Minor child is separately eligible for incentive for investment of capital gains.

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Sections 2(31), 54EC, 64(1A), 80C, 80CCF, 80G and similar other provisions of the Income-tax Act, 1961.

Notification no. 380/2006 dated 22.12.2006  which prescribing maximum limit of 50 lacs on the amount of investment in REC Bond for each individual.

Notification no. 143 of 2006 dated 29.06.2006 issued by the Central Government prescribing bonds of  Rural Electrification Corporation Ltd.

CBDT Circular No. 636, dated 31-8-1992 /198 ITR(St.)1

Deputy Commissioner of Income-tax, Circle-8, Kolkata Versus Rajeev Goyal 2012 (6) TMI 139 (Tri)

 Bajaj Ashok Chunnilal v. DCIT 2004 (9) TMI 297 (Tri).

 Smt. Babita P. Kanungo v. DCIT 2004 (5) TMI 235 (Tri).

 JCIT v. Govind Rohira Alias Srichand Rohra 2004 (7) TMI 283 (Tri).

 ACIT v. Madan Lal Bassi 2003 (11) TMI 292 (Tri).

JCIT v. Govind Rohira Alias Srichand Rohra 2004 (7) TMI 283 (Tri)    [2005] 095 ITD 0077 (Mum).

CIT v. S.K. Naik 1983 (11) TMI 61 (HC).

 CIT v. Segu Hamath 1988 (2) TMI 428 (HC).

Earlier articles of the same author on  subject  related with income of minor children were published in the Taxman (magazine section) as follows:

1. MINOR CHILD’S INCOME/LOSS-SOME ASPECTS   85 Taxman-Magazine 252.

2. MINOR CHILD’S INCOME/LOSS – SOME MORE ASPECTS AND CLARIFICATIONS   89 TAXMAN 374 (Mag.).

 3.MINOR CHILD'S INCOME -SOME ASPECTS 129 Taxman 33 (Mag.)}

4.  Minor- a separate assessee 155 Taxman 51 (Mag.).

Earlier articles published in Taxman magazine:

In the four articles referred to above in reference material  detailed discussions and analysis were made from time to time about relevant provisions, applicable when income of minor is assessed separately and when income is clubbed with one of parents of minor child. The author had expressed that ‘total income’ of minor child is to be clubbed. And for this purpose income of minor child is to be computed separately under each head , gross total income is to be derived from which eligible deductions under Chapter VIA are to be allowed to compute ‘total income’ which is to be clubbed with income of one of parent as per provisions of S. 64(1A).  With reference to related provisions author had also expressed views that a minor child is also a person an individual and an assessee for the purpose of income-tax Act, 1961.

In earlier articles author had expressed view that even deduction under Chapter VIA  ( like S. 80C, 80G  80L etc.) can be allowed separately in respect of each minor child whose total income is clubbed. The author had expressed view that in section 64(1A) the word ‘such income’ is preceded by words ‘total income’. Therefore, what is to be clubbed in ‘total income’ of minor child. The same view has been taken in some of orders rendered  by Tribunal, some of which were  referred to in earlier articles by author. In the recent case of Rajeev Goyal also the same contention has been accepted by the Tribunal. 

Deductions  for re-investment of capital gains:
Suppose a minor child is beneficial owner of a capital asset or is a joint owner of capital asset. And the minor  derives capital gains on transfer of such assets. In that case income of minor child is also to be computed under head ‘capital gains’. The minor child is also a person and an assessee. Therefore, if investment is made on account of minor child also, then corresponding deduction shall be allowable although income of minor child is clubbed with one of parents. 

Recent case decided by Tribunal:

Deputy Commissioner of Income-tax, Circle-8, Kolkata Versus Rajeev Goyal 2012 (6) TMI 139 (Tri) in  IT Appeal Nos. 951 & 963 (Kol.) of 2011 decided vide order dated - 01 June 2012 We find that assessee and his minor children  derived long term capital gains. The income of minor children was to be clubbed with income of assessee. The assessee made investment in eligible capital gains bonds u/s 54EC on his own account as well as on account of his minor children. The question arose as to whether investment made on account of minor children was eligible for deduction or not.

The Tribunal decided the matter in favour of assessee and held that  assessee and his minor children for whom investment was made as reinvestment of capital gains in capital gain bonds were independently entitled to separate investment and deduction limits of Rs.50 lakhs u/s 54EC and clubbing of LTCG u/s 64(1A) to be made after allowing deduction to each child up to Rs. 50 lakhs.

In this case the revenue should not have at all disputed the deduction. This is because what is to be clubbed is the total income of minor. Even if we consider head wise income, then income of minor computed under head ‘capital gains’ will have to be clubbed. Deduction u/s 54EC is a deduction during process of computation of income under head ‘capital gains’. The capital gains so computed will go as an element of Gross Total Income of assessee.

Facts of the case are as follows:

Assessee and his minor children sold certain shares and derived long term capital gains.

 Assessee sold shares of ARC India Ltd and earned LTCG of Rs.551 lakh approx and he  invested Rs.50 lakhs in his name in REC bonds.

Assessee's minor daughter earned LTCG from sales of shares amounting to Rs.49.74 lakhs(approx) minor daughter invested Rs.49.50 lakhs in her name in REC bonds.

  Assessee's minor son earned LTCG of Rs.39.57 lakhs (approx)  and made investment on account of minor son to the tune of Rs. 39.50 lakhs in his name.

Here we find that assessee and his son and daughter had transferred capital gains and earned long term capital gains in three accounts. Suppose there was no clubbing provision, then three persons would have filed separate return and  computed capital gains after deducting deduction u/s 54EC for reinvestment made in capital gains bonds. N this regard there is no difference in two situations one being sepearte assessment and other being clubbing in hands of father because  computation of capital gains is to be made in three accounts. Therefore deduction u/s 54EC is allowable separately for three persons.

 However,  while  clubbing  LTCG earned by his minor children in assessee's hands AO  restricted deduction under section 54EC only to investment of Rs.50 lakhs in assessee's name and did not allow deduction for investment in REC bonds made by his minor children citing the investment limit of Rs.50 lakhs imposed by the proviso to section 54EC(1). He considered that there is only one assessee and ignored that in facts there are three  persons and assesses, though income is clubbed in hands of one assessee.

Tribunal considered provisions and observed and held on the following lines:

A minor is a person distinct from his parents and is also an individual.

There is no bar in separately allotting bonds upto Rs. 50,00,000 to each such person.

 As per the definition of 'person' u/s 2(31), a minor is an assessable entity even though his income is clubbed u/s 64(1A) of the Act in the hands of his parents.

There is no mentioned limit on the deduction allowable to an assessee under section 54EC.

The limit of Rs.50 lakhs is ceiling on investment that may be made by an assessee and not a ceiling on deduction that may be allowed to an assessee.

 Thus, AO was not right in disallowing deductions in respect of investment  made in bonds  by minor children of the assessee by applying the Rs.50 lakhs limit.

 Section 64(1A) says 'In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child.' The word 'such' means the total income of the minor, because 'such' is preceded by the word total income.

 Thus, all the deductions are to be allowed while computation of income of the minor/spouse and only the net taxable income is to be clubbed under section 64.

Authors views

As explained in earlier articles and as rightly held by the Tribunal, minor child is also a person, an individual and an assessee. Minor can also  be assessed separately also for some of his income earned by his own efforts like remuneration for doing some work. Certain income of minor child are assessed in hands of one of his parents in accordance with S.64(1A). Even when income is clubbed in hands of one of parents, the minor child still remain  a person, an individual and  an assessee. Therefore, he can claim benefits which are available to a person, an individual or an assessee under various provisions.

Need to provide incentive to built up capital base of wife and minor children :

The views expressed by author about minors income have been accepted in many cases. From reported judgments we find that in some cases disputes are being raised by revenue. This is not required, because provisions are very clear and on bare reading of the same author had expressed his opinion long ago. However, when scrutiny assessment is made, some assessing officers have tendency to disallow even very justifiable claims of assessee. This leads to un-necessary litigation.

It seems that deductions u/s 80C, 80G and 80L were of small sums therefore disputes have not been raised in any High court, however, since amount involved in case of provisions like section 54, 54EC, 54F etc. can be of larger magnitude, the revenue is likely to carry dispute even before High Courts.

In view of author the revenue is not gaining any substantial revenue by way of provisions of clubbing. Now on reduced rates of tax, even at higher slabs, provisions of clubbing of income is not much important from the point of view of overall revenue.

By removing provisions of clubbing, the government can help citizens to built-up capital for wife and minor children of assessee, Even if there is some diversion of income, and some loss of revenue, it will be in overall interest of society for development of future entrepreneurs. If parents can make some extra efforts and make investments on account of minor children they should be encouraged to do so with a view to make capital base of children of our nation so that when they grow up they have capital to  pursue higher education and can also start some business or profession to get self employed and also to provide employment to others.

Removal of clubbing provisions will also lead to better disclosures and compliances. It is ground reality that many of assesses , particularly salaried person  including government employees fail to disclose income which need to be clubbed u/s 64(1A) and therefore, there is noncompliance.

When we have a system in which more than  90% of returns are accepted, the provisions should be very simple so that individual can comply with provisions easily and without help of professionals. We find that tax payers who can approach and afford to pay professionals can make right claims and disclose income correctly, whereas persons who cannot do so are either deprived of benefits available and allowable as per law or they fail to comply with the provisions. Both situations are not at all desirable.