2006 (8) TMI 124 - HC - Income Tax

Computing the total income - Whether Tribunal was right in law in holding that the share income of the minors who are beneficiaries of a trust which was a partner in a registered firm cannot be clubbed in the hands of the assessee under section 64(1)(iii) of the Income-tax Act? - To attract clause (iii) of section 64(1) of the Income-tax Act read with Explanation 2A of the same Act, unless it is found that the minor, for whose benefit the income is available, is shown to have an absolute right of disposal in praesenti over the same, it cannot be included in the income of the individual in computing his total income. In other words, if such income is to reach the hands of the minor/beneficiary only on attaining majority, then it cannot be included in the income of the individual in computing his total income.

Summary

Issues Involved:
1. Whether the share income of minors who are beneficiaries of a trust, which is a partner in a registered firm, can be clubbed in the hands of the assessee under section 64(1)(iii) of the Income-tax Act.

Detailed Analysis:

Issue 1: Clubbing of Minor's Income under Section 64(1)(iii)
The primary question referred to the court was whether the share income of minors, beneficiaries of a trust that is a partner in a registered firm, should be included in the total income of the assessee under section 64(1)(iii) of the Income-tax Act.

Arguments from the Revenue:
The Revenue relied on the judgment in CIT v. K.J. Ramaswamy [2002] 256 ITR 191, asserting that the income of the minor should be included in the total income of the individual/assessee. The rationale was that the income derived by the trustee in a representative capacity from the partnership firm should be clubbed with the income of the individual, i.e., the father of the beneficiary.

Arguments from the Assessee:
The assessee's counsel argued that since the trust deed stipulates that the minors cannot access their share of income until they attain majority, this income should not be included in the total income of the individual. The counsel also referenced the Supreme Court judgment in CIT v. M.R. Doshi [1995] 211 ITR 1, which interpreted section 64(1)(v) of the Income-tax Act, suggesting that the principle laid down there should apply, thereby excluding the minor's share from the total income of the individual.

Court's Analysis:
The court examined the relevant provisions of section 64 of the Income-tax Act, particularly section 64(1)(iii) and Explanation 2A. Section 64(1)(iii) mandates the inclusion of income arising directly or indirectly to a minor child from the admission to the benefits of partnership in a firm in the total income of the individual. Explanation 2A clarifies that if a minor child is a beneficiary under a trust and the trustee is a partner in a firm, the income arising to the trustee for the benefit of the minor child should be deemed as income arising indirectly to the minor from the partnership.

The court also reviewed the Finance Act, 1979, which introduced Explanation 2A to counter tax evasion strategies involving trusts. The legislative intent was to include the minor's share of income from trusts in the parent's income if it was for the minor's immediate or deferred benefit.

Supreme Court Precedent:
In CIT v. M.R. Doshi, the Supreme Court held that if the benefit from the income is deferred until the minor attains majority, such income should not be included in the parent's total income. This principle was applied to interpret Explanation 2A, concluding that if the minor's share of income is accumulated in the trust and not available for immediate use, it should not be included in the parent's income.

Conclusion:
The court concluded that for section 64(1)(iii) read with Explanation 2A to apply, the minor must have an immediate right to the income. If the income is accumulated in the trust until the minor attains majority, it should not be included in the parent's income. The court directed the Assessing Officer to verify the manner of disposal of the minor's share of income. If the income is credited to the trust account to be accumulated until the minor attains majority, it should not be included in the parent's income.

Final Judgment:
The court answered the question against the Revenue and in favor of the assessee, declaring that the judgment in CIT v. K.J. Ramaswamy is no longer good law in light of the Supreme Court's decision in CIT v. M.R. Doshi.

Summary:
The court held that the share income of minors who are beneficiaries of a trust, which is a partner in a registered firm, should not be included in the total income of the individual/assessee if the income is accumulated in the trust and not available for the minor's immediate use. This decision aligns with the Supreme Court's interpretation in CIT v. M.R. Doshi, rendering the earlier judgment in CIT v. K.J. Ramaswamy invalid.