2004 (9) TMI 297 - AT - Income Tax

Summary

Issues:
1. Treatment of interest payable by the assessee to his minor son as income accruing to the minor son.
2. Whether the assessee can follow different methods of accounting for expenses and income.
3. Clubbing provisions under section 64 in the case of minor child's income.
4. Charging of interest under sections 234B and 234C.

Analysis:

Issue 1: Treatment of interest payable by the assessee to his minor son as income accruing to the minor son.
The Assessing Officer treated the entire interest payable by the assessee, though not paid to his minor son, as income accruing to the minor son. The learned CIT(A) upheld this treatment, stating that all income accruing to the minor child should be clubbed as per section 64(1A). However, the appellant argued that the minor son follows the cash system of accounting for interest received, and since the income had not been received by the minor child, it cannot be clubbed in the hands of the assessee. The Tribunal agreed with the appellant, emphasizing that for clubbing provisions to apply, the income must first be part of the minor child's income under section 5.

Issue 2: Whether the assessee can follow different methods of accounting for expenses and income.
The appellant contended that he follows the mercantile system of accounting, while his minor son follows the cash system. The Tribunal acknowledged that the minor child is a separate legal entity and can follow his own method of accounting. It was argued that the income of the minor child should not be clubbed with the assessee's income based on different accounting methods. The Tribunal referred to various High Court decisions supporting the view that income must be computed separately for each person and each head of income.

Issue 3: Clubbing provisions under section 64 in the case of minor child's income.
The Tribunal analyzed the provisions of section 64 and emphasized that the income of the minor child must be computed separately before clubbing it with the parent's income. It was held that the interest payable by the assessee to his minor son, which had not been received by the minor child, cannot be considered as income accruing to the minor child and hence should not be clubbed in the hands of the assessee.

Issue 4: Charging of interest under sections 234B and 234C.
The Tribunal dismissed the ground of appeal against charging of interest under sections 234B and 234C, stating that it was consequential in nature. Consequently, the appeal was partly allowed, and the addition of interest not received by the minor child was deleted.

In conclusion, the Tribunal ruled in favor of the appellant, holding that the interest payable by the assessee to his minor son, which had not been received by the minor child, should not be clubbed in the hands of the assessee. The Tribunal emphasized the importance of separately computing the income of the minor child before applying clubbing provisions under section 64.