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Kapoor Chand (Dead) v. Asstt. Commnr. of Income Tax

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 675 of 2005)Decided 14 Jul 2015
Civil Appeal No. 675 of 2005
Justice A.K. Sikri · Justice N.V. Ramana

Background

The appellant's brother-in-law had set up two trusts for the benefit of the appellant's two minor children. The trustees became partners in a firm and earned a share of the firm's profits for the 1980-81 year, which the Income Tax Department added to the appellant's own income under Section 64(1)(iii) of the Income Tax Act (income of a minor child from admission to benefits of a partnership). The trust deeds specifically barred the children from receiving this income until they turned 18. The appellant's challenge succeeded before the Commissioner (Appeals) but was reversed by the Income Tax Appellate Tribunal and then by the High Court of Uttaranchal.

Decision Breakdown

The Supreme Court held that Section 64(1)(iii), read with Explanation 2A, taxes income only if it is actually for the benefit of a "minor child", meaning the minor must have a real, direct, and vested benefit in the income during minority. Since both trust deeds expressly deferred any benefit until the children attained majority (and even then only contingently, since a deceased minor's share would pass to the sibling), the income could not be treated as the minor's income for the relevant year. The Court relied on its earlier ruling in CIT v. M.R. Doshi and held that deferment of benefit beyond minority takes the income outside the clubbing provision; the Department was not without a remedy, as it could tax the money when the children actually received it on attaining majority. The appeal was allowed and the High Court's judgment set aside.

Lesson Learnt

Income placed in a trust for a minor child is only clubbed with a parent's taxable income if the minor actually stands to benefit from it during minority: a trust that locks the money away until the child turns 18 escapes this clubbing rule, though the money becomes taxable later when the child finally receives it.

Official source (sci.gov.in)View Judgment (PDF)

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