2023 (4) TMI 393 - HC - Income Tax

Court upholds clubbing minor's income with parents' income under Income Tax Act, dismisses writ petition.

The court dismissed the writ petition, upholding the clubbing of the minor's income with the parent's income under Section 64(1A) of the Income Tax Act ... Clubbing of income of a minor under Section 64(1A) of the Income Tax Act - deduction of tax at source on interest credited under Section 194A of the Income Tax Act - accrual by crediting of interest versus receipt by the minor - constitutionality of Section 64(1A) of the Income Tax ActClubbing of income of a minor under Section 64(1A) of the Income Tax Act - accrual by crediting of interest versus receipt by the minor - Whether interest accruing annually on a fixed deposit standing in the name of a minor must be included in the total income of the parent under Section 64(1A) despite the minor not being entitled to payment until attaining majority. - HELD THAT: - The Court construed Section 64(1A) which mandates inclusion of income that 'arises or accrues' to a minor child in the computation of the parent's total income, subject only to specified exceptions for manual work or specified skill-based activities. The judge held that the statutory test is accrual or arising of income, and that annual crediting of interest by the bank constitutes accrual even if the right to withdraw the principal and accumulated interest is postponed by a court order until the minor attains majority. The Supreme Court authorities relied upon by the petitioners (interpreting different sub sections of Section 64 applicable to transfers and trusts) were distinguished as addressing different statutory provisions and factual contexts; those decisions do not govern the interpretation of Section 64(1A). The contention that cash system accounting or non receipt during minority excludes such accrual was rejected as inapplicable to a minor who does not maintain an accounting system. The impugned administrative orders applying Section 64(1A) to include the interest in the mother's income were held to be lawful. [Paras 5, 9]Interest accruing annually to the minor on the fixed deposit is to be included in the parent's total income under Section 64(1A).Deduction of tax at source on interest credited under Section 194A of the Income Tax Act - accrual by crediting of interest versus receipt by the minor - Whether the bank was obliged to deduct tax at source under Section 194A when it credited interest annually to the minor's fixed deposit account notwithstanding that the minor could not withdraw the sums until majority. - HELD THAT: - The Court accepted the department's submission that Section 194A requires deduction of tax at source at the earliest of credit or payment of interest. Since the bank credited interest to the minor's account annually, that event amounted to accrual/credit for the purposes of Section 194A and triggered the duty to deduct TDS. The statutory obligation of the bank to deduct TDS upon crediting was distinguished from the separate question of clubbing of income; both were held to operate independently, and there was no infirmity in the bank's or tax authorities' actions in deducting TDS on annually credited interest. [Paras 4, 5, 9]The bank was justified in deducting tax at source under Section 194A upon annual crediting of interest to the minor's account.Constitutionality of Section 64(1A) of the Income Tax Act - Whether Section 64(1A) is constitutionally invalid insofar as it requires inclusion of a minor's accruing income in a parent's total income even when the minor cannot receive payment until majority. - HELD THAT: - The Court referred to and agreed with the Full Bench decision of the Madras High Court upholding the constitutional validity of Section 64(1A). It noted the limited and well established grounds on which legislation may be struck down (violation of fundamental rights, lack of legislative competence, basic structure breach, or manifest arbitrariness) and found none of those grounds made out on the facts. The argument that the provision is harsh or causes hardship to the parent was rejected; harshness does not render a statute unconstitutional. The Court also observed practical difficulties that would arise if taxation were deferred until the minor's majority, including problems in claiming credit for TDS. [Paras 6, 7, 9]Section 64(1A) is constitutionally valid and its operation in the present circumstances is not ultra vires the Constitution.Final Conclusion: The writ petition was dismissed. The High Court held that annual interest credited to the fixed deposit in the minor's name accrues and is taxable in the parent's hands under Section 64(1A); the bank was justified in deducting tax at source on such credited interest under Section 194A; and Section 64(1A) is constitutionally valid. Issues Involved:1. Clubbing of minor's income with the parent's income under Section 64(1A) of the Income Tax Act.2. Deduction of tax at source (TDS) under Section 194A of the Income Tax Act.3. Constitutional validity of Section 64(1A) of the Income Tax Act.4. Applicability of Supreme Court judgments in M.R. Doshi and Kapoor Chand.5. Financial hardship and practical implications for the petitioners.6. Relevance of Sections 5 and 145 of the Income Tax Act.Detailed Analysis:1. Clubbing of Minor's Income with Parent's Income:The petitioners contended that the interest income accruing to the 2nd petitioner (a minor) from a fixed deposit should not be clubbed with the income of the 1st petitioner (the minor's mother) under Section 64(1A) of the Income Tax Act. The court referred to the text of Section 64(1A), which mandates that income arising or accruing to a minor child should be included in the income of the parent, except for income arising from manual work or activities involving the child's skill, talent, or specialized knowledge. The court held that the interest income accruing annually on the fixed deposit is liable to be clubbed with the income of the 1st petitioner as per Section 64(1A).2. Deduction of Tax at Source (TDS):The petitioners argued that the 3rd respondent bank could not deduct tax at source under Section 194A on the interest income accruing to the minor. The court noted that Section 194A mandates the deduction of tax at source when interest is credited to any account, even if the right to receive the interest is deferred until the minor attains majority. The court held that the bank is liable to deduct tax at source on the interest income accruing annually.3. Constitutional Validity of Section 64(1A):The petitioners contended that Section 64(1A) is ultra vires the Constitution of India. The court referred to the Full Bench decision of the Madras High Court in K.M. Vijayan v. Union of India, which upheld the constitutional validity of Section 64(1A). The court agreed with the Madras High Court's view and held that the provision is not violative of the Constitution, as it does not infringe upon fundamental rights, lacks legislative competence, or violates the basic structure doctrine.4. Applicability of Supreme Court Judgments:The petitioners relied on the Supreme Court judgments in M.R. Doshi and Kapoor Chand to argue that the interest income should not be clubbed with the parent's income. The court distinguished these cases by noting that they dealt with different provisions of the Income Tax Act (Section 64(1)(v) and Section 64(1)(iii), respectively) and were not applicable to the present case. The court held that the interpretation of Section 64(1A) is materially different and does not support the petitioners' contentions.5. Financial Hardship and Practical Implications:The petitioners argued that clubbing the minor's income with the parent's income would impose a heavy tax burden on the 1st petitioner. The court dismissed this argument, stating that the financial burden on the 1st petitioner is not as significant as projected. The court noted that the tax deducted at source by the bank would be available as credit, and the benefit of threshold exemption would also apply. The court held that the plea of extreme prejudice or difficulty to the 1st petitioner is not tenable.6. Relevance of Sections 5 and 145:The petitioners argued that the provisions of Sections 5 and 145 of the Income Tax Act should be considered. The court found that Section 5, which deals with the scope of total income, is not relevant to the issues raised. Regarding Section 145, which allows income computation based on either the cash or mercantile system of accounting, the court noted that the 2nd petitioner is a minor and does not regularly employ any system of accounting. Therefore, the argument based on Section 145 was rejected.Conclusion:The court dismissed the writ petition, holding that the impugned orders were neither perverse nor contrary to law. The court upheld the clubbing of the minor's income with the parent's income under Section 64(1A) and the deduction of tax at source under Section 194A. The constitutional validity of Section 64(1A) was affirmed, and the petitioners' reliance on Supreme Court judgments was found to be misplaced. The court also rejected the arguments based on financial hardship and the relevance of Sections 5 and 145.