11.   Accumulated Income of Minor Not to be Clubbed with income of Father or Mother

Generally speaking, the income of a minor child is to be clubbed with the income of the father or the mother, whoever of the two has the higher income. However, a very interesting decision was given by the Supreme Court of India in the case of CIT v. M.R. Doshi 211 ITR 1.


The brief facts in this case were as under:


The taxpayer, an individual, had executed two deeds of trust and a supplementary deed, the effect of which was that the income from the trusts was to be accumulated until the attainment of majority by his three sans. The cumulative income was then to be divided into three equal shares and the respective 1/3rd share of each son was to be paid to him. The question was whether the income from the trusts could be included in the total income of the assessee under the provisions of Section 64(1)(v) of the Income Tax Act, as it then read. Section 64(1)(v), so far as it is relevant for the purpose of-Judges reads thus:


“In computing the total income of any individual, there shall be included all such income as arises directly or indirectly.


(v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughterj or both.”


In the judgment in the assessee’s own case (Addl. CIT v. M.K. Doshi [1980] 122 ITR 499), the Gujarat High Court held, on a construction of Section 64(1)(v), that the income from the transfer of assets can be included in the income of the transferor provided that, under the transfer, the benefit from such assets was immediately available or was deferred for the spouse or minor children of the settlor. In other words, the mischief of tax evasion by assessees by transfer of their assets, such as by settlement or by trust, so as to make the income of such transferred assets available to their spouses or minor children, without subjecting the same to tax in the hands of the settlors, was sought to be avoided by providing that such income would be includible in the hands of the settlors provided that the benefit from the income of such assets was either immediately available to or was deferred for the benefit of their spouses or minor children. If the child, for whom the benefit was provided, was to receive it on attaining majority, the provision contained in clause (v) was not attracted on the plain reading of clause (v) itself, because, otherwise, the Legislature would not have expressed itself in the manner in which it did. Reliance was placed upon Yogindraprasad N. Mafatlal v. CIT [1977] 109 TTR 602 (Bom.) where the same view was taken.
 
After discussing the issue at length, the Hon’ble judges of the High Court held that the trusts in the present case had this cumulative effect, that the income therefore is to be accumulated until the attainment of majority by the assessee’s three sons: the cumulative income is then to be divided in three equal shares and one such share is to be paid to each son. The payment, therefore, is to be made after each of the sons attains majority. Section 64(1)(v) requires, in the computation of the total income of an assessee, the inclusion of such income as arises to the assessee from assets transferred, otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of his minor children. The specific provision of the law, therefore, is that the immediate or deferred benefit should be for the benefit of a minor child. In this case, the deferment of the benefit is beyond the period of minority of the assessee’s three sons, since the assets are to be received by them when they attain majority, the provisions of Section 64(1)(v) have no application.
In view of the above mentioned decision of the Supreme Court of India, substantial tax planning can be achieved by taxpayers who have minor children, especially when a trust is created for the benefit of the minor child that provides for accumulations until the minor children attain majority.
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