TMI Blog1995 (7) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... so far as the daughter of the petitioner is concerned, the source of her income is traceable to the property which she obtained by a will from her maternal grandfather while she was five months old. She receives rental income from such property, which she reinvests and gets income by way of interest. Since the minor daughter's income is not traceable to the fictitious income covered under the unamended section 64 of the Income-tax Act, 1961, she got herself assessed under the Income-tax Act, 1961, from the date she used to get assessable income. For the past several years, she was an assessee under the Income-tax Act in her individual capacity. Until the assessment year 1992-93, her income was not clubbed with the petitioner's income as her source of income was not derived from any one of the ways mentioned in section 64 of the Act, as it was then prevailing. But after the amendment, her income is clubbed with her father's income, who was hitherto assessed independently. The grievance of the petitioner is, as per the amended Act, by clubbing the income of his minor daughter who was hitherto assessed independently, the tax burden at his hands became higher for no fault of his. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome which they derived from their mother by succession. Since the income from the source of their succession was outside the scope of section 64 of the unamended Act, the petitioner's minor children were assessed independently till the assessment year 1992-93. However, section 64 of the Income-tax Act was amended by the Finance Act, 1992, to the effect that all the income of a minor will be clubbed with that of his parents save the exclusive income earned by the minor out of his own skill, profession or manual labour, even though there are innumerable lawful sources of income of a minor which are not traceable to the avoidance of tax on the part of their parents through the minor. The petitioner states that unlike other laws, Hindu law recognises, the right to property of a Hindu child even from the date he is in the womb of his mother. Further, the Hindu Succession Act recognises "minor child" as a person and the right of the minor to succeed to the property of his grandfather as a coparcener or to his father or mother as an heir is a statutory right conferred on the minor on his independent status. Therefore, the property that a minor gets by "devolution" is not property that is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition was effected on January 22, 1960, whereby complete partition of joint family property was recorded and the properties of the joint family were divided as mentioned in the said deed. The partition deed divided the immovable properties into three schedules, viz., A, B and C. Schedule A was allotted to the petitioner's grandfather, Schedule B was allotted to the brother of the petitioner's father and Schedule C was allotted to the petitioner's father. This partition deed was accepted by the Income-tax Officer. After that, the petitioner's father continued to hold that property as his own. By a registered partition deed dated April 6, 1981, the property of the joint family consisting of the petitioner and his father, his mother and his sister was completely partitioned and the immovable properties were divided into schedules A and B. Schedule A was allotted to the petitioner's father and schedule B was allotted to the petitioner, who is a minor. As the petitioner is a minor, his father continued to be the guardian of the property in question. The property allotted to the minor son fetches interest income out of investments made in NSS, bank deposits and fixed deposits. The intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, amended by the Finance (No. 2) Act, 1980, not recognising the family partition under the Hindu law, the Division Bench of this court construed that non-recognition of partial family partition under section 171(9) of the Income-tax Act and clubbing of the coparcener's income as a whole was illegal and accordingly struck down sub-section (9) of section 171 as ultra vires in M. V. Valliappan v. ITO [1988] 170 ITR 238 (Mad). The impugned amendment seeks to do two things, viz., (i) it couples the entire income of a minor with that of his/her father even though there is no fictitious transfer traceable to the parents in any one of the manners provided under section 64. It fails to note whether there is any attempt at all on the part of the father to avoid tax at their hands through minors which alone can be clubbed by the artificial extension and (ii) while it recognises the income of minor treated separately to the cases of prodigy income of a minor on the reasoning that it has no nexus to the source of the parent, it failed to exempt all such income of a minor that would have the similar character of independent source, de hors the father. Further, the analogous provision relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Act, 1992, is explained in the circular of the Central Board of Direct Taxes, Circular No. 636 dated August 31, 1992, and in the speech of the Finance Minister. The petitioners have challenged the vires of the provisions of section 64(1A) of the Act on a misreading of the provisions of the said section by stating that section 64 dealt with only cases where there is a transfer of property to the minor child by the parents. The petitioners have overlooked the other part of the provisions wherein clubbing of income is made without any reference to transfer of assets by the parents. The Central Legislature is competent to enact the provision of section 64(1A) of the Act. The power of Parliament to levy tax is not curtailed by the incidence of tax and section 64(1A) of the Act provides for levy of tax on income and it is still a tax on income though not on the income of the person whose income is to be assessed but on another for the purpose of imposing the tax liability. This submission is supported by the decisions of this court in B. M. Amina Umma v. ITO [1954] 26 ITR 137 and K. Krishnaveni v. AAC [1985] 151 ITR 83. The provisions of section 64(1A) of the Act do not contravene art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utty Naha, AIR 1969 SC 378. According to learned counsel for the assessees, it is not the phraseology of the statute that governs the situation but the effect of the law that is decisive. The effect of section 64(1A) of the Income-tax Act is that it operates unevenly on minors who receive income. Section 64(1A) also leads to an anomalous situation. In order to support this contention reliance was placed upon the decision reported in Khandige Sham Bhat v. Agrl. ITO [1963] 48 ITR 21 (SC) ; AIR 1963 SC 591 at 594. It was further submitted that section 64(1A) is also violative of article 14 as it operates unequally within its range of selection and cannot be justified on the basis of valid classification. For supporting this contention, reliance was placed on ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82 (SC) and Raja Jagannath Baksh Singh v. State of U.P. [1962] 46 ITR 169 (SC). Again it was submitted that since section 64(1A) fails to make any classification, it is liable to be struck down by applying the test of "palpable arbitrariness". In order to support this contention reliance was placed on Federation of Hotel and Restaurant Association of India v. Union of India [1989] 178 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espective of the relationship between the minor and the transferor. The income will now be clubbed in the hands of the father or mother who may have nothing to do with the transfer or gift. Again it was contended that before the amendment, the transfer would be valid and no clubbing was permissible if the transfer was made for adequate consideration. The provision for clubbing would apply only if the transfer was for inadequate consideration. But under section 64(1A), income earned from all sources of a minor is to be clubbed in the hands of the parent except what is exempted under the proviso. Under the impugned section 64(1A), clubbing will be done irrespective of whether the transfer is for adequate, inadequate or no consideration. The income will be clubbed in the hands of the parents, even though the father/mother may have provided consideration. Learned counsel for the assessees also submitted that there is no provision that enables the father/mother to recover the tax paid on the clubbed income. Section 64(1A) merely states that when computing the total income of the assessee, the minor's income will be included. There is no legal fiction stipulating that the income of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r child on account of any-- (a) manual work done by him ; or (b) activity involving application of his skill, talent or specialised knowledge and experience. Explanation.--For the purposes of this sub-section, the income of the minor child shall be included,-- (a) where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub-section) is greater ; or (b) where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year, and where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do. " It remains to be seen that section 16 of the 1922 Act and section 64 of the 1961 Act were enacted to prevent avoidance of tax through transfer of assets directly or indirectly. Section 64(1A) includes income of the minor child irrespective of its source, in the hands of the parent having the lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from gifts given by parents but this does not apply to other income, including income from other gifted assets, and the practice of cross-gifting is widely used to evade clubbing. The Chelliah Committee has recommended that in order to plug this loophole, which accounts for a substantial leakage of revenue, the income of a minor child should be clubbed with that of the parent. There is merit in this suggestion and I propose to accept it. Recognising, however, the existence of a number of child prodigies, especially child artistes in our country, I propose to exclude their professional income, as also any wage income of minors, from the purview of such clubbing. The practice of clubbing the income of minor children with that of the parent for tax purposes is in vogue in a number of countries. " The interim report on Tax Reforms for December, 1991, submitted by Dr. Raja J. Chelliah Committee reads as under (at para 6.38 of the Report) : " At present, in India the income of the minor admitted to the benefits of any partnership is included in the income of the parent, irrespective of whether or not either parent is a partner in the same firm. Further, any income accruing to a min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it. In computing the total income of the petitioner for the purpose of assessment, the Income-tax Officer included the share of income of the wife and three minor sons under section 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922. The petitioner moved the Supreme Court under article 32 of the Constitution of India challenging the constitutionality of the said provisions on the grounds, viz., (i) that they were ultra vires the Legislature under entry 54 of the Federal Legislative List of the Government of India Act, 1935 ; (ii) that they contravened the provisions of article 14 and article 19(1)(f) and (g) of the Constitution. While deciding the issue arising in this case, the Supreme Court came to the following conclusions as can be seen from the headnote, which is extracted as under : " The entries in the Legislative Lists are not powers but fields of legislation and the widest import and significance should be attached to them. Thus interpreted, there could be no doubt that entry 54 of the Federal Legislative List must cover such legislation as the impugned provisions intended to prevent the evasion of tax. " The two tests of permissible classification under artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tax on income either in form or in substance, though the section provides for the incidence of the tax not on the person whose income is to be assessed to tax, but on another. There is nothing in the fundamental concepts of income-tax to prevent the imposition of the immediate and apparent incidence of the tax on a person other than the person whose income is to be assessed. Section 16(3)(a)(ii) was, therefore, well within the legislative power conferred on the Central Legislature by entry 54 read with section 100 of the Government of India Act, 1935. It does not also contravene any of the fundamental rights guaranteed by the Constitution of India. Section 16(3)(a)(ii) does not in any way prohibit or even interfere with the right of the parent of the minor to practise any profession or to carry on any occupation, trade or business. It also does not contravene the equal protection of the laws guaranteed by article 14 of the Constitution inasmuch as the classification is reasonable. An attempt to prevent by legislation an evasion of just tax liability and the necessary classification to give effect to that object cannot be termed unreasonable. " In the case of Patiala State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is a possibility of evasion of one's income by showing it as the minor's income and to avoid such an evasion there is a clubbing of the income earned by a minor through a particular source with the income of the father, it cannot be said to fall outside the legislative power to enact a law on income-tax. It is true that under section 64(1)(iii) of the Income-tax Act, 1961, prior to its amendment, the clubbing of the income of the minor who has been admitted to the benefits of the partnership in which his parent is a partner with the income of the parent was based on a nexus between the income of the minor from the partnership and the interest of the parent in the partnership. But the present provision is to the effect that even if the parent is not a partner, if a minor has been admitted to the benefits of a partnership and income is derived therefrom, that income should be clubbed with that of the parent and no nexus is contemplated by the section. Normally, a minor can be admitted only to the benefits of the partnership and he is not liable to meet the losses of the firm. While such is the legal position, if a minor is to be admitted to the benefits of the partnership withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eye. Price is surely a safe guide but other methods are not necessarily vocational. It depends. Practical considerations of the administration, traditional practices in the trade, other economic pros and cons enter the verdict but, after a judicial generosity is extended to the legislative wisdom, if there is writ on the statute perversity, 'madness' in the method or gross disparity, judicial credulity may snap and the measure may meet with its funeral. " Learned counsel for the petitioners placed reliance on the decision in Kunnathat Thathunni v. Moopil Nair's case, AIR 1961 SC 552, for the purpose of explaining article 14 of the Constitution of India. While considering this decision, the Supreme Court in Ganga Sugar Corporation's case, AIR 1980 SC 286, cited supra, held that (at page 298), "reference to K. T. Moopil Nair's case, AIR 1961 SC 552, was made at the bar to persuade us that unequals cannot be tortured into equality a vice which stultifies the soul of article 14 as Anatole France exposed in his sardonic epigram that 'the law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread'. We are sure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs hold no water. Learned counsel for the petitioners further submitted that by clubbing the minor's income in the hands of the parent whose income is higher would deprive the parent claiming various benefits provided under the Income-tax Act. In other words, such clubbing would reduce various benefits provided under the Act, both to the minor as well as to his parent. If they are assessed separately both of them can claim such benefits separately in their individual assessments. It remains to be seen that the Legislature wanted to tax the "minor's" income in the hands of the parent whose income is higher as "deemed income" which is permissible under the law. In the decision of Bhogilal Laherchand's case [1954] 25 ITR 50 (SC), it was held that "the term 'deemed' in section 4 brings within the net of chargeability income not actually accruing but which is supposed notionally to have accrued. It involves a number of concepts. By statutory fiction income which can, in no sense, be said to accrue at all may be considered as so accruing. Similarly, the fiction may relate to the place, the person or be in respect of the year of taxability". Further, the Legislature is competent to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the modern State, in exercising its sovereign powers of taxation, has to deal with complex factors relating to the objects to be taxed, the quantum to be levied, the conditions subject to which the levy has to be made, the social and economic policies which the tax is designed to subserve, and what not. In the famous words of Holmes J., in Bain Peanut Co. v. Pinson [1930] 282 US 499, 501 : 'We must remember that the machinery of Government would not work if it were not allowed a little play in its joints'. . . . Fine-tuning to attain perfect equality may be a fiscal ideal but, in the rough and tumble of work-a-day economics, the practical is preferred to the ideal, provided glaring caprice or gross disparity does not make the levy arbitrary or frolicsome. Article 14 is not intellectual chess unrelated to actual impact or the wear and tear of life but even-handed justice with some play in the joints. " In view of the foregoing reasons, we uphold the constitutional validity of sub-section (1A) of section 64 of the Income-tax Act. We also hold that it is within its legislative competence for Parliament to enact sub-section (1A) of section 64 of the Income-tax Act, since it falls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he abovesaid Act of 1992), also provides that when the abovesaid clubbing takes place under section 64(1A) of the Act, there shall be exclusion from the total income up to Rs. 1,500 of the income of each minor, coming under the said section 64(1A). Since my learned brother has set out the factual contexts in which the abovesaid attack is made, I need not repeat the same here. In dealing with the validity of section 64(1A), let me first deal with the aspect of legislative competence of Parliament which enacted the said provision. Entry 82 of List I of Schedule VII to the Constitution of India provides for "taxes on income other than agricultural income". No doubt, only such income is charged to tax in all the above cases. But, the attack is on the ground that the minor child's income is fictionally treated as the income of his or her father and actually clubbed with his own income and charged to tax in his hands. (The result being both the said minor's income and the father's income suffer tax at a heavier rate. But, it is settled law that the said entry 82 is wide enough to confer power to prevent evasion of income-tax.) (vide Punjab Distilling Industries Ltd. v. CIT [1965] 57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1972] 2 SCR 33, a decision by a Constitution Bench of seven judges. The test evolved in the said decision is this in short : where the legislative competence of Parliament to enact a particular statute is questioned, one must look at the several entries in List II to find out (applying the well-known principles in this behalf) whether the said statute is relatable to any of those entries. If the statute does not relate to any of the entries in List II, no further inquiry is necessary. It must be held that Parliament is competent to enact that statute whether by virtue of the entries in List I and List III or by virtue of article 248 read with entry 97 of List I. In this case, it is not even suggested that either of the two enactments in question is relatable to any of the entries in List II. If so, we need not go further and enquire to which entry or entries these Acts relate. It should be held that Parliament did have the competence to enact them. " So, the attack that Parliament has no legislative competency to enact the abovesaid section 64(1A) falls to the ground. No doubt, learned counsel for the petitioners also relied on a Division Bench judgment of this court in M. V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division Bench judgment, after holding that the abovesaid section 171(9) is not to counteract the tendency to tax avoidance, the court held that the said provision suffers from legislative incompetence. But, with due respect, I have to point out that this decision did not take note of the abovereferred decision in Union of India v. Harbhajan Singh Dhillon [1972] 83 ITR 582 (SC), the ratio of which has been accepted and reiterated in Attorney-General for India v. Amratlal Prajivandas [1995] 83 Comp Cas 804 ; AIR 1994 SC 2179. Those decisions are based on article 248 of the Constitution of India and residuary entry 97 of List I of the Seventh Schedule. Therefore, I am unable to persuade myself to accept the correctness of the abovesaid conclusion of the Division Bench regarding the legislative competence with reference to the abovesaid section 171(9). I may also point out that a Division Bench of the Patna High Court, while upholding the constitutional validity of the abovesaid section 64(1A) of the Act, has not only held that the abovesaid section 64(1A) is not violative of article 14 of the Constitution of India, but has also held that Parliament had the legislative competency to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income as the income of the minor or the income of some other close relative. But, in the present cases, there is no such "showing" at all by anybody including the assessee and it cannot be said that there is any "possibility of evasion" of tax. But, it appears to me that the object of section 64(1A) has not come in mainly as anti-avoidance measure, though incidentally such anti-avoidance was also in the contemplation of the Legislature. The main object behind the legislation of the said provision seems to be that all minor's income should be clubbed with the parent (except of course that which has been excluded specifically as mentioned above), since for all practical purposes, the parent treats and uses the said minor's income as part of his or her own income. This position is apparent from the following passage appearing in the Memorandum explaining the provisions in the Finance Bill, 1992, which, inter alia, brought out the abovesaid section 64(1A) : " In reality as well as in law, the minor children cannot administer their property nor can they take decisions on the disposal of income arising therefrom. These responsibilities fall on the parents, who, for all practical p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on an income of another when there is no possibility of evasion of income-tax. Anyway, in my view, in view of article 248 and entry 97 of List I and the interpretation put on it by the Supreme Court itself in the abovereferred to Union of India v. Harbhajan Singh Dhillon [1972] 83 ITR 582 and Attorney-General for India v. Amratlal Prajivandas [1995] 83 Comp Cas 804 ; AIR 1994 SC 2179, the abovesaid question may not actually arise in so far as the legislative competency of Parliament is concerned, though the question may have to be decided in the context of violation of any fundamental right. Then, coming to the question whether the abovesaid section 64(1A) offends article 14, the contention of the petitioners is that since the income of all the minors (excepting of course, the minors who are spoken of in the above proviso to section 64(1A)) are treated alike, it is a case of unequals being treated equally, since, according to the petitioners, cases where there is possibility of tax avoidance and cases where there is no possibility of tax avoidance are treated alike. In other words, according to them, when there is no tax avoidance as in the present cases, the minor's income canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the time and may assume every state of facts which can be conceived existing at the time of legislation. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J., that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solutions through any doctrinaire or strait-jacket formula and this is particularly true in the case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the Legislature. The court should feel more inclined to give judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... she be illiterate--a large majority of them are illiterate--would ordinarily be in economic matters a tool in the hands of her husband. Many things are done in her name without her knowledge of the same. When the Legislature of this country, which is assumed to know the conditions of the people and their requirements, with the awareness of this particular widespread fraudulent device in the matter of evasion of taxes, made a law to prevent the said fraud, it is difficult for this court in the absence of any counterbalancing circumstances to hold, on the analogy drawn from American decisions, that the need for such a law is not in existence. " After so saying, the Supreme Court also referred to a direct decision of the Madras High Court in B. M. Amina Umma v. ITO [1954] 26 ITR 137 sustaining the relevant provision on the ground of reasonable classification, no doubt on the footing that the relevant provision was to prevent the evasion of tax. Even ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82 (SC) observed that in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes must b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But, it must be noted that the underlying reasoning in the abovesaid passage in the context of the facts of the said case is that the income over which the Hindu undivided family has no control is required to be disclosed in the return as its own income and the family is exposed to the consequences of a penalty. But, in all the present cases, which deal with clubbing of income of minor children, it cannot be said that the parent-assessee has no such control since for all practical purposes the parent could treat and use the said minor's income as part of his or her own income. So, the abovesaid passage may not go to support the claim of the petitioners herein. That apart, as pointed out by learned counsel for the Revenue, the Supreme Court has also held in CIT v. Smt. P. K. Kochammu Amma [1980] 125 ITR 624, which dealt with the proceedings initiated by the income-tax authorities for levying penalty on the assessee for non-disclosure of income coming under section 64(1)(i) and (iii) of the Act, that the penal provision under the Act would be attracted. The Supreme Court, after referring to sections 4, 5, 2(45) and 64(1) of the Act, has observed as follows : " It is clear from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have underlined above) used in the abovesaid sections, it cannot be said that section 171(9) entrenches upon or enlarges the scope of sections 4 and 5 of the Act. Likewise, no such attack can be made with reference to section 64(1A) also. One other submission by learned counsel for the petitioner in Writ Petition No. 5744 of 1993 is as follows : Under section 171(9) of the Act only partial partition has been derecognised. Complete partition is still permissible under section 171(1). On account of section 64(1A), income from the assets received on a valid complete partition will also be clubbed. Hence, the amended section will render section 171(1) redundant in so far as the minor is concerned. So, if section 171 is to be read harmoniously with section 64(1A), the latter provision will have to be read down so as to exclude the income received by a minor in the case of a valid complete partition of a Hindu undivided family. The above argument of the said learned counsel has no merit. Section 64(1A) has been inserted in the statute much later than section 171 (section 171(9) or any other part of section 171) and it can be presumed that Parliament, when it enacted section 64(1A), w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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