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Application Of Tax On Maintenance And Alimony

Alimony and Maintenance under personal laws

Alimony and maintenance refer to financial support provided by one spouse to another following a separation or divorce. These are crucial concepts in family law, primarily aimed at ensuring the economic well-being of the dependent spouse. Alimony, often refer to as spousal support, is the financial support one spouse is ordered to pay to the other after divorce or during the period when the divorce proceeding is pending before the court. It is determined and enforced by the court based on various statutory criteria.

Maintenance refers to the financial support provided to a spouse, as well as to children, to ensure their living standard is maintained post-separation or divorce. It extends beyond the end of the marriage and can also be sought during the marriage. Alimony and Maintenane can be of two types (a) Interim Alimony and Maintenance (b) Permanent Alimony and Maintenance.

Section 24 of the Hindu Marriage Act of 1955 talks about interim Alimony and Maintenance. It is also known as pendente lite. If either the wife or the husband, has no independent income sufficient for her or his support and the necessary expenses of the proceeding, the court may, on the application of the wife or the husband, order the respondent to pay to the petitioner the expenses of the proceeding, and a monthly sum, as seem to the court to be reasonable, during the proceeding, taking into consideration the petitioner's own income and the income of the respondent.[1]

Permanent Alimony and Maintenance is mentioned under section 25 of the Hindu Marriage Act, 1955, as the amount granted after the divorce is finalized. It could be a lump sum or a periodic payment. Other legislations for alimony and maintenance under various personal laws are section 37 of the Special Marriage Act, 1954, section 40 of the Parsi Marriage and Divorce Act, 1936, and sections 36 and 37 of the Indian Divorce Act of 1869 dealing with Christian marriages. The Code of Criminal Procedure, 1973 section 125 allows a wife, child, or parent to seek maintenance. This is a significant provision as it is applicable regardless of the personal laws of the parties. Protection of Women from Domestic Violence Act, 2005 allows for maintenance as part of protection orders under Sections 18 and 20.

Factors determining Alimony and Maintenance

Courts assess multiple factors to determine suitable alimony and maintenance amounts, such as:

  • Income and assets of both spouses.
  • Conduct of the spouses during the marriage.
  • Age and health of the spouses.
  • Educational qualifications and the ability of the dependent spouse to earn a living.
  • Standard of living during the marriage.
  • Duration of the marriage.

Capital receipts and Revenue receipts

Capital receipts are receipts that are received occasionally and not from day-to-day activities. They are non-recurring in nature and cannot be regarded as a source of income. The Income Tax Act, 1961 does not define the term capital receipt. Examples of capital receipts can be amounts received as proceeds of the sale of an asset, borrowing loan, capital grant, etc.

Revenue receipts, on the other hand, are receipts that are money earned through day-to-day operational activities. These are recurring in nature and directly affect the profit and loss of the business. the disclosure of revenue receipts is required to be made in the income statement of the individual, company, or organization. Some of the examples of revenue receipts are rental income, interest earned, commission received, etc.

All revenue receipts are taxable unless exempted by the Income Tax Act, 1961, and all Capital receipts are not taxable unless as provided by the Act. As per the official website of the Income Tax department, all capital receipts are exempt from tax unless there is a specific provision for taxing them.‚Äč"[2] The apex court in Oberoi Hotel (P) Ltd. Vs. CIT[3], stated that whether the receipt is a capital receipt or revenue receipt has to be determined by looking at the facts of the case in hand, and it is not possible to lay down any single test or criterion as decisive.

Taxability of Alimony and Maintenance

The Income Tax Act does not contain provisions regarding the taxation of alimony. The word income mentioned under the Income Tax Act does not specify whether the monthly maintenance amount received by the spouse can be regarded as income as per the act or not. It thereby becomes necessary to determine through relevant case laws if tax is applicable to alimony and maintenance received.

Types of Alimony and Their Tax Treatment:

  • Lump Sum Alimony:
    If alimony is received as a lump sum payment, it is treated as a capital receipt as per the Income Tax Act, 1961 and is not taxable. Lump sum alimony is considered a one-time payment and is not classified as income, thus, it does not attract tax.
     
  • Alimony and Maintenance received periodically:
    Alimony received in the form of periodic payments, such as monthly or annual payments, is considered a revenue receipt. This type of alimony is treated as income of the recipient and is taxable under the Income Tax Act, 1961. The recipient spouse is required to include these amounts in their gross income and pay tax accordingly. It is important to note that the paying spouse does not get a deduction for these payments.


The Bombay High Court in the case of Princess Maheshwari Devi of Pratapgarh vs CIT[4], held that it is the obligation of the husband to maintain his wife, and alimony is considered to be the extension of such obligation. To constitute a revenue receipt, a source for the receipts must be established, which is established in the form of the decree in the present case. Therefore, the monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be income with the meaning of the Income Tax Act, 1961. In ACIT vs Meenakshi Khanna[5] Case, it was held by the tribunal that one-time payment as a lumpsum payment is not taxable in the hands of the recipient (wife).

Tax on Alimony and Maintenance Paid Through Asset Transfers:

  • Pre-Divorce:
    Any asset transferred without consideration before a divorce is considered a gift under section 56(ii) of the Income Tax Act, 1961, and is exempt from tax. The income generated from the transferred asset during the marriage is clubbed with the income of the spouse who transferred the asset.
     
  • Post-Divorce:
    If the spouse transfers the ownership of immovable assets or Shares/Mutual Funds to another spouse as alimony after divorce, it will be treated as settlement and not considered as transfer. Hence Capital Gains tax does not attract at the time of giving alimony i.e., Transfer of asset.[6] Treatment of assets received in kind, as alimony, should be treated similar to that of an asset received on settlement/gift or family partition. In other words, it will be a transaction not regarded as transfer of a capital asset under section 47 read with 2(47) of the Income Tax Act.[7]

    Once the divorce is finalized, the recipient spouse is liable to pay taxes on any income generated from the asset transferred as part of the alimony settlement. The clubbing provisions no longer apply. The person who gets the asset will have to pay capital gains tax if they sell it in the future.[8]
     


Taxability of Income Received as Rent Charge

When one spouse transfers an asset to another while they are still married, the spouse who is transferring the asset typically has to pay taxes on the rental income received. Clubbing provision is attracted under such circumstances. After the husband and wife are no longer married following the divorce, the income generated from the property transfer is taxed by the spouse who received it if one of the spouses receives the property as alimony. Clubbing Provisions will not be drawn in after the divorce.

Taxability of Child Maintenance and Alimony
Like spousal alimony, payments for maintenance of children are treated based on their form. Lump sum payments are considered capital receipts and are not taxable, while periodic payments are revenue receipts and taxable as income.

Foreign Assets
If foreign assets are transferred as alimony, the recipient spouse must pay tax on any gains realized upon selling those assets and is required to disclose the foreign assets when filing their Income Tax Returns.

Conclusion
The tax implications of alimony and maintenance in India hinge on the method of payment. Lump sum alimony is generally not taxable, while periodic alimony payments are taxable in the hands of the recipient. Asset transfers carry specific tax implications based on the timing and nature of the transfer. It is advisable to consult a tax professional to understand the detailed implications based on individual circumstances. For additional information, please refer to the applicable sections of the Income Tax Act, 1961, and related case laws.

End-Notes:
  1. Hindu Marriage Act, 1955, s 24
  2. Ektha Surana, Capital Receipts and Revenue Receipts: Meaning, Difference and Examples (ClearTax 10 January 2024) - https://cleartax.in/s/capital-receipts-and-revenue-receipts (accessed on 4 May 2024)
  3. Oberoi Hotel (P) Ltd. Vs. CIT (1999) XI SITC 109 (SC)
  4. Princess Maheshwari Devi of Pratapgarh vs CIT (1983) 33 CTR Bom 117
  5. ACIT vs Meenakshi Khanna (2013- TIOL880ITATDEL)
  6. Divorce, Alimony, and Taxability in India (ExTax.in, 30 January 2024) - https://eztax.in/divorce-alimony-taxability-in-india (accessed 15 May 2024)
  7. Abhishek Murli, Taxability of Alimony and Maintenance- https://saprlaw.com/taxblog/Taxability_of_Alimony_and_Maintenance.pdf (accessed on 5 May 2024)
  8. Divorce, Alimony, and Taxability in India (ExTax.in, 30 January 2024) - https://eztax.in/divorce-alimony-taxability-in-india (accessed on 5 May 2024)


Written By: Kushagra Prasad
, a second-year student at Gujarat National Law University, Gandhinagar

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