Income-tax is a charge on every person’s income of the previous year to be levied and computed in accordance with the provisions of the Income-tax Act.  Section 64 of the Act provides that income of individuals will also include income of spouse, minor child, etc in certain circumstances.  A question that arises is whether at the time of computing income of the assessee, whether the gross income or net income (after exemptions or deductions) of the individual assessee’s spouse or his minor child should be clubbed. 

This issue is dealt in the following cases:

 CIT v. S.K. Nayak [1984] 18 Taxman495 (Kar HC), 145 ITR 791 – The assessee’s wife was working as a whole-time director in a company of which he was the managing director.  The AO, while clubbing the income of the wife with that of the assessee did not allow standard deduction under section 16 in respect of the wife’s salary.  The HC held that there is no good reason why gross income should be clubbed with the income of her husband under section 64.  The HC held that it would be contrary to the scheme of the Act itself not to allow deductions before clubbing the income.  Same view is adopted in CIT v Lalji Agarwal (1988) 234 ITR 495 (All HC).

ACIT v. Madan Lal Bassi [2004] 88ITD557 (CHD.) – The shares owned by the assessee’s minor son were sold and sale consideration was utilised to purchase a house property in the same year. The assessee claimed exemption u/s 54F on account of reinvestment in purchase of house property by the assessee’s minor son.  The AO held that the assessee in the instant case was the father and not the son, so the deduction was to be allowed to the assessee and as the assessee owned a house on the date of transfer of original asset, the exemption under section 54F could not be allowed.

The ITAT held that section 64(1A) has to be applied in the end.  First income of the minor child is to be computed as per the provisions of the Act and then instead of subjecting that income to tax separately, it is to be added to the other income of the assessee and tax charged on his total income.  The ITAT held that gross receipts are not subjected to tax. Only ‘income’ has been brought under charge by adding it to the income of the father or mother, whichever is higher.

The ITAT observed that as per plain reading of sections 45(1) and 54F and as per scheme of computation of income, the minor child has to be treated as an assessee for the purposes of both the sections.  The ITAT further observed that only the assessee transferring the capital asset has funds to make investment in the residential house and fulfil the purpose and intent of the statutory provisions. It is illogical to expect the father or anybody else to make investment out of his pocket.

The ITAT held that the minor son can be treated as an assessee under sub-clause (a) of the section 2(7) as the said sub-clause would include, ‘person in respect of whom any proceeding under this Act has been taken for the assessment of his income’.  Whether the conditions of section 54F are satisfied or not is only to be seen in the hands of minor son.

The ITAT held that if by applying the provisions of section 54F, there is no income in the hands of minor child to be added under section 64(1A), the benefit cannot be denied on the ground that father of the minor child has a residential house at the time of transfer of capital asset.  The denial is possible only by taking hypertechnical view of the matter and by taking that father is the assessee in the sense that tax is being imposed on him and not on minor child. It would be fair and reasonable to hold that a minor child in the circumstances given above is entitled to benefit of the provisions of section 54F.

JCIT v. Govind Rohira alias Srichand Rohra [2005] 95ITD77 (MUM ITAT) – The assessee had included in his total income, LTCG of his minor son in respect of shares and claimed deduction under section 54F in the hands of minor on account of purchasing a residential house.  The AO held that benefit under section 54F could not be given to minor.

The ITAT held that a minor is entitled to have his own income.  Minor could be an owner of a house of his own. If the minor in the instant case was having such a house of his own, there was no difficulty in allowing his claim under section 54F.  The income arose from the sale of the shares which stood in the name of the assessee’s minor son. If he could legally purchase and sell the shares through his father, the income realized from the sale also could be utilised for the purchase of the house property acting through his father. Merely because the income was clubbed with the income of the assessee-father, there was no meaning in saying that he was not entitled to the benefits contemplated under section 54F.  The ITAT held that even if the income of the minor is clubbed with the income of the other individual, all the deductions are to be allowed while computing income of the minor/spouse and only the net taxable income is to be clubbed under section 64.

Shri Rajeev Goyal vs DCIT & Shri Shankar Sharma vs DCIT [2012] 22 34 (Kol.) – The assessee earned LTCG on sale of shares and invested a sum of Rs. 50 Lacs in REC Capital Gains Bond and claimed deduction u/s 54EC against LTCG. Similarly, minor children of the assessee also sold shares and earned LTCG, against which an investment was made in REC Capital Gains Bonds. Exemption u/s 54EC was claimed in hands of minor children also. The AO disallowed the deduction u/s 54EC with respect to investment made in the name of minor children, by restricting the total deduction to Rs.50 lacs only.

Referring to section 54EC(3) & notification dated 22nd December 2006, the ITAT observed that the notification stated that a ‘person’ was not to be allotted bonds more than Rs. 50 lakhs. Referring to section 2(31), the ITAT observed that minor child was considered as a separate person from his parents. As there is difference between word Assessee and Person, the bonds allotted to 3 different persons were within ambit of notification.

The ITAT also referred to the sec 64(1A), where such income would mean to club the total income of minor child. The ITAT held that total income would mean net income and not gross income. Therefore, the total income of minor child was to be computed after considering the deduction & exclusions & the same to be included in the total income of his parent. Accordingly, ITAT held that the benefit u/s 54EC for investment in the name of minor children was available to the assessee.

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