The income tax exemption on the money deposited in a single parent's account as maintenance for a minor child in a divorce settlement case could open flood gates of tax evasion, the Law Commission warned today.
In a recommendation submitted to the Punjab and Haryana High Court and the Law Ministry, the law panel has recommended against granting such an exemption in its report 'Prospects of exempting income arising out of maintenance money of minor'.
"The Commission is of the view that income earned by way of interest on the amount of maintenance deposited in favour of the child does not require to be exempted from being clubbed with the income of the parent/guardian; as such exemption, if granted, would open flood gates of tax evasion...," it said.
The Commission said the exemption would also defeat the very object of inserting the provisions of section 64(1A) in the Income Tax law, which had been brought to plug-in the loopholes to prevent the avoidance of tax, causing substantial loss or leakage of revenue.
The issue was referred to it by the Punjab and Haryana High Court.
At present, as per the Income Tax laws, the interest on money deposited as maintenance amount for a minor is clubbed with the income of the guardian.
Referring the matter to the Law Commission, the Punjab and Haryana High Court had asked it to consider "as to whether the Income Tax Act, 1961 requires amendment to create exception against clubbing of a minor's income accruing from maintenance money with either of the parent's income".
The court has said that as per its opinion, the circumstances of the minor having received maintenance money are different from say a minor in whose name some business has been started by either of the parents or who has been advanced some gift during the subsistence of marriage of parents.
"The matter is, therefore, forwarded to the Law Commission and the Ministry of Women and Child Development for consideration whether suitable amendments are required to be made in the Income Tax Act, 1961, to ensure that maintenance settled on minors is exempted from income tax or is treated differently," the court had said in last January.
The Commission's recommendations are not binding on the government or the courts.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)