Under section 64(1A) of the Income-tax Act, 1961, a minor child’s income is to be clubbed with that of one of his parents, subject to certain specific exceptions. As a consequence, a loss arising to the minor is also to be clubbed in the hands of the concerned parents. In this article, certain problems pertaining to carry-forward and set-off of loss in case of a minor who attains majority in a given assessment year is highlighted.
1. Introduction
The Finance Act, 1992 inserted sub-section (1A) to section 64 of the Income-tax Act, 1961, with effect from April 1, 1993, as amended till date, which reads as—
In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor child suffering from any disability of the nature specified in section 80U of the Act :
Provided that nothing contained in this sub-section shall apply in respect of such income as arises or accrues to the minor child on account of any—
manual work done by him; or
activity involving application of his skill, talent or specialised knowledge and experience.
Explanation.—For the purpose of this sub-section, the income of the minor child shall be included,—
where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub-section) is greater; or
where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year, and where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.
Child in relation to an individual includes a step-child and an adopted child of that individual.
Further, all earlier provisions relating to clubbing of minor’s income with his parents were deleted by the Finance Act, 1992 with effect from April 1, 1993.
As per the above-mentioned provisions, all income of a minor child will be clubbed with that of his parents except income earned by the minor child on account of any manual work done by him or any activity involving application of his skill, talent or specialised knowledge and experience, like the income of a child film artist.
The Finance Act, 1992 inserted sub-section (1A) to section 64 of the Income-tax Act, 1961, with effect from April 1, 1993, as amended till date, which reads as—
In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child, not being a minor child suffering from any disability of the nature specified in section 80U of the Act :
Provided that nothing contained in this sub-section shall apply in respect of such income as arises or accrues to the minor child on account of any—
manual work done by him; or
activity involving application of his skill, talent or specialised knowledge and experience.
Explanation.—For the purpose of this sub-section, the income of the minor child shall be included,—
where the marriage of his parents subsists, in the income of that parent whose total income (excluding the income includible under this sub-section) is greater; or
where the marriage of his parents does not subsist, in the income of that parent who maintains the minor child in the previous year, and where any such income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.
Child in relation to an individual includes a step-child and an adopted child of that individual.
Further, all earlier provisions relating to clubbing of minor’s income with his parents were deleted by the Finance Act, 1992 with effect from April 1, 1993.
As per the above-mentioned provisions, all income of a minor child will be clubbed with that of his parents except income earned by the minor child on account of any manual work done by him or any activity involving application of his skill, talent or specialised knowledge and experience, like the income of a child film artist.
2. Set-off of loss suffered by minor clubbed in parent’s hand
Similarly, any loss suffered by a minor under any head of income will be clubbed in the hands of his parents under section 64(1A) and will be set-off against any income of the parents under the same head of income or under some other head of income, as per the provisions of the Act.
Explanation 2 to section 64 says that for the purpose of this section, income includes loss.
Section 80 of the Act provides that notwithstanding anything contained in the Chapter (Chapter VI), no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139 of the Act, shall be carried forward and set-off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.
Carry-forward and set-off of loss referred to above relates to business loss under section 72(1); speculation business loss under section 73(2); capital gain loss under section 74(1) or 74(3) and loss incurred in maintaining race horses under section 74A(3).
As per the provisions of the Act, certain losses incurred during an assess-ment year which are not set off during the same assessment year as per the Act are to be carried forward to the next assessment year for set-off.
Similarly, any loss suffered by a minor under any head of income will be clubbed in the hands of his parents under section 64(1A) and will be set-off against any income of the parents under the same head of income or under some other head of income, as per the provisions of the Act.
Explanation 2 to section 64 says that for the purpose of this section, income includes loss.
Section 80 of the Act provides that notwithstanding anything contained in the Chapter (Chapter VI), no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139 of the Act, shall be carried forward and set-off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.
Carry-forward and set-off of loss referred to above relates to business loss under section 72(1); speculation business loss under section 73(2); capital gain loss under section 74(1) or 74(3) and loss incurred in maintaining race horses under section 74A(3).
As per the provisions of the Act, certain losses incurred during an assess-ment year which are not set off during the same assessment year as per the Act are to be carried forward to the next assessment year for set-off.
3. Problem arising during year in which minor attains majority
Now take the example of a minor child who has suffered long-term capital loss on sale of his investments in shares during the financial year ending on March 31, 1999 corresponding to the assessment year 1999-2000. This long-term capital loss under the head ‘Capital gains’ will be clubbed in the hands of one of his parents, say the father. This loss will be adjusted against any capital gain earned by his father. After adjustment of capital gain against capital loss, if any, capital loss is still left, the same will be allowed to be carried forward to next year corresponding to the assessment year 2000-2001, if return is filed as per section 139(3), read with section 80, of the Act. The minor becomes major during the subsequent financial year ending on March 31, 2000 corresponding to the assessment year 2000-2001.
Now, a pertinent question arises whether the minor child who attains majority during the next year will be eligible for carry-forward and set-off of the unabsorbed loss under the head ‘Capital gains’, determined in the hands of father though relating to the minor child, or his father will be eligible to carry forward and set-off the unabsorbed loss in his own hands.
As per section 64(1A), income of a minor child is deemed to be the income of the parents. This legal fiction is enacted for a limited purpose. But a legal fiction has to be carried to its logical conclusion. And as a natural corollary, a loss deemed to be the loss of parents under deeming provisions should be given effect to is logical conclusion and should be allowed to be carried forward and set off in the hands of parents subject to other provisions of the Act.
Further, the Supreme Court has held in CIT v. P. Doraiswamy Chetty [1990] 52 Taxman 346/183 ITR 559 that if husband and wife are partners in a firm and wife’s share is included in husband’s total income under section 64(1)(i), the husband is entitled to carry forward wife’s share of loss also.
Now take the example of a minor child who has suffered long-term capital loss on sale of his investments in shares during the financial year ending on March 31, 1999 corresponding to the assessment year 1999-2000. This long-term capital loss under the head ‘Capital gains’ will be clubbed in the hands of one of his parents, say the father. This loss will be adjusted against any capital gain earned by his father. After adjustment of capital gain against capital loss, if any, capital loss is still left, the same will be allowed to be carried forward to next year corresponding to the assessment year 2000-2001, if return is filed as per section 139(3), read with section 80, of the Act. The minor becomes major during the subsequent financial year ending on March 31, 2000 corresponding to the assessment year 2000-2001.
Now, a pertinent question arises whether the minor child who attains majority during the next year will be eligible for carry-forward and set-off of the unabsorbed loss under the head ‘Capital gains’, determined in the hands of father though relating to the minor child, or his father will be eligible to carry forward and set-off the unabsorbed loss in his own hands.
As per section 64(1A), income of a minor child is deemed to be the income of the parents. This legal fiction is enacted for a limited purpose. But a legal fiction has to be carried to its logical conclusion. And as a natural corollary, a loss deemed to be the loss of parents under deeming provisions should be given effect to is logical conclusion and should be allowed to be carried forward and set off in the hands of parents subject to other provisions of the Act.
Further, the Supreme Court has held in CIT v. P. Doraiswamy Chetty [1990] 52 Taxman 346/183 ITR 559 that if husband and wife are partners in a firm and wife’s share is included in husband’s total income under section 64(1)(i), the husband is entitled to carry forward wife’s share of loss also.
4. Conclusion
Income or loss, once clubbed under the provisions of the Act, will be treated at par with the other income or loss. In case of any loss clubbed under the provisions of the Act in the hands of the parents, the parent will alone be eligible to carry forward and set off the loss.For the sake of convenience, loss under the head ‘Capital gains’ is made the subject-matter of our discussion. The treatment of any other allowable loss, suffered by the minors will also be on the same lines.
Income or loss, once clubbed under the provisions of the Act, will be treated at par with the other income or loss. In case of any loss clubbed under the provisions of the Act in the hands of the parents, the parent will alone be eligible to carry forward and set off the loss.For the sake of convenience, loss under the head ‘Capital gains’ is made the subject-matter of our discussion. The treatment of any other allowable loss, suffered by the minors will also be on the same lines.
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