PERSONAL TAX: Minor's capital gains clubbed with parent's

The Income Tax Act '(the Act') states that any income earned in the minor's name shall be taxable and should be added to the income of their parents in their tax returns. This income is added to the total income of that parent whose income is relatively higher among the two. This provision is commonly referred to as clubbing of income of minors in the hands of their parents. However, the Act exempts any income earned by a minor by way of manual work done by him or on account of any activity which involves application of his skill, talent or specialised knowledge and experience, for example, acting or doing some odd jobs.

In this week's case, a taxpayer's (mother) minor daughters got a property by way of a settlement deed from their grandmother. After obtaining the high court's permission, the mother sold the property. While granting permission for the sale of this property, the court imposed a condition that the sale proceeds shall be deposited in a bank account for the purpose of securing the minor daughters' interests, which the mother complied with. Further, the mother utilised these proceeds to invest in a new residential property in the joint names of herself and her husband.

During assessment, the tax officer was of the view that capital gains arising on account of sale of the property was taxable in the hands of the mother as per the relevant provisions for clubbing of minors income. The officer also restricted the claim made by the taxpayer in relation to the capital gains exemption to the extent of 50% as the investment was made in joint names although the taxpayer's husband was not having any share in the property that was sold.

The taxpayer went in appeal but did not get any relief at the first appellate level. She accordingly filed a second appeal with the tax tribunal. Before the Chennai Tax Tribunal, the taxpayer mainly put up two grounds of appeal.

First, the taxpayer argued that as the property belongs to the minor daughters it cannot be assessed in her hands. With reference to the relevant clubbing provisions of the Act, the taxpayer submitted that the words "any such income" as used in the Act may not include capital gains arising out of transfer of property which was obtained by the minor daughters from their grandparents. After a careful reading of the clubbing provisions, the tribunal ruled that the tax officer has rightly clubbed the minors' income in the mother's hands.

The second ground for the taxpayer's argument was whether the tax officer was justified in restricting the claim for exemption to only 50% on account of the investment being made in the joint names of self and husband. The tribunal observed that under the common law, the taxpayer and husband are one and the same. Therefore, when an investment was made in the name of the taxpayer and her husband, it has to be considered that the investment was made by the taxpayer herself. The common social practice to purchase a property in joint names cannot be ignored by judicial authorities.

The tribunal said that the legal intent behind the LTCG exemption is to promote housing. Thus, even though the property that was sold did not have the taxpayer's husband as joint owner, the tribunal observed that the legal intent was achieved. Besides, the taxpayer's husband cannot be considered as a third party, as far as the investment made by the taxpayer is concerned. Hence, the tribunal ruled that the mother taxpayer is eligible for 100% exemption under section 54F of the Act.

The writer is a Sebi-registered investment advisor