2023 (4) TMI 393 - HC - Income Tax

Clubbing of minor s Income to parents income - income (interest on fixed deposits) accruing to a minor - whether tax at source cannot be deducted in respect of the interest income accruing on the fixed deposit under the provisions of the Income Tax Act 1961? - HELD THAT - Income accruing or arising in the hands of a minor child will be added to the parent s total income. Exceptions are provided only if income arises or accrues to the minor child on account of any manual work done by him or any activity involving application of his skill talent or specialized knowledge and experience. The Income Tax Act does not exempt the interest income accruing to 2nd petitioner on an amount received as part of death benefits of her deceased father even if by order of Court that income can be utilized only after the minor attains majority. The contention that the income can be taxed only after the minor attains majority cannot be accepted as the income has accrued on the bank crediting the account of the 2nd petitioner every year with the amount of interest payable. The ground of extreme hardship to the 1st petitioner if she is required to pay tax on the income accruing to the minor is no ground to hold that the income cannot be clubbed with that of the 1st petitioner. Harshness in a statutory provision is no ground to hold that it should not be applied in a given case. If this income were to be taxed only after the 2nd respondent attains majority the financial burden on the 2nd petitioner when she attains the age of majority will be huge. Moreover it would be practically impossible to get the credit of the tax deducted at source by the bank in the year in which the minor attains majority. Further the financial hardship to the 1st petitioner does not appear to be so great as projected in the writ petition. The tax deducted at source by the 3rd respondent bank as per section 194 A (10%) will be available as credit (Rule 37BA of the Income Tax Rules 1962). The benefit of threshold exemption is also available. The provisions of Sections 5 of the Act have no relevance in determining the questions raised. The 2nd petitioner is a minor. Therefore the question of her following a ... system of accounting regularly employed by the assessee does not arise for consideration. WP fails.

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.

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