Income Tax Appellate Tribunal - Bangalore
Sri Bajaj Ashok Chunnilal vs Deputy Commissioner Of Income-Tax on 30 September, 2004
Equivalent citations: [2005]92ITD353(BANG), [2007]293ITR48(BANG), (2005)92TTJ(BANG)914
ORDER
Deepak R. Shah, Accountant Member
1. This appeal by the assessee is arising out of the order of Learned Commissioner of Income Tax (A) - IV, Bangalore, dated 26.11.2002 pertaining to assessment year 1997-98.
2. The assessee filed return of income for the assessment year 1997-98 declaring an income of Rs. 2,04,040/-. The assessee is running the business under the name and style of M/s. Padam Trading Company and are dealers in iron and steel products. In the Profit & Loss Account of the said business, the assessee has debited Rs. 92,217/- being interest paid to his minor son Mst. Sandeep Bajaj and the same was shown as interest payable in the balance sheet. During the year under reference, a sum of Rs. 13,800/- was paid as interest to Mst. Sandeep Bajaj and the same was clubbed along with the income of the assessee in accordance with the provisions of Section 64. The assessing officer treated the entire interest payable by the assessee though not paid to his minor son as income accruing to the minor son on the ground that the assessee cannot follow different system of accounting in his own case. He accordingly treated the difference between Rs. 92,217/- claimed as interest expenses being interest paid to minor son and sum of Rs. 13,800/- actually received as interest by the minor son Sandeep Bajaj as income of assessee as Clubbed under Section 64(1 A).
3. Learned CIT(A) held that the entire interest payable by the assessee accrued to the minor child. Since the assessee claimed the interest expenses on accrual basis and since Section 64(1 A) provides that all income as arose or accrues to the minor child is to be clubbed. He also held that under Section 145 the assessee is not free to follow two separate methods of accounting in respect of same transaction in his case and in the case of his minor child. He held that the minor child is not an assessee with effect from assessment year 1993-94. He accordingly held that the assessee cannot claim expenditure on mercantile basis and treat the income in respect of the same item on cash basis. Since the assessee is following mercantile system, the income accruing to the minor child is to be included in the total income of the assessee. The assessee is in further appeal before us.
4. Learned counsel for assessee Shri Srinivasan submitted that the assessee is following mercantile system of accounting which has been accepted by the Department in the earlier years. The minor son is following the cash system of accounting in respect of interest received, even prior to 1992 i.e., the year in which the minor's income was first clubbed, the minor was following cash system of accounting and offering interest actually received as income which was accepted. The assessee and his minor son are two different assessees in the eyes of law. A minor is a separate legal entity by himself having his own rights. The income is clubbed under the provisions of Section 64. The law is well settled that even the same assessee can follow different methods of accounting in respect of different sources of income received under the respective heads. Further in the case of business income, the assessee may follow mercantile system of accounting whereas in respect of other sources, the assessee has the liberty to follow cash system of accounting. Even in the case of two different business, say one profession and other trading, the assessee can follow cash system of accounting for professional income and mercantile system for trading. In the case of the assessee, the assessee and his minor son are two different assessees and it is only due to the clubbing of income the income of the minor is offered in the hands of the assessee. He relied upon the decision of Hon'ble Madras High Court in the case of CIT v. Planters Co. (P) Ltd., (123 ITR 648) where the Court observed as under:
"Income is liable to be taxed on the basis of its accruing or arising to the assessee or its receipts by the assessee, during the relevant previous year. The accrual or arising of the income is generally dependent on the method of accounting employed by the assessee. In the cash system of accounting, the accrual or arising of the income will be simultaneous with its receipt in the mercantile system of accounting, the accrual of the income is independent of its receipts".
Since the income has not been received by the minor child who is following cash system of accounting for interest income even prior to assessment year 1993-94, the income cannot be clubbed in the hands of the assessed as accruing to the minor child.
5. Learned Departmental Representative Shri Lamadade strongly Supported the orders of authorities below. He also relied upon the decision of Hon'ble Madras High Court in the case of G. Padmanabha Chettiar and Sons v. CIT (182 ITR 1) for the proposition that the assessee cannot follow different method of accounting for expenditure and income.
6. We have carefully considered rival submissions and relevant facts of the case. Under the Income Tax Act, Section 5 determines the scope of total income. As per Section 5, total income is determined with reference to different residential qualification of the assessee. As per Section 5, the total income is to be computed subject to the provisions of Income Tax Act The income under the head 'profits and gains of business' and income under the head 'income from other sources' is computed as per the method of accounting regularly employed by the assessee. Though under Section 64(1A), the income of minor child is to be included in the total income of his parents, the minor child is basically to be an assessee. Thus he can follow his own method of accounting. Section 64 enacts deeming provision for inclusion of others income in the income of assessee. However, if a particular income does not fall within the gamut of Section 5, the same cannot be made taxable by invoking provisions of Section 64. Our above view is fortified by the decision of Hon'ble Bombay High Court in the case of CIT v. FY Khambaty (159 ITR 203). Thus to club the income under Section 64 the same should primarily be part of income of the minor child under Section 5. Hon'ble Supreme Court in the case of CIT v. JH Gotia (156 ITR 323) upheld the view of Hon'ble Mysore High Court that income sought to be computed is to be clubbed under the same head under which it is earned. Thus whatever be the nature of income in the hands of minor child retain the character of same income even though clubbed in the hands of parent under Section 64. From the scheme of taxation adopted in the Act, it seems very much proper that for the purpose of computation, each person and each head of income accrued to or received by him or her is to be separately computed in accordance with the provisions of the Act. Thus, whatever deductions, etc., are provided for in the computation Sections 15 to 59 have to be allowed. Our above view is fortified by the decisions of Hon'ble Karnataka High Court in the case of CIT v. S.K. Nayak (145 ITR 791), Bombay High Court in the case of Amarchand Jalan v. CIT (160 ITR 805) and Madras High Court in the case of CIT v. PN Ramaswamy (146 ITR 627). Hon'ble AP High Court in the case of CIT v. Segu Harinath (171 ITR 318) considered similar situation on facts of the case Hon'ble High Court held that:
"While Section 64(1)(iii) authorizes the inclusion of the share income of the minor child, it obviously refers to the share income determined in the hands of the minor child by applying all the provisions of the Act. In that view of the matter, where a minor is admitted to the benefits of a partnership and monies are borrowed on behalf of the minor for investment in the partnership firm, the share income of the minor, which would be taggable with the income of the father or mother, as the case may be, is to be determined after deducting interest, as per Section 67(3), paid or payable on such capital borrowed."
Considering all the aforesaid decisions it can be held that unless and until the income of the minor child is computed, the clubbing provision will not apply. For computing the income of minor child as per Section 5, the same has to be computed considering the provision of Section 145. Thus unless and until income is said to be received by the minor child on the basis of method of accounting regularly employed by him, Section 64 cannot be invoked to club the income which otherwise would have been accrued to the minor child. Thus it is not a case of assessee following different method of accounting for expenses and income but it is a case of two different assessees whose computation is to be made based on the method of accounting employed by each of them individually. Undoubtedly, the minor son was not following mercantile system of accounting. The interest has not been received by the minor child. Thus by invoking provision of Section 64(1A), the interest payable by assessee cannot be considered to have been received by minor son so as to club the same in the hands of minor child. We accordingly delete the addition of Rs. 78,417/- being the interest having not been received by the minor child and accordingly not to be clubbed in the hands of the assessee.
7. The next ground of appeal is against charging of interest under Section 234B and 234C. The same are consequential in nature and this ground is accordingly dismissed.
In the result, the appeal is partly allowed.