JUDGMENT

1. A matrimonial dispute between the parties ended with dissolution of their marriage and the husband settling a fixed amount for maintenance of the minor children, which were placed in fixed deposits by Ms. Payal Mehta, the appellant-mother, as their guardian.

2. Ms. Payal Mehta, urged that income tax should not be levied on interest accruing on maintenance deposited in the name of the minors. The following order was, therefore, passed on 19.11.2015:-

“Two issues have arisen namely whether interest earned by a minor from maintenance placed in a fixed deposit by the minor's father should be treated as income of the minor and if answer to this question is in the affirmative, whether interest income accruing to the minor should be clubbed with the income of the parent, who maintains the child i.e. who has the custody or guardianship of the child.

We are of the prima facie opinion that an exception must be created for children, who have received a consolidated amount as maintenance and even otherwise clubbing interest income of a minor, with the income of a parent would require the minor to pay income tax at a much higher rate.

Let notice be served upon the Principal Chief Commissioner, Income Tax.

At the asking of Court, Ms. Urvashi Dugga, Advocate, accepts notice and prays for time to argue the matter.

Adjourned to 26.11.2015”

3. Counsel for the revenue points out that the Income Tax Act, 1961, as enacted, does not exempt interest on maintenance deposited in the name of a minor.

4. We have considered the entire controversy. A divorce between parents does often lead to the custody of a minor being entrusted to one or the other, parent and in some cases to grandparents etc. A parent may also settle a fixed amount or a property as maintenance upon a minor which may earn interest or income. The interest income accruing to a minor (if at all can be called so) from a fixed deposit is taxable and is clubbed with the income of his guardian. An extract from the affidavit filed by The Assistant Commissioner of Income Tax (Hq.)(Judl.), Chandigarh, setting out the relevant provisions of the Income Tax Act, 1961, read as follows:-

“2. The existing provisions of the Income Tax Act, 1961 do not allow any exemption against clubbing of interest income of a minor who has received a consolidated amount as maintenance. The existing provisions in the Income Tax Act, 1961 regarding clubbing of a minor's income with a parent's income are explained as under:-

i)      As per Sub Section (1A) of Section 64 of Income Tax Act, 1961, any income of a minor child, arising or accruing to the minor shall be included, in computing the total income of an individual whose total income (excluding the minor's income) is greater than his or her spouse, if marriage of the minor's parents subsists.

ii)     If marriage of minor's parents does not subsist, the minor's income as above shall be included in computing the total income of that parent who maintains the minor child.

Exceptions:-a) If the minor child is suffering from any disability of the nature specified in Section 80U, then clubbing provisions as above shall not apply.

b) If the minor child's income has arisen or accrued to him on account of any manual work done by him or on account of any activity involving application of his skill talent or specialized knowledge & experience, then also clubbing provision above shall not apply.

Deduction:- Under Section 10(32) of the Income Tax Act, 1961 an individual is entitled to exemption of Rs.1500/- in respect of each minor child if income of such minor as included in the individual's total income exceeds Rs.1500/-.

The statute contains exceptions from clubbing of income as given at (a) and (b) above to the general rule of clubbing of a minor child's income with his/her parent's income. The statute presently does not provide for any other exception.

3. During the proceedings in the above case, as directed by the Hon'ble High Court, the officers of the Income Tax Department were also present to assist the court. It was opinion of the court that the exception should also be created in such cases where the maintenance is provided for the minor children.

In keeping with the court's direction, a reference is drafted for tot the Hon'ble Law Commission of India to consider as to whether the Income Tax Act, 1961 requires amendment to create exception against clubbing of a minor's income accruing from maintenance money with either of the parent's income. In the opinion of the court, the circumstances of the minor having received maintenance money are different from say a minor in whose name some business has been started by either of the parent or who has been advanced some gift during the subsistence of marriage of parents. Therefore, an exception against clubbing of income from maintenance money is a desirable thing, in case of minor children residing with a single parent.

4. In view of this if may be proposed that a clause 'c' is added to proviso of section 64(1A) of the Income Tax Act, 1961, which is as under:-

(c)    Income accruing or arising to the minor from the maintenance money provided for the minor, where the marriage of the minor's parents does not subsist.”

5. The Income Tax Act, thus, does not exempt interest income accruing to a minor, on an amount deposited as maintenance and his or her income is clubbed with his/her parent's/guardian, thereby requiring the minor apart from paying income tax to pay tax at the rate paid by his guardian. The matter is, therefore, forwarded to the Law Commission of India and the Ministry of Women and Child Development, New Delhi, for consideration whether suitable amendments are required to be made in the Income Tax Act, 1961, to ensure that maintenance settled on minors is exempted from income tax or is treated differently.

6. A copy of the reference be forwarded to the Law Commission of India, New Delhi and to the Ministry of Women and Child Development, New Delhi.

7. Disposed of accordingly.

Order accordingly.

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