Q: Whether the Gross Total income or Net Total Income of the minor child has to be clubbed in the hands of the parents ?
In case of clubbing of income of minor child, deduction under section 54EC is to be allowed on minors’ income from LTCG separately and only net income is to be clubbed
In case of clubbing of income of minor/spouse, all deductions are to be allowed while computing income of minor/spouse and only net taxable income is to be clubbed under section 64
where income of assessee’s minor children was clubbed with his income, assessee was eligible for deduction under section 54EC on investment in REC Capital Gain Bonds on account of minors’ income from long-term capital gains separately.
Minor is an assessable entity even though his income is clubbed in hands of his parents (Section 2(31) of the Income-tax Act, 1961 definition of person )
IN THE ITAT KOLKATA BENCH ‘A’
Deputy Commissioner of Income-tax, Circle-8, Kolkata
Section 54EC, read with section 64, of the Income-tax Act, 1961
Circulars & Notifications: Notification No. 380 of 2006, dated 22-12-2006
Interpretation of : Person as occurring in section 2(31) and ‘total income’ : as occurring in section 64(1A) of the Income-tax Act, 1961
Assessment year 2007-08
During the relevant assessment year, the assessee earned long-term capital gain (LTCG) on sale of shares. The two minor children of assessee, being beneficial owners of shares, also earned LTCG on sale of beneficial shares. The assessee along with his minor children invested amount of LTCG in REC bonds and claimed deduction under section 54EC. The Assessing Officer clubbed the income of minor children in the hands of assessee but disallowed the deduction under section 54EC claimed by the assessee on account of his minor children. He restricted the deduction to Rs. 50 lakhs invested by the assessee. On appeal, the Commissioner (Appeals) deleted the disallowance and allowed the claim of assessee. The case of revenue was that as per Board’s Notification No. 380/2006, dated 22-12-2006 the maximum limit of the amount of investment in REC Bonds was Rs. 50 lakhs. It submitted that there was only one assessable entity being the assessee, for purpose of computation of total income and his two minor children could not be termed as independent assessee or independent person and their income had to be only clubbed in hands of the assessee.
From the notification issued by Rural Electricity Corporation Ltd. dated 29-6-2006 it is clear that there is nothing in the above notification insofar as the deduction is to be allowed under section 54EC. The said notification says that ‘a person’ shall not be ‘allotted’ bonds more than Rs. 50,00,000. This word ‘person’ has been defined in section 2(31), which includes an individual.
From section 2(31) it is clear that in case minor is an assessable entity even though his income is clubbed under section 64(1) in the hands of his parents, he is to be considered separate than his parents who is also an individual and a person as per this definition. There was no limit in separately allotting bonds up to Rs. 50,00,000 to each of such person nor there is any mentioning limiting the deduction to an assessee. Section 54EC(3) Explanation (b), suggests that the conditions for providing a limit on the amount of investment by an assessee can be notified or could have been notified by the Central Govt. But in the notification relied on by the Assessing Officer as aforesaid, no limit of investment by an ‘assessee’ is prescribed. But the condition for allotment of bonds to a single person is specified. In fact the issuing authority was fully aware of the notification and taking into account the fact that it was being issued to three different ‘persons’, the allotment was made. The deduction or otherwise was not the subject matter of notification rather it was out of the purview of the aforesaid notification. In view of the above, even if section 54EC(3) Explanation (b ) is considered, assessee’s case falls outside the embargo put on by the amendment made in this section. Even section 64(1A) speaks of the addition of the total income of minor child and income of a minor child for the purpose of inclusion under section 64(1A) will be his total income. [Para 7]
Section 64(1A) says that in computing the ‘total income’ of an individual all such income as arises or accrues to the minor child. The word ‘such’ means the total income of the minor, because ‘Such’ is preceded by the word ‘total income’. The word ‘such’ means the ‘same’ or of the ‘same nature’ as has been defined in all the dictionaries and here the word ‘such’ is preceded by the word ‘total income’. The word ‘total income’ has been defined under section 2(45).
From the definition of total income, it is clear that it is not the gross total income but the income of any person, who is an assessee, as computed under the provisions of the Act, means the total income as computed under the provisions of the Act is to be added. [Para 8]
Capital gain which is the subject matter of this appeal is to be computed under Chapter IV-E. Section 54EC provides that capital gain not to be charged on investment in certain bonds. Therefore, the investments made in certain bonds shall be outside the scope of capital gain for the purpose of computation of total income itself. It is not a deduction under Chapter VI-A which comes into picture only after computing the total income and the deductions are being allowed from gross total income as per section 80A(1). For the purpose of computation of gross total income from capital gain, any amount invested as per the provision of section 54EC is outside the computation of total income itself. It may also be mentioned that there is difference between the word ‘assessee’ and the word ‘person’. The notification, on which the Assessing Officer relied upon, has not put any embargo on the investments by an assessee but the embargo is on allotment of the bonds to a ‘person’ and such embargo is on the allotting authority. The bonds have been allotted to the three persons as per the notification itself and the assessee is entitled to the benefits as per provisions of section 54EC under which restriction have been put only for investments from 1-4-2007.
The various judgments clearly show that even if the income of the minor is clubbed with the income of the other individual, all the deductions are to be allowed while computating of income of the minor/spouse and only the net taxable income is to be clubbed under section 64. In view of the above, the claim of assessee is to be allowed and the Assessing Officer is to be directed to recompute the long-term capital gains accordingly. [Para 9]