Report No. 265

4. Legislative history of section 64 of the Act, 1961

4.1 The purpose of enacting section 64(IA) was to design a mechanism to overtake and circumvent the tendency of the assesses to avoid or reduce tax liability by entering into settlements or transferring the properties in such a way that he could retain the control over or interest in the same or its income, but it may reduce the tax liability, Tulsidas Kalichand v. CIT, (1961) 42 ITR 1 (SC) Such transfers were purposely made in favour of the member of the family who was ordinarily under the protection of the assessee or was dependent on him, Balaji v. ITO., (1961) 43 ITR 393 (SC).

4.2 The constitutional validity of section 64(IA) of the Act 1961 was upheld by the Madras High Court in K.M. Vijayan & Ors. v. Union Of India & Ors., (1995) 215 ITR 371. The legislative history of section 64(IA) has been detailed by the Court as under:

The Finance Bill, 1992, (38 of 1992), was introduced in the Lok Sabha and the same was enacted by Parliament with effect from April 1, 1993. In terms of section 35(b) of the said Finance Act, amendments were introduced in the Income-tax Act, whereby sub-section (IA) to section 64 was introduced, which reads as under:

(IA) ..........

It remains to be seen that section 16 of the 1922 Act and section 64 of the 1961 Act were enacted to prevent avoidance of tax through transfer of assets directly or indirectly. Section 64(IA) includes income of the minor child irrespective of its source, in the hands of the parent having the larger income. The proviso carves out two exceptions to this case. The earlier provisions relating to clubbing were held to be valid by the Supreme Court and various other High Courts.

The provisions of section 16(3)(a)(i) and (ii) of the Act which were corresponding to unamended section 64(1)(i) and (ii) of the Act of 1961 were held to be valid and not in violation of articles 14 and 19(I)(b) of the Constitution of India as can be seen from the decision of the Supreme Court in Balaji v. ITO, (1961) 43 ITR 393 (SC). The. provisions of section 16(3)(a)(iv) of the 1922 Act corresponding to the unamended section 64(1)(iv) of the 1961 Act were held to be valid and not in contravention of article 14 of the Constitution as can be seen from G. K. Devarajulu Naidu v. CIT, (1963) 48 ITR 756 (Mad.).

The unamended section 64(I)(i) and (ii) did not violate articles 14 and 19(1)(b) and (g) of the Constitution of India as can be seen from the decisions in Smt. Shreelrunwardevi Daga v. L. G. Trivedi, ITO, (1972) 85 ITR 451; and Smt. Savitri Devi v. CIT, (1974) Tax LR 74 (All). Section 64(1)(iii) as substituted with effect from April 1, 1976, providing for clubbing of income of a minor who was admitted to the benefits of a partnership firm was held to be valid as can be seen from the decision in K. Krishnaveni v. AAC (1985) 151 ITR 83 (Mad.).

4.3 It can be seen that while introducing the Finance Bill (38 of 1992) in Parliament, the Finance Minister in his speech stated as under:6

6. See: [1992] 194 ITR 17.

It is said that the child is the father of man, but some of our taxpayers have converted children into tax shelters for their fathers. The tax law provides for clubbing of income from gifts given by parents but this does not apply to other income, including income from other gifted assets, and the practice of cross-gifting is widely used to evade clubbing. The Chelliah Committee has recommended that ,in order to plug this loophole, which accounts for a substantial leakage of revenue, the income of a minor child should be clubbed with that of the parent.

There is merit in this suggestion and I propose to accept it. Recognising, however, the existence of a number of child prodigies, especially child artistes in our country, I propose to exclude their professional income, as also any wage income of minors, from the purview of such clubbing. The practice of clubbing the income of minor children with that of the parent for tax purposes is in vogue in a number of countries.