NRIs-avail tax free investment in India

Tax free real estate investment in India
Section 64 aims at foiling a taxpayer’s attempt to avoid or reduce the incidence of tax by adopting any of the modes covered by this section. Some such modes are transferring assets to minor child, or admitting the minor child to the benefits of partnership in a firm. Finance Act, 1992 introduced a ‘catch all’ provision, sub-section (1A) in section 64, in chapter V, providing clubbing of all such income as arises or accrues to a minor child. The relevant portion of the provision is quoted below:
In computing the total income of any individual, there shall be included all such income as arises to his minor child.
If the income was not clubbed with that of the parent, he or she would have been eligible for basic exemption, Rs 1,00,000, in FY 2006-07 and other deductions and only the net income would be taxable. The purpose of this write up is to examine, a) whether income to be clubbed would be gross or net income, after allowing statutory deduction and b) whether, benefit of minimum threshold would be available?
1.2 The scope and effect of sub-section (1A) in section 64 was elaborated in CBDT’s circular no 636, dated 31st Aug, 1992, as under:
‘36.1 In reality as well as in law, the minor children can not administer their property nor they can take decisions on the disposal of income arising therefrom. These responsibilities fall on the parents, who, for all practical purposes, treat and use this income as part of their own income. Exclusion of minor children’s income from the income of their parents, also leads to tax avoidance’.
Issue:
1.3 A taxpayer transfers property to their grand children, Who than derives rental income. income after standard deduction is below taxable limit. The question is whether gross income or income after standard deduction would be clubbed in the hands of the parent. Further, if income after standard deduction is below the minimum threshold, whether any income is laible for clubbing?
Analysis:
2. Explanation to this sub-section provides, in whose hands, 'income includible', would be clubbed, whether mother or father. Title of section 64 is 'Income of individual to include income of spouse, minor child, etc'. Thus, what needs to be considered is ' all income', under sub-section (1A).
3. 1 Section 64(1A) occurs in chapter V, which is after chapter IV. Section 14, in chapter IV provides that 'all income', for the purposes of charge of income-tax and computation of 'total income', would be classified under specified heads, like salary, house property income, business or professional income, capital gain and income from other sources. 'Total income' is defined in sub-section 2(45) to mean 'the total amount of income referred to in section 5, computed in the manner laid down in the Act'. Income, falling under section 10, is not included in the computation of income. Under section 16, salary ‘income’ shall be computed after making deduction, i) standard deduction(omitted w.e.f 1.4.2006); ii) entertainment allowance to the government employee; iii) employment tax. There are various other deductions permissible under chapter VI-A, which are allowed in computing the 'total income'. Property ‘Income’ is computed after making the standard deduction, etc. ‘Profits and gains’ of business is computed after allowing permissibledeductions. ‘Capital gains’ is computed after allowing the benefit of exemption under various sections 54 to 54H and section 48, deducting the cost of acquisition and expenditure incurred wholly and exclusively in coneection witht eh transfer. Specified deductions are allowed in computng ‘income from other sources’. Income-tax is charged, under section 4, in respect of the 'total income' of the previous year, as provided in the relevant Finance Act. Section 2 of every year's Finance Act provides that income-tax shall be charged as per rates in the 1 st schedule. Finance Act, 2006, states that, if 'total income' does not exceed, Rs 1,00,000, income-tax, would be nil.
Scheme of the Act:
3.2 The above discussion shows the scheme of the Act. If, 'total income', after allowing all deductions, is below the minimum threshold, no amount would be included, under section 64(1A).
4.1 The judicial guidelines, in this regard, are available in various decisions of the Tribunal and the high courts, discussed hereinafter.
4.2 [2005] 96 ITD 91 (MUM.)
IN THE ITAT MUMBAI BENCH 'G'
Smt. Babita P. Kanungo
v.
Deputy Commissioner of Income-tax, Circle 25(1)
The words "all such income" in this section refer to total income and we are of the considered opinion that for giving effect to this section, first the total income of the minor children is to be computed and then such total income only of the minor children is to be clubbed with the income of the parent. In view of our above finding that agricultural income does not form part of total income as defined in section 2( 45), read with section 10(1), we find that section 64(1A) cannot be applied to agricultural income of 'minor children'…. In view of section 2(2) of the Finance Act, 1997, the agricultural income of the minor children of the assessee could not be included into the income of the assessee for rate purposes.
4.3 The question before Karnataka High Court, in CIT v SK Nayak (1984) 145 ITR 791, was, whether gross or net salary of the wife, after allowing standard deduction, would be clubbed under section 64(1)(iii). Clause (iii) of sub-section (1) provided clubbing of income of the spouse, by way of salary, etc, from a concern in which the assessee has a substantial interest. The court held: 'If the wife herself had been an assessee, there would not have been any doubt as to her right to compute her net income. She is entitled to the standard deductions and other expenses. If that is so, we fail to see any good reason why gross income should be clubbed with the income of her husband under section 64. It will be contrary to the scheme of the Act itself not to allow deductions before clubbing of income'.
4.4 Following the judgement in SK Nayak's case(supra), similar view was taken by the Allahabad High Court in the case of CIT v Lalji Agarwal, 234 ITR 820.
Income below the minimum threshold:
5. The above cases show that only the net income would be clubbed under section 64. The next question is, if the 'net income' is below the minimum threshold, would it be clubbed, with that of the parent under section 64(1A)?
6.1 Sections 88B & 88C, till their deletion, provided specified rebates to senior citizens and women. Section 88D provided rebate to an individual, whose total income did not exceed Rs 1 lac. With effect from 1.4.2006, these rebates were integrated in the minimum threshold. The treatment accorded to the minimum threshold shows that it is part of ‘scheme of the Act’.
6.2 The Act considers ‘deductions’ from income and ‘rebates’, interchangeable, which would be apparent from the following discussion.
Rebate, deduction and threshold are interchangeable:FM’s speech:
Sections 81 to 85C and 87, 87A & 88, till their replacement, provided rebates from income-tax. Finance (No 2) Act, 1967, replaced them by deduction. Section 87, dealing with rebate from income-tax on long term savings, was replaced by section 80C, permitting deduction, from assessable income.This was, again replaced by rebate in section 88, w.e.f 1.4.1991.Finance Act, 2005, again repalced it by deduction in section 80C. Reason, for replacement, given by the Finance Minister, reproduced below, in the 2005 budget speech, makes clear, that rebate, deduction and threshold are interchangeable.
152. Besides, I propose to fix the threshold exemption level for women at Rs 1.25 lakh and the exemption level for senior citizens at Rs 1.50 lakh. These revised exemption levels will be in lieu of the prevailing tax rebate provisions.
153. Given the higher exemption limit, and the scaling up of tax brackets, the need for a separate personal allowance does not exist. Threfore, in conformity with the growing internaitonal practice, I propose to remove the standard deduction.
154. …, in addition to the basic exemption limits, I propose to allow every taxpayer, a consolidated limit of Rs 1 lakh for savings which will be deducted from the income before the tax is calculated. …the rebate under section 88 is being eliminated and section 80L is being omitted to reflect the new regime.
6.3 Decision in Smt. Babita P. Kanungo (supra) refers to section 2 of the Finance Act, which allows basic exemption. Although, in that case, the question was clubbing of agricultural income for rate purposes, but 'scheme of the Act', referred in the case of SK Nayak (supra), is that minimum threshold is also considered a deduction from taxable income. Thus, it is only, the income, after allowing various deductions and the minimum threshold, which could be considered for clubbing under section 64(1A).
4. The minimum threshold in the case of women and senior citizens is Rs 1,45,000 and Rs 1,95,000 respectively. This limit applies only to ‘individuals’ ‘resident in India’. The question is whether non-resident women and senior citizens are eligible to higher minimum threshold? The author is of the opinion that they should be eligible, otherwise it would be discrimination, which is not permissible under India’s double taxation avoidance agreements (DTAs). This is discussed below.
5. DTAs prohibit discrimination against nationals and residents. For example, para 1 of Article 24 of Indo-Canada DTA prohibits discrimination against nationals in regard to ‘any taxation or any other requirement connected therewith which is either or more burdensome than the taxation and connected requirements to which nationals of that other state in the same circumstances are’. ‘Taxation’ is defined in para 6 of this article to mean ‘taxes which are the subject of this agreement’. ‘Income tax’ is included in the definition of ‘taxes’ under the agreement. Thus, Canadian nationals, but non-resident in India, could not be subject to lower threshold.
6. Revenue’s argument that Canadian resident women and senior citizens are not ‘in the same circumstances’ as women and senior citizens, resident in India, we may refer to para 3 of this article 24, which is as under:
‘Nothing in this article shall be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.’
10. The para may mean that a contracting state is obliged to grant to residents of other contracting state, personal allowances, reliefs and reductions for taxation purposes, which are not on account of civil status or family responsibilities, on pain of being discriminatory under the DTA.
11.1 Higher minimum threshold to women and senior citizens are not account of their civil status or family responsibilities. This would be apparent from the budget speech of Hon’ble Finance Minister, while introducing these provisions:
Budget speech 2000:
136. As an expression of our gratitude to the contribution made by senior citizens during their active years and taking into account the possible hardships that they face in the advanced years of their life, I propose to raise the tax rebate available to them from Rs.10,000 to Rs.15,000. At the marginal tax rate of 30%, this translates into an exemption of an additional Rs.15,000 from their gross income, or substitutes the need to save an additional Rs.25,000 to avail of a similar exemption under section 88.

137. I have always maintained that despite all challenges, my job as Finance Minister in making a budget is easier than that of an average house-wife struggling to balance the family budget. As a token of appreciation and recognition of women as productive contributors to the economy, I propose an additional rebate of Rs.5,000 for women tax-payers from their tax liability. This would be subject to the overall ceiling of Rs.15,000 if they also happen to be senior citizens.
Memorandum-budget 2000:

WELFARE MEASURES
Rebate of Income-tax in case of senior citizens
Section 88 B of the Income-tax Act provides for a special tax relief in the form of rebate of an amount equal to hundred per cent.
of income-tax or an amount of ten thousand rupees, whichever is less, to individual residents in India who attain the age of sixty-five
years or more at any time during the previous year.
The rebate to the senior citizens has been provided to help them in meeting the rising cost of old age care and medical expenses.
The Bill proposes to raise the existing tax rebate of rupees ten thousand to rupees fifteen thousand in the case of such individuals
while retaining the other requirements of the provision.
The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-
2002 and subsequent years. [Clause 44]
Tax rebate for women
To encourage women to become financially independent, it is proposed to insert a new section namely, section 88 C in the Incometax
Act. Under the provision, an assessee being a woman, who has not attained the age of sixty-five in the previous year, shall be
entitled to a tax rebate of an amount equal to such income-tax or an amount of rupees five thousand, whichever is less.
The proposed amendment will take effect from 1st April, 2001 and will, accordingly, apply in relation to assessment year 2001-
2002 and subsequent years. [ Clauses 42 and 45)
Memorandum to Finance Bill, 2005:
In the case of every individual being a woman (resident in India) who is below sixty-five years of age at any time during the
previous year, the proposed basic exemption limit of Rs. 1,00,000/- is to be increased to Rs. 1,25,000/-. In other words, no resident
woman below the age of sixty-five year needs to pay tax on incomes upto Rs. 1,25,000/-. In the case of a resident individual of the
age of sixty-five years or more at any time during the previous year, the proposed basic exemption limit of Rs. 1,00,000/- is to be
further increased to Rs. 1,50,000/-. In other words, no resident individual of the age of sixty-five years or more with income upto Rs.
1,50,000/- will pay any tax.
Elimination of tax rebate for senior citizens under section 88B and for women under section 88C
The provisions contained in section 88B allow for a deduction from income-tax payable on the total income of an individual who
is of the age of sixty five years or above, of the whole amount of such income-tax or rupees twenty thousand, whichever is less.
The provisions of section 88C allow for a deduction from income-tax payable on the total income of a woman who is below the
age of sixty five years of the whole amount of such income-tax or rupees five thousand, whichever is less.
In view of the proposed increase in the exemption limit for senior citizens to rupees one lakh fifty thousand and for women to rupees
one lakh twenty five thousand, it is proposed to omit the said sections.
The proposed omissions will take effect from 1st April, 2006 and will, accordingly, apply in relation to the assessment year
2006-2007 and subsequent years. [Clauses 30 and 31 ]
11.2 The perusal of the budget speeches and the memorandums show that provisions for rebate was not introduced on account of their family responsibilites. Hence, if higher minimum thresholds are not granted to residents of DTA countries, it will be discrimination, which is prohibited, under Indian treaties.
Conclusion:
12. The preceding analysis shows that before clubbing, the parent should compute all permissible deductions and the threshold exemption form the minor’s gross income. Only the net income should be added to the parent’s income. Tax files in the name of minors would help the parents to enjoy, legally, more tax free income.
13. Under the DTA, property income is taxable, where the property is located. Non-residents, particularly Indians, can enjoy tax free income to the extent of minimum threshold not only in their names, but by investing in the names of their children. Non-residents, women and senior citizens, could also claim deduction of higher threshold, while computing income for clubbing purposes.