[Opinion] Pre-Budget 2023 – Eliminate Tax on Alimony

Authored by Dr Hemant O Sharma – CA, PhD, Hardayal Singh – CCIT, Retired Ombudsman Income-Tax & Gopal C Mehta – Advocate High Court

Table of Contents

Prologue

Facts in Maheshwari Devi’s case

1. Alimony, a personal payment but not income

2. Alimony, not a “sum received without consideration”

3. Alimony, not taxable even if it is “sum received without consideration”

4. Payment to wife during subsistence of marriage

5. Marriages under Muslim personal law are a contract

6. Alimony includes sum paid for children also

7. Justice should be done, not by application of law alone

8. US & UK law tax law on alimony taxability

9. Capital receipt

10. Taxes buy civilisation

11. Family Settlement

12. No TDS on alimony

Epilogue

Prologue

Change is the only constant – whether evolutionary or devolutionary. Legislation, more so tax legislation, to be meaningful & contemporaneous, have to respond to and accommodate the relentless changes, sooner than later.

Divorces contributing to societal upheaval are neither a stigma nor condemned. Divorce results in receipt of alimony by spouse, generally the wife. The society comes across several instances where divorces are filed by mutual consent, so as to expedite the annulment of marriage.

Yet the law on alimony received by spouse, is an area, where legislation has miserably failed the beleaguered daughters, sisters and mothers, despite hon’ble Bombay High Court bringing it to notice of legislation about 40 years back, in Princess Maheshwari Devi of Pratapgarh v. CIT [1983] 12 Taxman 220 (Bom).

This article argues that there is need for legislation to step in and undo the wrong done unto the spouse receiving alimony.

Facts in Maheshwari Devi’s case

Maheshwari Devi obtained a decree of nullity of her marriage. In the petition filed for nullity, she had claimed both monthly alimony and a gross sum as permanent alimony. The Court awarded a gross amount of Rs. 25,000 as permanent lump sum alimony and a further permanent alimony of Rs. 750 per month till her re-marriage. The divorce in her case was not obtained by mutual consent but was pronounced on her petition for nullity of marriage.

The Maharani received Rs. 25,000 towards lump sum alimony and Rs. 6,000 towards monthly payment of alimony during the previous year relevant to the AY 1964-65. In the subsequent three years, she received Rs. 9,000 each year by way of monthly payments. She claimed exemption from income-tax in respect of both the receipts on the ground that these did not constitute income. This claim was rejected by the ITO, the AAC and the Tribunal.

On reference to the High Court, her contention was that alimony was merely an extension of the husband’s obligation under the Hindu law to maintain his wife, which was merely recognised and enlarged by section 25 of the Hindu Marriage Act. According to her, the alimony received on nullity of marriage could not be said to have any definite source, nor could it be described as a return for any past service or any definite consideration; it was merely a personal payment which could not be considered to be income.

On the other hand, the revenue, inter alia, argued (i) that there was no earlier right in the assessee to get maintenance from her husband on the basis of separate residence and that right to monthly alimony or nullity of marriage was a right which was created in her favour by the decree alone; and (ii ) that the impugned payment was a regular periodic payment received by the assessee pursuant to a legal right created in her favour by the decree, so that it had a definite source and was taxable as income.

Hon’ble Bombay High Court held that:

(a) “The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be ‘income’ within the meaning of the said term in the Income-tax Act. Moreover, it could not be regarded as a series of windfalls or casual receipts. Consequently, it constituted taxable income of the assessee.”

(b) “…………..Nor was there anything in the decree to indicate that the said amount of Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, the receipt of that amount must be looked upon as a capital receipt.”

In simple words, lump sum alimony was exempt and monthly alimony was brought to tax in her hands.

The following issues bear consideration:

1. Alimony, a personal payment but not income

1.1 Maheshwari Devi claimed and was awarded alimony by the court. These days, unlike yesteryears, divorces take place by mutual consent. The estranged partners produce consent terms before family court u/s 13B of the Hindu Marriage Act 1955 for its seal of approval & enforceability at a later date should the need so arise.

1.2 Based on such consent terms the court passes a decree of nullity of marriage. Hence, there is no order of court requiring the husband to pay alimony to wife.

1.3 Consent terms do not result from a decree of court, but the decree is itself based on consent terms. Hence to that extent alimony envisaged in consent terms, is personal payment but not income.

1.4 The Delhi High Court held that:

“Income in the context of Income-tax Act, 1961 (Act hereinafter), has been given an inclusive definition in section 2(24). But judicial decisions have considerably enlarged the concept of income. It has been observed by Lord Wright in Raja Bhadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC) that the word ‘income’ is of the broadest connotation. The learned Lord in this decision has gone to the extent of saying that anything, which comes in from outside source, is income. But such broad view is no longer valid as gifts, bounties, voluntary payments, etc., coming from outside sources do not constitute income or taxable receipts unless the law specifically provides for their taxation as income as in the case of ‘gifts’ vide section 56(1)(vi) of the Act in the cases of individuals & HUFs……….[see Sidharth Publications (P.) Ltd. v. CIT [1981] 129 ITR 603 (Delhi)].”

2. Alimony, not a “sum received without consideration”

2.1 Clauses (vii) (erstwhile) & (x) of sub-section (2) of section 56 brings “sums received without consideration” to tax as income, which in effect brings receipts in nature of personal payments (commonly known as gifts) to tax, by a specific legislation.

2.2 It is submitted that alimony is not in nature of “sums received without consideration”; consideration for payment of alimony is maintenance for wife and children.

2.3 Alimony being a receipt in nature of personal payment is not made chargeable to tax by a specific legislation; hence, neither despite inclusive definition of income nor by implication also, can alimony be brought to tax in hands of recipient.

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3. Alimony, not taxable even if it is “sum received without consideration”

3.1 A “relative” as defined vide clause (vii) of sub-section (2) of section 56, inter alia, means “spouse of the individual”. It is not qualified with the current-spouse and also does not also exclude ex-spouse; hence it shall be erroneous to consider spouse only to mean the current-spouse.

3.2 It is submitted that even on annulment of marriage, alimony received by the wife from her spouse, should fall within the meaning of relative and should be covered by the fifth proviso to clause (x) of sub-section (2) of section 56, by virtue of which alimony, even if considered as “sum, received without consideration”, shall be out of purview of sub-section (2) of section 56.

4. Payment to wife during subsistence of marriage

4.1 It is nobody’s argument that sum paid by husband to wife for maintaining the family, when marriage subsists, falls within the meaning of income. The situation shall not be any different, even if the wife during subsistence of marriage, approaches court seeking a sum for maintaining herself and children, in case husband does not do so.

4.2 It is submitted that a court order is only the legal recognition of the social & moral obligation, necessitating maintenance of wife & children by husband, irrespective of whether she earns or not.

4.3 Receipt of alimony is gender neutral – which itself means that the evident characteristic of alimony is maintenance & not enrichment.

5. Marriages under Muslim personal law are a contract

It would be interesting to note that marriages under Muslim personal law are per se contracts. Hence can it be said that sum paid by a Muslim husband to his wife, in routine course of family maintenance, let alone from divorce, arises out of a contract & is therefore chargeable to tax in her hands?

6. Alimony includes sum paid for children also

6.1 It is never in dispute that to determine the sum of alimony, amount for maintenance for children is also considered. Hence to the extent of such sum for children, the clubbing provisions of sub-section (1A) of 64 shall be applicable. It is interesting to note that, in the context of clubbing, the Explanation (b) to this sub-section states that:

“where the marriage of his parents does not subsist, in the income of that parent whomaintains the minor child in the previous year.”

6.2 The term “maintains the minor child” is not defined in the Act. The wife who merely holds custody of minor child, and gets maintenance from his father, can by no stretch of imagination be brought to tax on the sum received for child. It is the father who really maintains the child.

6.3 The Income Tax Act 1961 is silent on the maintenance received from father for the major child. Can he be brought to tax separately for sum received by mother for his maintenance, or should the mother continue being taxed for the entire alimony? It is submitted that the husband may no more be the husband of the wife, but he is still the father of the child, until he abandons him in law.

6.4 It is interesting to speculate, that when the mother remarries, and does not receive any alimony for her maintenance, can the minor’s maintenance received by her from his biological father, still be brought to tax in her hands?

6.5 Would the taxability of alimony in the hands of wife be the same, if the husband were to separately transfer maintenance for the child in his bank account?

7. Justice should be done, not by application of law alone

7.1 The judges are expected to fill the gap in legislative provisions. The courts cannot be expected to leave the issue unaddressed, specially when the legislature has failed the citizens for almost 40 years, by not legislating.

7.2 Attention needs to be drawn to editor’s note appearing in Taxmann:

“The assessee’s counsel pointed out before the Court that if the monthly payments of alimony were regarded as income of the assessee, the result would be that in case the husband made the payments out of his income, he would get no deduction for the same in his own hands, and at the same time, the wife would be liable to pay tax on that amount. The Court opined that though a suitable amendment would be desirable to see that in cases where payments of alimony were made by the husband from his income, and were such that they could not be claimed as deductions from his income in his own assessments, they should not be taxed in the hands of the wife, yet it was for the Legislature to move in the matter.”

(emphasis supplied)

7.3 Equity, fairness and justice demands that upon continued failure of legislature, based on observations of hon’ble Bombay High Court 40 years back, alimony received by wife should not be brought to tax, as it amounts to double taxation.

7.4 It is more so as the Parliament has not overturned the obiter dicta of hon’ble Bombay High Court by legislating tax on alimony even when the deduction for such payment is not available to husband.

7.5 The various aspects of income – regularity, periodicity, definite source, return, real & notional should not be interpreted in a manner so as to render “equity” for taxing an income, wholly irrelevant. Alimony as a payment to obviate hardship to the wife and children, ought to be taken cognizance of.

7.6 In 2005, the US Senate formally apologised for not passing an anti-lynching law when it was needed the most.

7.7 The observation of Justice Indu Malhotra in case of Navtej Johar which decriminalized homosexuality, needs reinforcement, that government should apologise to the LGBT community for the ill-treatment meted out to them by society for several decades.

7.8 It is submitted that the Parliament should apologise to the harassed, repressed, depressed & divorced wives for not legislating in their favour for the last 40 years.

7.9 It is submitted that it cannot be the case of Revenue that loss is caused to it by not charging alimony to tax. It is only that they do not get double tax on this sum of alimony.

8. US & UK law tax law on alimony taxability

8.1 In the US, amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony or separate maintenance payments for federal tax purposes. Certain alimony or separate maintenance payments are deductible by the payer spouse, and the recipient spouse must include it in income (taxable alimony or separate maintenance).

8.2 In the UK, spousal maintenance, sometimes known abroad as alimony, and child support are an entirely tax neutral event. It is paid out of taxed income and is received free of income tax. But this has been the position only since 1989, the Finance Act 1988, when the then Chancellor of the Exchequer, Nigel Lawson, made significant changes to the UK tax regime. (Extracted from article of David Hodson)

9. Capital receipt

9.1 The hon’ble Bombay High Court clearly held that lump sum received by Maheshwari Devi is a capital receipt, and is not chargeable to tax.

9.2 It can be convincingly argued that wife always demanded a lump sum payment, but in view of the inability of husband to make such lump sum payment, he agreed for monthly payments. Hence monthly payments are really a part of lump sum payments made in instalments.

9.3 In case of Asstt. CIT v. Meenakshi Khanna 34 taxmann.com 297 (Delhi) it is held that lump sum alimony received against consideration of relinquishing her personal right of claiming monthly payments as provided under the divorce agreement will be treated as capital receipt and will not liable to tax.

10. Taxes buy civilisation

10.1 There is no reason why we should complain about the present rates of income-tax even though one may not be able to muster the enthusiasm of Justice Holmes of the U.S. Supreme Court who observed,

“taxes are what we pay for civilized society. I like to pay taxes, with them I buy civilization.”

10.2 C. K. Daphtary, the first Solicitor-General of India, who was known for his ready wit and felicity of language, in a speech when he was felicitated by the Bombay Bar, referred to the observation of Justice Holmes and wryly commented “if by payment of taxes one buys present-day civilization then I do not want any part of it!”

10.3 It is submitted that bringing alimony to tax in the hands of depressed, dejected & desolate wife, is not only harsh but also an instance of taxation bereft of civility, for which civility taxes are levied & are expected to usher in.

10.4 In Tamil Nadu State Transport Corporation (Salem) Ltd vs. Chinnadurai (Madras High Court) pronounced on June 2, 2016, it was held that:

“Compensation awarded by the Motor Accident Claims Tribunal, and interest accruing thereon, is to ameliorate the sufferings of the victims and does not have the character of “income”. If there is a conflict between a social welfare legislation and a taxation legislation, the social welfare legislation will prevail since it sub-serves larger public interest. CBDT Circular dated 14.10.2011 is not good law”

(emphasis supplied)

10.5 It is submitted that courts loath double taxation as also opportunity for double taxation, as held by hon’ble Madras High Court:

“Whether since transactions pertaining to undisclosed income of assessee were also subject matter of settlement application in case of PJ, there was a possibility that such a subsequent consideration by Settlement Commission could be deemed as double taxation – Held, yes – Whether since order passed in settlement application of PJ had become final, issue in case of assessee should be revisited in light of order passed in matter of PJ – Held, yes”

[2019] 111 taxmann.com 311 (Madras)

11. Family Settlement

It may not be out of context to state that divorce by mutual consent can be an instance of family settlement – hence any consideration received in pursuance thereof should be beyond tax implications – has not been still examined by court.

12. No TDS on alimony

The penchant of the legislation to recover taxes at the instance of payment is well-known. The fact that no TDS has been made applicable on the payment of alimony by the husband itself asserts that it is not chargeable to tax.

Epilogue

In view of the above, the legislature, in view of the imminent budget of 2023, is petitioned to lend sanctity to the above submissions, for making law on alimony to be more meaningful & contemporaneous, granting much needed reprieve to the beleaguered daughters, sisters and mothers, which shall also be in conformity with the wisdom of Kabir.

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