Wp(C)/9919/2019 Of Sibi Joy v. Income-Tax Officer (Tds)

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR. JUSTICE GOPINATH P. THURSDAY, THE 5 DAY OF JANUARY 2023 / 15TH POUSHA, 1944WP(C) NO. 9919 OF 2019 PETITIONERS: 1SIBI JOY,BETHEL, VNRA 110, VIKAS NAGAR, SREEKARIYAM, TRIVANDRUM 695 017.2GRACE MARY VARGHESE (MINOR)REPRESENTED BY MOTHER MRS. SIBI JOY,BETHEL, VNRA 110, VIKAS NAGAR, REEKARIYAM, TRIVANDRUM 695 017.BY ADVS.D.S.SREEKUMARANT.S.MAYA (THIYADIL)SHRI.MAHESH ASHRI.RAMAKRISHNAN P RESPONDENTS: 1INCOME-TAX OFFICER (TDS)AAYAKAR BHAVAN, KAWDIAR, TRIVANDRUM 695 003.2COMMISSIONER OF INCOME -TAX (TDS)I.S PRESS ROAD, KOCHI 682 018.3MANAGER,STATE BANK OF INDIA, SREEKARIYAM BRANCH, TRIVANDRUM 695 017.BY ADVS.SRI.CHRISTOPHER ABRAHAM, S.C., INCOME TAX DEPARTMENTTHIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON05.01.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T 'C.R.' The writ petition has been filed challenging Ext. P5 order of the 1[st] respondentand Ext. P6 order of the 2[nd] respondent. According to the petitioners, the income(interest on fixed deposits) accruing to the 2nd petitioner - a minor - cannot beclubbed with the income of the 1st petitioner and that tax at source cannot bededucted in respect of the interest income accruing on the fixed deposit under theprovisions of the Income Tax Act, 1961 (the Act). 2.The facts of the case, in brief, are that the 1[st] petitioner herein is aregular income tax assessee. The 2[nd] petitioner (minor) is the daughter of the 1[st]petitioner. The husband of 1[st] petitioner / father of the 2[nd] petitioner, Vinod EasawVarghese, died in an accident. TheIst Addl. Subordinate Judge’s Court,Thiruvananthapuram, vide Ext.P3 order in OP(Succession) No. 44/2008 (dated12.11.2009), held that the 1[st] petitioner is entitled to 1/3[rd] share and that the 2[nd]petitioner is entitled to 2/3[rd] share from the estate of the deceased, which includesamounts received as compensation owing to the death of the aforesaid Vinod EasawVarghese. In terms of Ext.P3 order, the 2[nd] petitioner’s share was to be deposited asa fixed deposit in the State Bank of India, and the fixed deposit receipt was to beproduced before the Court for safe custody until the 2[nd] petitioner attains majority.It is the case of the petitioners that the 3[rd] respondent Bank cannot deduct tax atsource under S.194 A of the Act on the interest income accruing annually on thesaid fixed deposit of the 2[nd] petitioner. The petitioners preferred Ext.P4 applicationunder section 197 (1) of the Act before the 1[st] respondent seeking a certificate fornon-deduction of tax with respect to interest accruing annually on the said fixed deposit. The 1[st] respondent vide Ext.P5 order rejected the said application on theground that the income of the minor has to be clubbed with the income of the 1[st]petitioner (mother of the 2[nd] petitioner), for the purpose of taxation under the Act. Arevision petition was preferred under Section 264 of the Act before the 2[nd]respondent, who vide Ext.P6 order (dt. 02/11/2012), did not find any ground toissue any directions in exercise of jurisdiction under Section 264 of the Act. Thepetitioners are therefore before this Court under Article 226 of the Constitution ofIndia. deposit. The 1[st] respondent vide Ext.P5 order rejected the said application on theground that the income of the minor has to be clubbed with the income of the 1[st]petitioner (mother of the 2[nd] petitioner), for the purpose of taxation under the Act. Arevision petition was preferred under Section 264 of the Act before the 2[nd]respondent, who vide Ext.P6 order (dt. 02/11/2012), did not find any ground toissue any directions in exercise of jurisdiction under Section 264 of the Act. Thepetitioners are therefore before this Court under Article 226 of the Constitution ofIndia. 3.Sri. D.S. Sreekumaran, the learned counsel appearing for thepetitioners would contend that the petitioners were entitled to the death benefits ofthe deceased from his employer and also as part of the motor vehicle accident claim.It is submitted that the 2/3[rd] share of the death benefits (an amount of Rupees Sixtylakhs) was deposited in the name of the 2[nd] petitioner as per Ext.P3 order of theCourt and that the fixed deposit receipt is produced before the Court for safecustody. It is submitted that since the order of the Court clearly stipulates that anypayment to be made to the minor only when she attains majority, any benefit(interest income) arising out of the fixed deposit will also be received by the 2[nd]petitioner only when she attains majority. It is submitted that in the absence ofreceipt of any income in the intervening period, tax cannot be deducted at source. Itis submitted that since immediate or deferred payment of benefit is not available tothe 2[nd] petitioner during her minority and the benefit of the fixed deposit togetherwith accumulated interest is payable only after she attains majority; tax cannot bededucted u/s 194 A. It is contended that the 1[st] respondent, without appreciating thepeculiar fact circumstances in the present case, issued Ext.P5 order. The learned W.P (C) No.9919/2019 counsel pointed out that, in view of the aforesaid order, the income of the 2[nd]petitioner has to be clubbed with the income of the 1[st] petitioner (mother of the 2[nd]petitioner) as per Section 64(1A) of the Income Tax Act and that the 1[st] petitioner ismade liable to pay tax for the interest income with respect to the said fixed depositof the minor. It is submitted that the 1[st] petitioner is not liable to pay income tax onthe interest accruing annually from the fixed deposit of the 2[nd] petitioner. It issubmitted that since there is no income earned by the 2[nd] petitioner during herminority, the interest income could not be clubbed with the income of the 1[st]petitioner. It is also submitted that the 2[nd] petitioner maintains a cash system ofaccounting, and therefore, clubbing of income u/s 64 (1A) of the Act in the hands ofthe 1[st] petitioner cannot be justified, as no amount (income) has actually beenreceived by the petitioners. The learned Counsel submits that the 2[nd] respondentfailed to appreciate the peculiar circumstance in which the petitioners are placedand erroneously refused to exercise jurisdiction under Section 264 of the Act. Insupport of his contentions, the learned counsel for the petitioners placed reliance onthe judgment of the Supreme Court in Commissioner of Income Tax, Gujaratv M.R. Doshi (Dead) by Lrs. 1995 (supp) 3 SCC 464 (1995) 211 ITR 1) &Kapoor Chand v Asst. Commr. of Income Tax, (2015) 14 SCC 405, tobuttress his contentions. Relying on the above decisions, it is contended for thepetitioners that there is no immediate or deferred benefit for the minor during theperiod of her minority. The benefit is to be received only after the period of herminority; therefore, the petitioners are not liable to pay tax with respect to the saidfixed deposit. It is further submitted for the petitioners that, in the present case,taxation of income in the hands of the 1st petitioner is legally unsustainable. Reference is made to Sections 5 & 145 of the Act. It is also submitted that therespondents have no jurisdiction to change the order of Sub Court with respect tothe said fixed deposit and the department can initiate action to collect tax from the2nd petitioner only when she becomes major. It is submitted that if the interestincome accrued from the said fixed deposit is clubbed with that of the 1[st] petitioner’sincome, the same will result in payment of heavy tax by the 1[st] petitioner. It iscontended that, if the provisions of section 64(1A) provide for the clubbing ofincome (whether received or not) of the minor that would render the provision ultravires the Constitution of India as it requires an individual assessee to pay tax on anincome that the minor is not entitled to receive during her minority. It is contendedthat the intention and purpose of enactment would not be to cause a heavy burdenon another person who is not receiving any benefit out of the interest incomeaccrued annually. It is contended that the same is in violation of the principles ofnatural justice. 4.Adv. Christopher Abraham, the learned Standing Counsel appearing forthe Respondent department, would contend that Ext.P5 and Ext.P6 orders pertainto the assessment year 2013-2014. It is submitted that the impugned orders werepassed in the year 2012. Therefore, the cause of action for the present case arose inthe year 2012 and the petitioners did not pursue further legal proceedingschallenging the said orders. It is submitted that tax is being deducted at sourceregularly from the interest credited in the said fixed deposit account from the year2012. It is submitted that petitioners have acquiesced for such deduction all theseyears; therefore, they cannot challenge the same after a delay of more than 6 yearswithout any justifiable reason for the inordinate delay caused in filing the petition. W.P (C) No.9919/2019 He submits that the question arising for consideration in the present writ petition iswhether the 3[rd] respondent bank can deduct tax at source u/s 194A of the Act fromthe interest income that accrues to the 2[nd] petitioner and whether the interestincome of the minor can be clubbed with that of 1[st] petitioner under section 64 (1A)of the Act. The learned counsel contends that, a reading of section 194A makes itclear that the bank with whom the fixed deposit is maintained has the liability todeduct tax at the applicable rate when the interest accrued in the fixed deposit iscredited to any account. It is submitted that the bank has to credit the accruedinterest after deducting tax at applicable rates so as to claim a deduction of theinterest so paid as an expense in computing its (bank’s) income each year. It iscontended that section 194A mandates the deduction of tax at source at thehappening of the earliest event of credit or payment. It is submitted that the creditof the interest takes place annually though the right to receive the interest alongwith the principal is postponed till the 2[nd] petitioner attains majority. It is submittedthat since income accrues on the fixed deposit each year, such income is taxable asper the provisions of the Income Tax Act. It is submitted that there is no infirmity inExt.P5 order of the 1[st] respondent, as also in Ext.P6 order of the 2[nd] respondent. It issubmitted that the interest accruing annually on the fixed deposit is liable to beclubbed with the income of the 1[st] petitioner u/s 64(1A) of the Income Tax Act. Thelearned counsel would contend that the decision rendered by the Supreme Court inM.R. Doshi (supra) is not applicable to the present case. It is contended that thecase relates to a trust deed created in favor of a minor and the income was to vest inthe minor only after the attainment of majority and thus there was deferment ofbenefit until such time and the assessment of the benefit in the hands of the parent W.P (C) No.9919/2019 W.P (C) No.9919/2019 on any earlier occasion was against the provisions of section 64(1)(v). It iscontended that the provisions of section 64(1)(v) [since deleted] are materiallydifferent from the S.64(1A) of the Income Tax Act and, therefore, the interpretationgiven by the Supreme Court to Section 64(1)(v) of the Act cannot be applied whileinterpreting the provisions of section 64(1A) of the Act. The learned counsel alsosubmitted that the decision in Kapoor Chand (supra) relates to trust created forthe benefit of two minor children and, therefore, is not applicable to the presentcase. It is contended that, in the present case, section 64(1A) of the Act requires theclubbing of the minor’s income with that of the parent when it accrues to the minor.It is further submitted that the 3[rd] respondent bank deducting TDS u/s 194 A andclubbing of the interest income of the minor with the income of 1[st] petitioner u/s 64(1A) is independent of each other and that the petitioners are liable to pay tax forthe interest income accruing annually. 5.I have considered the contentions raised. In order to appreciate thecontentions raised, it would be useful to refer to the text of Section 64(1A) of theAct. Section 64 (1A) of the Act reads as under:- “(1A) In computing the total income of any individual, there shall beincluded all such income as arises or accrues to his minor child, not being aminor child suffering from any disability of the nature specified in section80U: Provided that nothing contained in this sub-section shall apply in respectof such income as arises or accrues to the minor child on account of any— (a) manual work done by him; or (b) activity involving application of his skill, talent or specialised knowledge and experience. Explanation. —For the purposes of this sub-section, the income of the minorchild shall be included, — (a) where the marriage of his parents subsists, in the income ofthat parent whose total income (excluding the income includibleunder this sub-section) is greater; or (b) where the marriage of his parents does not subsist, in theincome of that parent who maintains the minor child in theprevious year, and where any such income is once included in the total income of eitherparent, any such income arising in any succeeding year shall not beincluded in the total income of the other parent, unless the Assessing Officeris satisfied, after giving that parent an opportunity of being heard, that it isnecessary so to do.” It is clear from the provision that income accruing or arisingin the hands of a minor child will be added to the parent's total income. Exceptions are providedonly if income arises or accrues to the minor child on account of any manual workdone by him or any activity involving application of his skill, talent or specializedknowledge and experience. The Income Tax Act, does not exempt the interestincome accruing to 2nd petitioner on an amount received as part of death benefitsof her deceased father even if, by order of Court, that income can be utilized onlyafter the minor attains majority. The contention that the income can be taxed onlyafter the minor attains majority cannot be accepted, as the income has accrued, onthe bank crediting the account of the 2nd petitioner every year with the amount ofinterest payable. M.R. Doshi (supra) proceeds on the proper interpretation to beplaced on the provisions of Section 64(1)(v) of the Act. That provision (as extractedin the judgment) reads as follows: - “64. In computing the total income of any individual, there shall be includedall such income as arises directly or indirectly—*** (v) to any person or association of persons from assets transferredotherwise than for adequate consideration to the person or association ofpersons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minorchild (not being a married daughter) or both.” On an interpretation of that provision, it was held: - “64. In computing the total income of any individual, there shall be includedall such income as arises directly or indirectly—*** (v) to any person or association of persons from assets transferredotherwise than for adequate consideration to the person or association ofpersons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minorchild (not being a married daughter) or both.” On an interpretation of that provision, it was held: - “5. As the facts show, the trusts in the present case have this cumulativeeffect, that the income therefrom is to be accumulated until the attainmentof majority by the assessee's three sons; the cumulative income is then to bedivided in three equal shares and one such share is to be paid to each son.The payment, therefore, is to be made after each of the sons attainsmajority. Section 64(1)(v) requires, in the computation of the total incomeof an assessee, the inclusion of such income as arises to the assessee fromassets transferred, otherwise than for adequate consideration, to the extentto which the income from such assets is for the immediate or deferredbenefit of, inter alia, his minor children. The specific provision of the law,therefore, is that the immediate or deferred benefit should be for the benefitof a minor child. Inasmuch as in this case the deferment of the benefit isbeyond the period of minority of the assessee's three sons, since the assetsare to be received by them when they attain majority, the provisions ofSection 64(1)(v) have no application.” Kapoor Chand (supra)was decided with reference to Section 64(1)(iii) of theAct as well as Explanation 2-A thereof and those provisions are completely differentfrom the provisions of Section 64 (1A) of the Act. Therefore, Kapoor Chand(supra) also does not come to the aid of the petitioners. Therefore, the argumentsraised on the authority of the aforesaid judgments of the Supreme Court can only berejected. 6.The contention of the learned counsel that the provisions of section64(1A) of the Income Tax Act are ultra vires the Constitution of India, cannot beaccepted. The question was considered by a Full Bench of the Madras High Court inK.M Vijayan and others v Union of India and others, (1995) 215 ITR 371Mad, where it was held: - “33. In view of the foregoing reasons, we uphold the constitutional validityof sub-section (1A) of section 64 of the Income-tax Act. We also hold that it is within its legislative competence for Parliament to enact sub-section (1A) ofsection 64 of the Income-tax Act, since it falls under Schedule VII, List I,entry 82. Further, we hold that sub-section (1A) of section 64 of the Income-tax Act, 1961, is not violative of article 14 and article 19 of the Constitution.In that view of the matter, it is not possible to strike down sub-section (1A)of section 64 of the Income-tax Act as illegal, unconstitutional and ultravires the Constitution as alleged by the petitioners. In the result, the writpetitions are dismissed. No costs” I am in complete agreement with the view taken by the Madras High Court. Astatutory provision can be declared unconstitutional only on the following 1rounds;(i) Violation of the fundamental rights guaranteed under Part-III of theConstitution; (ii) Lack of legislative competence; (iii) Violation of the basic structuredoctrine; and (iv) Manifest arbitrariness {vide Shayara Bano and others v.Union of India and others, (2017) 9 SCC 1}. None of these grounds are madeout. I am in complete agreement with the view taken by the Madras High Court. Astatutory provision can be declared unconstitutional only on the following 1rounds;(i) Violation of the fundamental rights guaranteed under Part-III of theConstitution; (ii) Lack of legislative competence; (iii) Violation of the basic structuredoctrine; and (iv) Manifest arbitrariness {vide Shayara Bano and others v.Union of India and others, (2017) 9 SCC 1}. None of these grounds are madeout. 7.The ground of extreme hardship to the 1st petitioner if she is requiredto pay tax on the income accruing to the minor is no ground to hold that the incomecannot be clubbed with that of the 1st petitioner. Harshness in a statutory provisionis no ground to hold that it should not be applied in a given case. Moreover, I am ofthe view that if this income were to be taxed only after the 2nd respondent attainsmajority, the financial burden on the 2nd petitioner when she attains the age ofmajority will be huge. Moreover it would be practically impossible to get the creditof the tax deducted at source, by the bank in the year in which the minor attainsmajority. Further the financial hardship to the 1st petitioner does not appear to beso great as projected in the writ petition. The tax deducted at source by the 3rdrespondent bank as per section 194 A (10%) will be available as credit, (Rule 37BAof the Income Tax Rules, 1962). The benefit of threshold exemption is also available. Considering that the 1st petitioner will have to bear the tax only on thebalance amount and also considering that the interest income on the sum of Rs.60lakhs cannot create a huge financial burden on the 1st petitioner, the plea ofextreme prejudice/difficulty to the 1st petitioner is only to be rejected. 8.The provisions of Sections 5 of the Act have no relevance indetermining the questions raised. Section 145 on which reliance has been placed,along with the argument that the 2[nd] petitioner follows ‘cash system’ and therefore income can be recognized only on actual payment, reads as under:- “145. Method of accounting.- (1) Income chargeable under the head "Profitsand gains of business or profession" or "Income from other sources" shall,subject to the provisions of sub- section (2), be computed in accordance witheither cash or mercantile system of accounting regularly employed by theassessee.” The 2[nd] petitioner is a minor. Therefore, the question of her following a “...system of accounting regularly employed by the assessee” does not arise for consideration. 9.No other point has been raised. The impugned orders are not perverse or contrary to law. The writ petitionfails and it is accordingly dismissed. AMG Sd/-GOPINATH P. JUDGE APPENDIX OF WP(C) 9919/2019 PETITIONER EXHIBITS EXHIBIT P1TRUE COPY OF DEATH CERTIFICATE OF LATE VINOD EASAW VARGHESE DATED 18-11-2008VARGHESE DATED 18-11-2008 EXHIBIT P2TRUE COPY OF BIRTH CERTIFICATE OF GRACE MARRY VARGHESE DATED 03-06-2008VARGHESE DATED 03-06-2008 EXHIBIT P3TRUE COPY OF ORDER OF THE HON'BLE SUB COURT TRIVANDRUM IN OP(SUCCESSION) NO. 44/2008 DATED 12--11-2009TRIVANDRUM IN OP(SUCCESSION) NO. 44/2008 DATED 12--11-2009 EXHIBIT P4TRUE COPY OF APPLICATION U/S. 197 OF IT ACT IN FORM NO. 13 DATED 04-06-2012.NO. 13 DATED 04-06-2012. EXHIBIT P5TRUE COPY OF PROCEEDINGS OF THE INCOME TAX OFFICER (TDS), TRIVANDRUM DATED 16-07-2012.(TDS), TRIVANDRUM DATED 16-07-2012. EXHIBIT P6TRUE COPY OF ORDER U/S. 264 OF THE COMMISSIONER OF INCOME TAX (TDS) COCHIN DATED 02-11-2012.INCOME TAX (TDS) COCHIN DATED 02-11-2012.