[2012] 25 taxmann.

com 7 (Article)
Only net income can be clubbed!
SANDEEP BAGMAR R.

Advocate

Introduction

1. 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, 1961 ('the Act'). The charge is on every person,
which includes: (i) an individual; (ii) a HUF; (iii) a company; (iv) a partnership firm; (v) an association
of persons or body of individuals; (vi) a local authority; and (vii) every artificial juridical person not
mentioned above1. With respect to individuals section 64 of the Act provides that income of individuals
will also include income of spouse, minor child, etc. A question which arises here is that at the time of
computing income of the assessee, whether the gross income or net income after standard deductions of
the individual assessee's spouse or his minor child is to be included? The answer to this question was
answered almost three decades ago by the Karnataka High Court2.

The question again arose in the case of Dy. CIT v. Rajeev Goyal 3, wherein the Hon'ble Tribunal
followed the ratio laid down by the Karnataka High Court.

Background of the Case

2. The assessee and his minor child during the previous year 2006-07 had sold shares owned by the
assessee and his minor child as beneficial owners respectively. On the sale proceeds received, the
assessee and his minor child were chargeable to tax under long-term capital gains. The assessee and his
minor child purchased Rural Electrification Corporation Bonds ('REC Bond') from the proceeds of the
shares sold, thereby claiming deduction of Rs. 1.39 crores under section 54EC of the Act.

The assessee invested a sum of Rs. 50 lakhs in REC Bonds from the sale proceeds of shares amounting
to Rs. 5.51 crores, his minor daughter invested a sum of Rs. 49.50 lakhs in REC Bonds from the sale
proceeds of shares amounting to Rs. 49.73 lakhs and his minor son invested a sum of Rs. 39.50 lakhs in
REC Bonds from the sale proceeds of shares amounting to Rs. 39.56 lakhs. Thus, a total of Rs. 1.39
crores was claimed as deduction under the provisions of section 54EC of the Act. The Assessing Officer
('AO') disallowed the deduction on the ground that under section 54EC deduction is restricted to Rs. 50
lakhs to an assessee and the deduction claimed by the minor children has to be disallowed.

Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A), who allowed the
claim of the assessee and deleted the amount disallowed. Aggrieved by the order of the CIT(A), the
revenue appealed to the Tribunal.

3. Arguments Advanced

3.1 The contentions of the revenue - The contentions of the revenue were that the benefit of deduction
under section 54EC is available to an assessee and in the instant case there was only one assessable
entity, being the individual (Shri Shankar Sharma), for the purpose of computation of total income under
the Act. Revenue further contended that, the minor children of the assessee could not be termed as
independent assessees for the purpose of this Act, being minors, and their income could be only clubbed
 in the hands of the assessee.

3.2 The contentions of the assessee - On the other hand, the assessee contended that section 54EC did
not put any restrictions with respect to the investment to be made in specified assets for claiming
deductions until 1-4-2007, after which a proviso was inserted to the said section limiting investments up
to Rs. 50 lakhs. Relying on further Notifications 4 , the assessee contended that a person could not be
allotted bonds of value more than Rs. 50 lakhs.

The assessee's bone of contention was that the word 'person' has been defined under section 2(31) which
includes individual and there could not be any dispute that minor child is an individual separate from his
parent who is also a person under the Act. Therefore, the assessee contended that section 54EC provides
limit for each such person and also contended that there was no such limit provided either under section
54EC or under section 64 as contended by the Revenue.

Ruling of the Tribunal

4. The Tribunal after carefully examining the relevant provisions of the Act held as follows:

(i) Minor children are to be considered as separate persons other than their parents, for the purpose of
the income-tax, as they are also individuals;

(ii) Section 54EC does not provide any limit for allotting bonds to each of such persons nor there is any
provision which limits the deduction as claimed by the revenue;

(iii) The income which is to be clubbed is one as defined under section 2(45), i.e., income computed in the
manner laid down in the Act and not the gross total income of any person;

(iv) Any amount invested as per the provisions of section 54EC is outside the computation of total income;

(v) There is a difference between the word 'assessee' and the word 'person' under the Act; and

(vi) Income of a minor, if clubbed with the income of the other individual, all the deductions are to be
allowed while computing the income of the minor/spouse and only net taxable income of the
minor/spouse is to be clubbed under section 64.

5. An Appraisal of the Case

5.1 Even a minor can claim benefits as an assessee - The Tribunal rightly held that the minor child is a
person within the meaning of section 2(31), i.e., an individual. Therefore minor's income has to be
assessed separately in accordance with the provisions of the Act and the net income after standard
deductions is to be clubbed in the hands of the assessee under section 64. In other words, even when
income of minor is clubbed in the hands of one of his parents, the minor child still remain a person, i.e.,
an individual. Therefore, minor can claim benefits which are available to a person, as an assessee under
the provisions of the Act.

5.2 Only net income of spouse has to be clubbed with that of her husband - The Tribunal rightly
followed the decisions of the various High Courts and the Tribunals which have concluded on the said
issue. The Karnataka5 and the Allahabad6 High Courts have held that only the net income of the spouse
under salary, after deduction under section 16(1), should be clubbed in the hands of the assessee under
section 64 and not the gross salary income. It was also held that, it would be contrary to the scheme of
the Act itself not to allow deductions before clubbing the income of the wife with that of her husband.

5.3 Decisions of other Tribunals in similar cases - The Tribunal also relied on decisions of the other
Tribunals which have concluded on similar issues. A short summary of the same is as under:

5.3.1 Minor's income has to be computed independently - Minor's income has to be computed
independently. The minor's income can be offered on cash basis, while the parent may be following it on
accrual system - Bajaj Ashok Chunnilal v. Dy. CIT7.

5.3.2 Only income falling under the Act has to be covered - The clubbing provisions will cover income
falling under the Act. Agricultural income which falls outside the purview of the Act, but is only
included for rate purposes under the Finance Act cannot be clubbed even for rate purposes - Smt. Babita
P. Kanungo v. Dy. CIT8 .

5.3.3 A minor is entitled to benefits under section 54F - A minor is entitled to have his own income and
he can be a owner of house of his own. Merely because the income is clubbed with the income of the
minor's father, there is no meaning in saying that he is not entitled to the benefits contemplated under
section 54F of the Act. - Jt. CIT v. Govind Rohira alias Srichand Rohra9 and Asstt. CIT v. Madan Lal
Bassi10.

6. Issues related to Chapter VI-A deductions to a minor/spouse

6.1 Unsettled question of Chapter VI-A deduction to a minor/spouse - No doubt the Karnataka and
Allahabad High Courts have set the precedent that standard deduction as provided for under Chapter IV
in each respective head of income will be available to the minor before his income is included in the
hands of his parents. However, whether Chapter VI-A deduction will also be available before the income
of minor/spouse is clubbed in the hands of his parents/husband, is not settled yet.

6.2 The favourable rulings of the Karnataka High Court and Bombay High Court on this issue - One
view is relying on the principles laid down by the Karnataka High Court that only 'total income' of the
minor is to be clubbed; 'total income' means the total amount of income referred to in section 5,
computed in the manner laid down in this Act. Therefore, total income here would be income after
deduction available under Chapter VI-A of the Act and moreover, provisions of Chapter VI-A do not
override the provisions of section 5. Reliance can also be placed on the decision of the Bombay High
Court, in the case of CIT v. F.Y. Khambaty11, wherein it was held that, while computing total income
under section 5, one has to exclude such income as is excluded from the scope of total income by reason
of any other provision of the Act and not the other provisions of the Act which override the provisions of
section 5.

6.3 Contrary views on the issue - The contrary view which is possible is that deductions under Chapter
VI-A are not available in the hands of the minor/spouse. Section 80A of the Act provides that while
computing total income of an assessee, there shall be allowed from his gross total income, in accordance
with and subject to the provisions of Chapter VI-A, the deductions specified in sections 80C to 80U. The
term 'gross total income' is defined under section 80B and means the total income computed in
accordance with the provisions of this Act, before making any deduction under Chapter VI-A. The
expression 'computed in accordance with the provisions of the Act' implies:– (i) that deductions under
appropriate computational section have already been given effect to; (ii) that income of other persons, if
includible under sections 60 to 64, has been included; (iii) the intra-head and/or inter-head losses have
been adjusted; and (iv) that unabsorbed business losses, unabsorbed depreciation, etc., have been set off.
Chapter VI-A of the Act deals with special deductions. For the purposes of computing such deductions,
it constitutes a separate Code by itself12 . Thus, the total income referred to in section 64 means income
computed before making deductions under Chapter VI-A. In the above sequence of interpretation it can
be concluded that deductions under Chapter VI-A will not be available in the hands of minor/spouse
before their income is clubbed in the hands of their parents/husband. It will be available only in the
hands of the assessee in whose income, income of minor/spouse is included.

6.4 How to act till issue is resolved? - Till the issue is settled by the courts, both views are possible. In
my view, when two interpretations are possible the one which is most beneficial or favourable to the
assessee should be adopted,13 even if it results in obtaining double benefits.14

Concluding Remarks

7. The provisions of section 64 are intended to check tax avoidance by persons through diversion of
income to the members of their families. However, the rates at which tax brackets exist today, clubbing
provisions do not give much advantage to the revenue. The revenue in the case of Rajeev Goyal (supra)
challenged the order because the amount involved was high, otherwise the law on the said issue was
well-settled when clubbing provisions were introduced three decades ago.

■■

____________

1. Section 2(31) of the Act.

2. CIT v. S.K. Nayak [1984] 18 Taxman 495 (Kar.).

3. [2012] 22 taxmann.com 34 (Kol.)

4. CBDT Notification No. 380 of 2006 dated 22-12-2006 and Notification No. 143 of 2006 dated 29-6-
2006.

5. S. K. Nayak (supra).

6. CIT v. Lalji Agrawal [1998] 234 ITR 820 (All.).

7. [2005] 92 ITD 353 (Bang.).

8. [2005] 96 ITD 91 (Mum.).

9. [2005] 95 ITD 77 (Mum.).

10. [2004] 88 ITD 557 (Chd.).

11. [1986] 24 Taxman 29 (Bom.).

12. Indian Rayon Corpn. Ltd. v. CIT [2003] 128 Taxman 739 (Bom.).

13. Central Provinces and Berar Provincial Co-operative Bank Ltd. v. CIT [1946] 14 ITR 479 (Nag).
14. Pradip J. Mehta v. CIT [2008] 169 Taxman 454 (SC); CIT v. H.S. Shivarudrappa [1993] 67 Taxman
387 (Kar).• DT - Secs. 2(31), 2(45), 5, 16(1), 54EC, 64, 80A, 80C to 80U