1. Facts of the Case
- The assessee, an individual woman, was entitled to 1/3rd share in her deceased husband’s estate.
- The remaining 2/3rd share of the estate was transferred in the name of her minor daughter.
- This minor’s share was kept in a fixed deposit in a bank and was produced before the Court for safe custody until the minor attained majority.
- The assessee filed an application under Section 197(1) of the Income Tax Act seeking a certificate for non-deduction of tax at source (TDS) on interest accruing annually on the fixed deposit.
- The Income Tax Officer (ITO) rejected the application, stating that the interest income of the minor daughter was liable to be clubbed with the assessee’s income under the Act.
2. Issues in the Case
- Is the interest income earned on the fixed deposit in the minor daughter’s name liable to be clubbed with the mother’s (assessee’s) income under Section 64(1A) of the Income Tax Act?
- Can the assessee validly seek a certificate under Section 197(1) for non-deduction of TDS when the income technically belongs to a minor, and is under court custody?
- Whether the Income Tax Officer’s rejection of the application under Section 197 is legally justified?
3. Legal Principles Covered
A. Section 64(1A) – Clubbing of Minor’s Income
As per Section 64(1A) of the Income Tax Act, 1961:
“In computing the total income of any individual, there shall be included all such income as arises or accrues to his/her minor child, except where the income arises on account of the child’s own manual work or application of skill, talent or specialized knowledge.”
Therefore, any passive income like interest on bank FDs earned by a minor child is to be clubbed with the income of the parent whose total income (excluding such income) is greater.
B. Proviso to Section 64(1A)
Clubbing is not applicable where the income is arising to the minor on account of the application of the assets inherited by the minor due to the death of the parent.
If the minor has inherited assets from the deceased father, the interest income arising from that inheritance is NOT subject to clubbing.
This proviso is directly applicable in this case, as the minor daughter inherited 2/3rd share of her deceased father’s estate, and the interest income arises from this inherited amount.
C. Section 197(1) – Application for Certificate of Lower or Nil TDS
- This section allows a person to apply to the Assessing Officer to issue a certificate authorizing no deduction or lower deduction of tax at source, if total tax liability is nil or lower.
- The AO is required to examine the nature of income and ownership of the income while deciding the application.
D. Relevant Case Law
- Shivani Khanna v. CIT (2000) 248 ITR 590 (Delhi HC)
- Held that income arising to a minor from assets inherited from a deceased parent is not liable to be clubbed under Section 64(1A).
- CIT v. Manjula Devi (1970) 77 ITR 208 (SC)
- Confirmed that income kept in court custody for the benefit of the minor is still assessable in the hands of the minor, unless provisions of clubbing apply.
4. Possible Judgement
The action of the Income Tax Officer in rejecting the application under Section 197(1) is incorrect based on the legal and factual matrix.
- The interest income accrued from the fixed deposit is on account of assets inherited by the minor (from the deceased father).
- Therefore, by proviso to Section 64(1A), clubbing provisions do not apply.
- The income should be taxed in the hands of the minor daughter, not the assessee.
- Since the minor has no other income, her total income may fall below the basic exemption limit, and no TDS should be required.
- Hence, the assessee’s application under Section 197(1) for a certificate of no deduction of tax at source is valid and should have been allowed.
