2015 (11) TMI 398 - SC - Income Tax

Supreme Court: Minor children's trust income not taxable if benefit delayed beyond minority

KAPOOR CHAND (DEAD) Versus ASSISTANT COMMISSIONER OF INCOME-TAX

The Supreme Court held that the income of minor children from a partnership in a firm through a trust could not be taxed at the hands of the individual ... Trusts for the benefit of two minor children - provisions of section 64(1)(iii) invoked - the Assessing Officer included the said income in the income of the assessee and taxed as such - Held that:- No doubt two minor children of the appellant were the beneficiaries under the two trusts. It is also not in dispute that the said trustees were the partners in the firm and had their shares in the income as partners in the said firm. However, the entire controversy revolves around the question as to whether it could be treated as income of a 'minor child'. This controversy has arisen because of the reason that the income that had been earned by the trustees was not available to the two minor children till attaining the age of majority. As pointed out above, this was one of the conditions contained in the trust deeds that the income so generated by the trust, shall not be given to or spent for the benefit of the minor children till they attain majority and the money was to be handed over to them only on attaining the majority which would mean that the income was available to these persons when they cease to be the minors. This very question came up before this court in almost identical circumstances in the case of CIT v. M. R. Doshi [1994 (9) TMI 3 - SUPREME Court] wherein held as in this case the deferment of the benefit is beyond the period of minority of the assessee's three sons, since the assets are to be received by them when they attain majority, the provisions of section 64(1)(v) have no application. In the present case, as pointed out above, specific stipulation which is contained in both the trust deeds is that in case of demise of any of the minor the income would accrue to the other child. Therefore, the receipt of the said income is also contingent upon the aforesaid eventuality and the two minors had not received the benefit immediately for the assessment year in question, viz., as 'minor' children. Thus High Court [2003 (10) TMI 33 - UTTARANCHAL High Court ] does not lay down the correct proposition of law. Issues:Interpretation of section 64(1)(iii) of the Income-tax Act, 1961 regarding taxation of income of minor children from partnership in a firm through a trust.Analysis:The judgment deals with an appeal filed against the inclusion of income of minor children under section 64(1)(iii) of the Income-tax Act, 1961. The appellant's brother-in-law had created trusts for the benefit of the appellant's minor children, who were also partners in a firm. The Assessing Officer included the trust income in the appellant's income under section 64(1)(iii). The Commissioner of Income-tax (Appeals) initially ruled in favor of the appellant, stating that the income was not available to the minors until they reached majority. However, the Tribunal overturned this decision, leading to the High Court's affirmation.The key contention revolved around whether the income could be considered that of a 'minor child' under section 64(1)(iii). The trust deeds specified that income was to be received only upon attaining majority, leading to a delay in benefiting the minors. The Supreme Court referred to a similar case and highlighted the importance of immediate or deferred benefit for the minor child. The Court emphasized that if the benefit is postponed beyond minority, it cannot be considered a benefit for the minor child.The Court analyzed the provisions of section 64(1)(iii) and Explanation 2A, which clarifies the treatment of income arising to a trust for the benefit of a minor child. The Court noted that the trust deeds' stipulations, including the contingent receipt of income upon the demise of a minor, did not fulfill the criteria of immediate or deferred benefit for the minors during the assessment year.The respondent argued that the trust deeds were structured to evade taxation, citing the insertion of Explanation 2A by the Finance Act, 1979. However, the Court found that Explanation 2A did not address situations where income could not be utilized for the minor's benefit during minority.Ultimately, the Court held that the income of the minor children could not be taxed at the hands of the individual due to the delayed benefit provision in the trust deeds. The Department could tax the income upon the minors attaining majority or explore other avenues under the Income-tax Act. Consequently, the Court allowed the appeal, setting aside the High Court's judgment as it did not align with the correct interpretation of the law.