 1961 (‘the Act’) require an amendment to provide for exemption from clubbing of minor‘s income accruing by way of interest on the amount deposited by one of the parents of the minor child as maintenance, at the hands of the other parent / guardian under an order of the Court.

The plea taken in this case was that the interest on the amount of maintenance deposited in the name of minor child should not be subjected to tax, i.e., such income be not clubbed with the income of either of the parent for the purpose of imposing the tax

However, the Law Commission (‘Commission’)  of India headed by Dr. Justice B.S Chauhan (Former Judge, Supreme Court) submitted its Report No. 265 dated 20th March, 2017 to the Government has recommended not to grant the said relief for such parents.

The Commission gave a thoughtful consideration of the relevant provisions of the Act, interpretation of taxation Laws, legislative history of section 64, Report of Dr. Raja J. Chelliah Committee etc. 

The Commission observed that the issue of custody of the child and determination of the amount of his / her maintenance are of temporary nature. Both these issues are decided taking into consideration the welfare and interest of the child and not the right of either of the parent under any statute. Each case has to be decided on its own facts and welfare of the child is of paramount importance. The issue of res judicata is unknown in such cases as the order of custody as well as the amount of maintenance can be varied by the court at any stage on application by either of the parents/parties.

The Commission examined both, the arguments for not granting and not granting the exemption as under:

Arguments for seeking the exemption
The arguments which such an assessee could advance would be that the amount had been put in fixed deposit by the other spouse on the direction of the court. Thus, the said spouse had acted under legal compulsion and not under free will. The assessee had not made any transfer or deposit in favour of such minor, rather he or she is bound by the order of the court. Being the guardian, the assesse cannot use or derive any benefit from the income or part thereof for the reason that such deposit had been made for the welfare of the child as per the direction of the Court. It requires to be treated like the self-earned income of the minor, which is not to be clubbed with the income of either of the parents at par with the provisos(a) and (b) to section 64(1A) of the Act, 1961. The addition of any income arising out of maintenance money provided for the minor in such cases would adversely affect the parent/ guardian. If the income of the minor is clubbed with the income of parent/ guardian then, the tax liability will stand enhanced. Therefore, minor‘s income from the maintenance amount should not be clubbed with the income of the parent/ guardian.

Arguments for not granting exemption
The Explanation to section 64(1)A of the Income Tax Act provides for clubbing the income of the minor with the income of the guardian under both situations- when the marriage of the parents subsists and also when it does not subsist. The High Court made the reference considering the circumstances where deposit for maintenance is entirely different from transfer of assets by parents or grandparents or starting some business in the name of minor by either of the parents or who has been given some gifts when marriage of the parents subsists. The reference has been made on principles of equity and justice which have no application in determination of tax liability. If the exemption from clubbing of income from maintenance money is granted following marital discord, based on such considerations, the same should apply to all other genuine cases. Assets are generally placed in the hands of the minor for securing the minor‘s future. It is true that human ingenuity has in many cases, resulted in transfer of assets to minors or spouses for the sole purpose of tax avoidance. Very frequently the grand parents of minor children place substantial assets in their name for a variety of reasons such as love and affection, absence of financial discipline on the part of parents where they may not be capable of protecting family properties and other assets. Making a minor entitled to benefits of partnership may also be dictated by such circumstances. 

The High Court seems to have failed in appreciating the statutory requirement according to which the liability of paying tax seems to be of the father in view of the provisions of section 64(1A) of Act, 1961. Even otherwise the money deposited under the order of the Court by the father would have remained with him along with the liability to pay tax on income from such money if it had not been so deposited in the name of the minor. The word used therein by the legislature in its wisdom is ‘maintain‘, that means the allowance covering the basic cost of maintaining a child or providing with necessities for life or existence and it also means to ‘sustain’, ―’support’, and to ‘bear’ or ―to pay or furnish the means of keeping up of‖. There is a distinction between having the custody of the child and liability to maintain him / her.

In view thereof as the father had paid the money for maintaining the child, the mother could have taken a plea that income of interest on maintenance money could be clubbed with income of the father and no cause of action could have arisen for her.

The Supreme Court in Balaji (Supra) dealt with the issue of classification in such cases under article 14 of the Constitution and held:

It was then said that there might be genuine partnerships between an individual and his wife and, therefore, there is no reasonable relation between the classification and the object sought to be achieved, at any rate to the extent of those genuine cases. But there is no classification between genuine and non-genuine cases the classification is between cases of partnership between husband, wife and/ or minor children, whether genuine or not‘, and partnership between others. In demarcating a group, the net was cast a little wider, but it was necessary, as any further subclassification as genuine and non-genuine partnerships may defeat the purpose of the Act.

In the context of clubbing the income of minor child from partnership, the Court explained as follows:

It may be that a father or a husband may have to pay tax at a higher rate than ordinarily he would have to pay if the addition of the wife‘s or children‘s income to his own brings his total income to a higher slab. But it may not necessarily be so in a case where the income of the former is not appreciable; even if it is appreciable, he can debit a part of the excess payment to his wife and children. In short, the firm, though registered, would be treated as a distinct unit of assessment, with the difference that, unlike in the case of a registered firm, the entire income of the unit is added to the personal income of the father or the husband as the case may be. This mode of taxation may be a little hard on a husband or a father in the case of genuine partnership with wife or minor children but that is offset, to a large extent by the beneficent results that flow therefrom to the public, namely the Prevention of Evasion of Income Tax, and also be the fact that, by and large, the addition payment of tax made on the income of the wife or the minor children will ultimately be borne by them in the final accounting between them. (Emphasis supplied)

The aspect of equity or fairness has been addressed by the Supreme Court in the above mentioned cases. The guardian/parent can meet the tax liability directly from the income accruing to the minor without having to look for other sources.

The Commission has recommended as under:

The Commission is of the view that income earned by way of interest on the amount of maintenance deposited in favour of the child does not require to be exempted from being clubbed with the income of the parent/ guardian; as such exemption, if granted, would open flood gates of tax evasion and would defeat the very object of inserting the provisions of section 64(1A), which had been brought to plug-in the loopholes to prevent the avoidance of tax, causing substantial loss or leakage of revenue.

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