Friday, 28 August 2015

SC rules clubbing provisions inapplicable to income arising to trust created for benefit of minors which is deferred beyond period of minority


This Tax Alert summarizes a recent ruling of the Supreme Court (SC) in the case of Kapoor Chand v. ACIT (Taxpayer), wherein the issue was whether income from a partnership firm arising to a trust created for the benefit of minors was taxable in the hands of the parent by virtue of the clubbing provisions as were operative during the year under appeal.


In terms of the trust deed, such income could not be received by or spent for the benefit of a minor till attaining majority. In case any minor died before attaining majority, his or her share would vest into the surviving minor.


The SC held that the clubbing provisions were attracted only when income results to minors during their minority. In the present case, due to operation of trust deed covenants, the minor did not receive any benefit during the year. Benefit, if at all, would accrue when the minor attained majority. The SC held that income should first result in benefit to the minor during the tenure of minority. Where benefit is deferred till attaining majority, the minor does not derive any benefit during minority and, therefore, the clubbing provisions were not attracted.


Compared to the provisions of the ITL examined by the SC, as per the present scheme of taxation of partnership firms under the ITL, the share of profits received by the partner is exempt from tax. Consequently, the specific provision requiring clubbing of the share of profit earned by a minor from admission to partnership in a firm has been deleted.


Although the specific provision with which the SC was concerned no longer exists in the statute, the principle laid down by the SC, to the effect that income must first accrue to the minor, holds good in the context of the present clubbing provisions.


The limited question before the SC was whether the clubbing provisions, which envisage taxability of income earned by a minor, can operate to cover income which can accrue to a child only after he or she has attained majority.


This SC decision may be considered applicable to the specific facts.

In the course of judgment, without expressing any opinion, the SC observed that the subject income may be taxed in the hands of the child when he or she receives income upon attaining majority or could have been taxed in the hands of the trustee of the trust as a representative assessee. In the absence of further guidance in the ruling, the impact of these observations will need a proper review in the facts of the case

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