TaxTMI 
TaxTMI 
1999 (9) TMI 47
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.... Constitution of India. Before us the competence of the Legislature is not challenged and the challenge is only on the following points : (a) that there is a hostile discrimination between the income of the minor which is clubbed with the income of his/her father/mother, and the income of that minor which is not so clubbed. In a case where the income is clubbed it is liable to higher rate of tax and, therefore, the provisions are discriminatory ; (b) there is no nexus of the object sought to be achieved in clubbing the income of the minor with either of the parents ; (c) that the provisions are against the Directive Principles of State Policy inasmuch as a special status has been given to the minor. Reliance is placed on the memorandum accompanying the Finance Bill which reads as under "MEASURES AGAINST TAX AVOIDANCE Clubbing of minors' income. Section 64 of the Income-tax Act provides that in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to a minor child of such individual from,--- (i) the admission of the minor to the benefits of partnership in a firm, (ii) assets transferred di....
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.... the Direct Tax Laws Committee examined the provisions of section 64 in great detail and made the following recommendations : "I-11.2. As regards the provisions of section 64, they are principally aimed at clubbing the income of a spouse or minor child of the taxpayer in the circumstances specified therein under the amendments made by the Taxation Laws (Amendment) Act, 1975, the clubbing has been extended, in certain circumstances, to the income of the son's wife or the son's minor child, apart from further tightening up of the provisions for clubbing the income of the spouse or minor child. It has been recognised that one of the methods of tax avoidance is the diversion of income to the spouse or minor children by taxpayers. With a view to preventing such avoidance, section 64(1) enumerates seven different contingencies for clubbing the income. One of the suggestions made to us was that these provisions could be considerably simplified by the introduction of the concept of a family comprising husband, wife and minor children, as a taxable unit. The concept of the family as a unit of assessment has been discussed for almost the last ten years, when a suggestion to this effect wa....
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.... income of the parent irrespective of whether or not either parent was a partner in the same firm. I-11.4 Our attention has been drawn to instances where the new provisions are being circumvented by the interpolation of a trust for the benefit of minors and the trustees to utilise the trust funds by way of investment in business enterprises and partnerships. The legal position under partnership law is that partnership is the relationship between the persons who are named as partners and the fact that a partner is in turn accountable for his share of income of any third party is irrelevant to the partnership. The introduction of a trust takes advantage of this position under the partnership law and seeks to avoid the clubbing under section 64(1). It is appropriate that the adoption of such a device is countered and the underlying provisions of the section are given proper effect. We, accordingly, recommend that where a minor receives income as a beneficiary under a trust and such income is derived from the profits and gains of business carried on by the trustees in partnership with others, such income of the minor such be added to the income of the parent. The clubbing provision ....
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....LATING TO AVOIDANCE OF TAX New provision : Taxation is now regarded as an important cost factor and so it is a common practice to undertake tax planning basically to ensure that while tax is reduced or totally avoided the transactions are structured within the legal framework of the law to minimise costs. While tax avoidance by taking advantage of law as distinguished from evasion is generally considered legitimate, the line between the two has tended to become thin. Hence, many tax systems in the world now contain provisions defining unacceptable tax planning. These provisions have come to be known as anti-avoidance provisions which cover cases other than those of sham transactions amounting to outright tax evasion. The Ramsay doctrine which was also taken note of by the Supreme Court in the celebrated McDowell's case, explains a tax avoidance scheme as one where steps having no commercial purpose apart from the avoidance of a liability to tax are inserted in a composite transaction made up of a pre-ordained series of transactions. While dealing with the relevant anti-avoidance provisions, Barwick C. J., observed : 'if the actual transaction into which the parties have en....
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.... respect or for any other purpose, disregard or vary the arrangement and make such adjustments as he considers appropriate, including the computation or recomputation of gains or profits, or the imposition of liability to tax, so as to counteract any tax advantage obtained or obtainable by that person from or under that arrangement. Sub-section (2) : In this section, 'arrangement' means any scheme, trust, grant, understanding, covenant, agreement, disposition, transaction and includes all steps by which it is carried into effect. Sub-section (3) : This section shall apply to any arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act but, shall not apply to any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax. Proviso : Provided that the Assessing Officer cannot take any action tinder this section without the previous approval of the Commissioner. It is suggested that the Board may issue clear instructions that the provision should not be invoked in case of ordinary commercial transactions including normal claims of expenses and allowanc....
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....on (284 US 206-221), where it was observed that a husband cannot, consistently with the due process and equal protection clause of the 14th amendment, be taxed by a State on the combined total of his and his wife's incomes as shown by separate returns, where her income is her separate property and, by reason of the tax being graduated, its amount exceeded the sum of the taxes which would have been due had their separate incomes been separately assessed. The directive principles enshrined under article 45 of the Constitution of India contemplated free and compulsory education and other articles of the Constitution provide for the welfare particularly for the minor which cannot be whittled down by causing a burden on the minor as observed in Unni Krishnan (V. P.) v. State of A. P., AIR 1993 SC 2178 ; [1993] 1 SCC 645. Section 64(1A) was inserted by the Finance Act, 1992, from April 1, 1993, i.e., the assessment year 1995-94. The validity of this provision was challenged before the Patna High Court in the case of Syed Askari Hadi Ali Augustine Imam v. Union of India [1994] 209 ITR 746, it was observed that the provisions of section 64(1A) are for the purpose of checking the evasion....
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....nd the provisions of section 64/65 of the Act have also been upheld in the following cases. --------------------------------------------------------------------------------------- Provisions Citations --------------------------------------------------------------------------------------- Section 16(3)(a)(i) and (ii) of the 1922 Balaji v. ITO [1961] 43 ITR 393 (SC) Act corresponding to section 64(1) (i) and (ii) S.Srinivasan v. CIT [1967] 63 ITR 273 (SC) Smt. Shreekunwardevi Dag....
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....nson [1930] 282 US 499, 510 : 'We must remember that the machinery of Government would not work if it were not allowed a little play in its joints'... Fine-tuning to attain perfect equality may be a fiscal ideal but, in the rough and tumble of work-a-day economics, the practical is preferred to the ideal, provided glaring caprice or gross disparity does not make the levy arbitrary or frolicsome. Article 14 is not intellectual chess unrelated to actual impact or the wear and tear of life but even handed justice with some play in the joints." In Punjab Distilling Industries Ltd. v. CIT [1965] 57 ITR 1 (SC), it was observed that tax can be evaded by breaking the law or can be avoided in terms of the law. The entries in the legislative lists were held to be construed liberally and in their widest amplitude, and not in a narrow or restricted sense. Each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended by it. It is submitted that the minor's rights are to be protected rather than creating, a burden on them. Reliance is placed on the judgment given in the case of Kakumanu Pedasubhayya v. Kakumanu ....
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.... 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. On the basis of this it is submitted that a minor who was liable to tax or at a lower rate of tax is subject to a higher rate of tax which is ultimately to be borne by them and thus a higher burden is created. The apex court while upholding the provisions observed as under : "But it (the relevant provision of the Income-tax Act which enabled the share of each partner of a registered firm to add to his other income for being charged as part of his total income) gave an effective handle to evade taxation in another direction. A husband or father could nominally take his wife or his minor sons in partnership with him so that the tax burden might be lightened, for, if the income was divided between a number of people, the income derived by an individual therefrom might fall under the limits of taxable income or under a less onerous slab. This device enables....
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....rce because, once a legal fiction is created it has to be carried to its ultimate object and conclusions. It may not be in the strict sense evasion of tax but it is one of the modes which the legislation has considered and which is adopted to circumvent the liability of tax. Under section 64(1A), in computing the total income of any individual the income of the minor child is sought to be included. Under the Income-tax Act, a Hindu undivided family is considered to be a separate entity. For the purpose of rate of tax earlier there were different rates of taxes prescribed for specified and unspecified Hindu undivided families. The Legislature is competent to provide a different rate of tax as well and it could have been provided for assessment of an individual who is having a minor child earning income separately. It is thus a provision for computation of income of an individual whose minor child is having income and that by itself constitutes a different class. Instead of providing a separate slab, it is provided that the income of such minor would be included in the income of the individual. There is no lack of competence in the Legislature for providing such a legislation. The....