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Not a minor mistake
September, 23rd 2006
An advertisement by the Income-Tax Department shows a child in its nappies reminding his father about the impending due date for payment of advance tax. The Department seems to have taken the adage `child is a father of man' a tad too seriously. It is one thing for a toddler to shame its parents by switching off the lights and fans in a room not in use but quite another to proffer innocent reminder on a profound tax matter which even dyed-in-the-wool accountants often forget. Section 27 of the Income-Tax Act, 1961, inter alia, says: "an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred." The way the provision is couched one gets the impression that the transferor would be permanently fastened with income-tax liability emanating from it, though the provision admittedly does not say so in so many words. It should have for good measure added that on the minor attaining majority this deeming provision would cease to operate which seems to be the intention of Parliament as is clear from a careful reading of the parallel provision on the issue of minor contained in Section 64(1A), which unambiguously states that the income of a minor child subject to a few specified exceptions would be added to the taxable income of its parent, father or mother, whoever has got a greater income before such addition. Clubbing of income This leaves no one in doubt the clubbing of a minor's income ceases once he ceases to be a minor. But not so under Section 27. A careful reading of the Section reveals that once a gift of a house property is made to a minor, the parent who made the gift would be deemed to be the owner of such property for all times to come till he/she is alive. Ditto with regard to gifts of house property to one's spouse. The Supreme Court's view in Philip John Plasket Thomas vs CIT (1963 49 ITR 97) in the context of Section 16(3) (a) (iii) of the I-T Act of 1922, which corresponds to Section 64(1) (iv) of the I-T Act, 1961, that the relationship of husband and wife should not only have existed at the time of gift but also at the time of accrual of income, cannot come to the rescue of those coming under the purview of Section 27 which is a separate and independent code for taxing income from house property. Section 64(1)(iv) reads as follows: "In computing the total income of any individual, there shall be included all such income as arises directly or indirectly, subject to the provisions of clause (i) of Section 27, to the spouse of such individual from the assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart." On the language of Section 64(1)(iv), the apex court's views are unexceptionable. But the court will find it difficult to grant the same relief when confronted with a matter under Section 27. This is because while Section 64 trains it sight on both the asset and the income, Section 27 fixes the ownership issue for tax purposes and trains its sights only on the house property. And this is done with reference to the relationship at the time of transfer. It is for Parliament to step in and set right the incongruence if it feels that its intention was not to stretch this deeming fiction of ownership beyond the minority of the child of the transferor and beyond the point where the relationship of spouse broke. S. Murlidharan (The author is a Delhi-based chartered accountant.)
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