Article Details

TAX TALK-31.07.2017-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

The judiciary has held that a lump-sum receipt in the form of Alimony will not be taxable in the hands of the recipient whereas monthly alimony payments will be treated as income in the hands of the recipient...

Taxation of Alimony

Query 1]
Assessee is a Divorcee. As per the decree of divorce, she got the following benefits:
1] Onetime alimony in Dec-2016 by Bank DD.
2] Her minor [aged three years] daughter [who is in the custody of the Divorcee mother] gets for the purpose of her maintenance Rs. 15,000/- per month, which is directly credited by the minor’s father to her Separate Savings Account (operated by the Divorcee mother guardian).
3] The minor’s father remits Rs. 5,000/- per month to the minor’s S/B for the purpose of crediting to the minor’s Sukanya Samruddhi A/C.
The Divorcee has separate Salary income (10% slab) & she will be filing her IT return for AY 2017-18 in ITR -2. She will not claim the benefit for Rs. 60,000/- (3 above). She will club the interest on S/B A/C of the minor in her own interest income. Now the specific Queries for filing ITR-2 are as under:
i] Where to show the alimony [1 above] amount in the ITR-2?
ii] Whether the amount at no 2 above is to be treated as minor’s income & added to the Divorcee’s income?
Iii] Whether to show the interest on Sukanya Samruddhi A/C as the exempt income of the Divorcee?
iv] Whether to show the S/B account of the minor in item no 14 of Part B – TI in ITR -2 as the Divorcee is the signatory to the A/C in the capacity of mother guardian? [dk********@yahoo.co.in]

Opinion:

“In every marriage more than a week old, there are grounds for divorce. The trick is to find, and continue to find, grounds for marriage”- Robert Anderson
Life is not about waiting for the storm to pass. It’s about learning how to dance in the rain. And the funny part, divorce is the one human tragedy that reduces everything to cash.

The Income Tax Act does not contain specific provisions relating to taxation of “Alimony”. Even the meaning of “Income” as given in section 2(24) of the Income-tax Act does not specifically include “Alimony”. Definition of "income" as contained in the Act is merely an inclusive definition and doesn’t throw any direct light as to whether the alimony under a decree could be regarded as "income". Whether alimony can be treated as income or not need to be ascertained by visiting the relevant decided case laws as no clear cut guideline is available in the provision & scheme of the Act.

In CIT vs Shaw Wallace and Co. AIR (1932) PC 138; (1932) 2 Comp. Cases 276, it was held that “Income” connotes a periodical monetary return coming in with some sort of regularity or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus, income has been likened pictorially to the fruit of a tree, of the crop of field.

Before arriving at the relevant case laws on taxation of alimony, readers need to get familiar with two terms - Capital Receipt and Revenue Receipt. A general principle followed is that all revenue receipts are taxable unless specifically exempted by the Act whereas all Capital receipts are not taxable unless otherwise provided by the Act.

On taxation of alimony, Bombay High court has considered the scope of “income” for levy of income tax in the case of Princess Maheshwari Devi of Pratapgarh vs CIT (1983) 33 CTR 117 (Bom) & has arrived at the following conclusions:

Alimony is an extension of the husband’s obligation under Hindu Law to maintain his wife. To constitute a revenue receipt, a source for the receipts must be established and it is established in the form of the decree.
The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be "income" within the meaning of the said term in the said Act.
The pleading of the assessee that the alimony is not a return for any past service or any definitive consideration and is merely a personal payment was not accepted by the court. It was held that
“The ‘return’ in our view, in a case like this, can never be interpreted as meaning only a return for labour or skill employed on capital invested”.

3. With regard to the one time lump-sum receipt of alimony, it was held that the “right” to receive the lump-sum payment is undoubtedly a capital asset. One-time receipt of the asset is not a regular income but is a capital receipt & hence would not be taxable. It was held that
“In our view, from the point of view of taxability, the decree must be regarded as a transaction in which the right of the assessee to get maintenance from her ex-husband was recognized and given effect to. That right was undoubtedly a capital asset. By the decree that right has been diminished or partly extinguished by the payment of the lump-sum amount”.

The same ratio was arrived at in the case of ACIT vs Meenakshi Khanna (2013) 143 ITD 0744 (Del).

In short, the judiciary has held that a lump-sum receipt in the form of Alimony will not be taxable in the hands of the recipient whereas monthly alimony payments will be treated as income in the hands of the recipient.

Whether clubbing provision applies in the case of alimony:
By virtue of specific clubbing provision, where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration, any income from such asset is deemed to be the income of the transferor.
However, the clubbing provision is not applicable if the asset or amount is transferred in connection with an agreement to live apart as the relationship cease to exist. For clubbing provisions to apply, continuity of the relationship of “spouse” is essential. Even if the assets had been gifted to a spouse during the period in which they were married, once the divorce takes effect, the clubbing provisions cease to apply.

Whether lump-sum amount paid as alimony is taxable u/s 56(2)(x):
After the above judicial pronouncements, Income Tax Act-1961 has been amended so as to provide that where any amount/property is received by any person “without consideration” and if its value exceeds Rs. 50,000/- then it would be treated as income of the recipient u/s 56(2)(x). Though it is basically intended to tax the gift, but its wording stretches to various other transactions also. Whether, in cases of divorce, can it be said that the recipient has received the assets without consideration? In India, the law of the land places an obligation on the husband to maintain his wife which arises out of the status of a marriage. Right to maintenance forms a part of the personal law. In divorce, wife relinquishes her personal right of claiming monthly maintenance as provided under law. In my opinion, “relinquishment of right of maintenance” or “an agreement to live apart separately” is the “consideration” against which alimony is received in a divorce case and so the amount would not be taxable u/s 56(2)(x) as it is not for inadequate consideration.

Coming to specific issues raised in the present query,

There is no column/ requirement to report one time/ lump-sum alimony in the ITR-2 & hence it cannot be & need not be incorporated.
The income of the minor will be required to be clubbed with the income of the mother.
Yes, interest income on Sukanya Samruddhi A/C is required to be shown as the exempt income of the Divorcee.
Saving bank account of the assessee is required to be incorporated in item no 14 of Part B – TI in ITR -2 as the Divorcee income. In my opinion, quoting minor’s account may not be necessary at Point No. 14.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.com]