TMI Blog1999 (9) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... ature 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 directly or indirectly to the minor child by such individual otherwise than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was contained in the Budget Speech. We have carefully examined this suggestion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 in section 64 should be extended to cover such cases. I.11.5 It would follow f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 entered involves the taxpayer any liability to tax or does not afford the taxpayer some b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allowances, and involving transactions of tax mitigation where the reduction in tax is derived from the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 of tax and the Legislature is competent to enact such a provision for imposition of tax. The provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------------------------------------- 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 Daga v. T. G. Trivedi, ITO [1972] 85 ITR 451 (Bom). E. V. Narasa Reddy v. ITO [1960] 39 ITR 629 (AP) Section 16(3)(A)(iv) of the 1922 Act, G. K. Devarajulu Naidu v. CIT [1963]48 ITR 756 (Mad) corresponding to section 64(1)(iv) Section 64(1)(iii) K. Krishnaveni v. AAC of I.T. [1985] 151 ITR 83 (Mad) Section 64(1A) Syed Askari Hadi Ali Augustine Imam v. Union of India [1994] 209 ITR 746 (Patna)------------------------------------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey are vexatious. In Halsbury's Laws of England, Vol. XXI, page 216, para. 478, it is stated as follows : 'Infants have always been treated as specially under the protection of the sovereign, who, as parens patriae, had the charge of the persons not capable of looking after themselves. This jurisdiction over infants was formerly delegated to and exercised by the Lord Chancellor ; through him it passed to the Court of Chancery, and is now vested in the Chancery Division of the High Court of justice. It is independent of the question whether the infant has any property or not'." In Balaji v. ITO [1961] 45 ITR 393 (SC), the provisions of section 16(3)(a)(i) and (ii) for inclusion of the wife's or minor child's share of profits of the firm in which assessee is a partner were challenged. It was considered that the provisions were enacted by the Legislature to prevent evasion of tax. For infringement of article 14 of the Constitution of India it was observed that there are two conditions laid down for passing the test of permissible classification (i) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive entries have to be read in a very wide manner and so as to include all subsidiary and ancillary, matters. So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. Experience has shown that attempts to evade the tax are often made." The provisions of section 16 of the Act of 1922 and section 64/65 of the Act of 1961 have been amended from time to time may be on the basis of the interpretation given by the courts or looking to the financial needs and plugging the loophole of drainage of revenue which according to the Legislature should have been received by the Government. So far as the jurisdiction to enact a law providing for taxation it is not in dispute that the provisions of entry 82, List I of the Seventh Schedule authorise Parliament to make an enactment on the taxes on income. The tax which has been levied is on income and cannot be said that it is not an income. In whose hand the income is to be taxed is a machinery provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he children by an individual. It is not necessary that there should be in all cases evasion or avoidance of tax. When the provisions are made to block the loophole for any possible tax avoidance, the Legislature is competent to have a wider field of discretion not only for the substantive provision but for procedural provisions as well. The decisions relied on by learned counsel for the petitioners are not of any assistance as the competence of the Legislature is not challenged and it is only on the basis of article 14 of the Constitution of India with reference to the special status of the minor validity of the provisions have been challenged. There is no hostile discrimination between those minors whose income is not included with the income of their parent as they may not be assessable at all or may be assessable at a lower rate of tax as the individual whose minor children is having income have been considered a different class by themselves. Even the expert committee has considered it to be a method for avoidance of tax. In view of the judgment given in the case of Balaji v. ITO [1961] 43 ITR 393 (SC), if the Legislature has selected for the purpose of classification a group o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
