Taxation of Alimony

In Dooars Tea Ltd. v. Commr. of Agri., IT (1963) 44
ITR 6, the Supreme Court has pointed out that it is necessary to bear in mind
that the word ‘income’ as used in the Indian IT Act, 1922, is a word of elastic
import and its extent and sweep are not controlled or limited by the use of the
words ‘profit and gains’ and they have pointed out that the diverse forms which
income may assume cannot exhaustively be enumerated, and so in each case the
decision of the question as to whether any particular receipt is income or not
must depend upon the nature of the receipt and the true scope and effect of the
relevant taxing provisions.

In H.H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT, (1963) 49 ITR 594, it was held that a voluntary payment, which is made entirely without consideration and is not traceable to any source which a practical man may regard as a real source of his income but depends entirely on the whim of the donor, cannot fall in the category of ‘income.’ Thus voluntary and gratuitous payments which are connected with the office, profession, vocation or occupation may constitute income, although if the payments were not made, enforcement thereof cannot be insisted upon. These payments constitute income because they are referable to a definite source, which is the office, profession, vocation or occupation. It could thereof be said that such payment is taxable as having an origin in the office, profession, or vocation of the payee, which constitutes a definite source for the income. What is taxed under the Indian IT Act is income from every source (barring the exception provided in the Act itself) and even a voluntary payment, which can be regarded as having an origin, which a practical man can regard as a real source of income, will fall in the category of income, which is taxable under the Act.”

The motive of payer is not relevant while deciding whether a receipt is revenue or capital in nature. [P. H. Divecha v. CIT, (1963) 48 ITR 222 (SC)]

In (IT v. Smt. Shanti Meattle, (1973) 90 ITR 385 (All.) it was held that “In the circumstance of the case, the allowance received by the assessee from her husband was held to be taxable as income in her hands.”

In CIT v. M. Ramalaxmi Reddy, (1980) 19 CTR (Mad.) 270; (1981) 131 ITR 415, it has been held by the Division Bench of the Madras High Court that il receipt cannot be treated as income where no characteristics of income can be detected in it. Where a person gets some receipt of money where he does not angle for it, or where it is not the product of an organised seeking after emoluments, or where it is merely a chance encounter with a venture, which while enriching him does not form part of any scheme of profit making, the idea of income is absent. It has been held there that the real basis for the concept of non-taxable casual receipt is that the transaction in question which produces it does no constitute any trade or an adventure in the nature” of trade.

It has been held in the case of Mehboob Production P. Ltd v. CIT, (1977) 106 ITR 758 (Bom.) that:

“In order to constitute of income, the receipt must be one which comes in (a) as a return, and (b) from a definite source. It must also be of the nature which is of the character of the income according to the ordinary meaning of that word in the English language and must not be of the nature of a windfall.”

A receipt in lieu of source of income is a capitaf-receipt and a receipt in lieu of income is a revenue income.

It has been held in the case of Commissioner of Income-tax v. M. P. Poncha, (1995) 125 CTR (Bom.) 274; (1995) 211 ITR 1005 (Bom.) that:

“Payment of alimony to divorced wife – payment made by employer out of assessee’s salary under instructions of assessee.

This is a clear case of application of income by the assessee for payment of alimony to his ex-wife and maintenance of his minor child. The direction to the employer or the agreement with the employer to pay the agreed amount of Rs.650 per month to the ex-wife every month is only a mode of payment. It does not in any way amount to diversion of salary income before it accrues to the assessee. The employer is obliged to pay the amount only after the salary income accrues to the assessee and becomes payable to him. It is at that point of time that the employer has agreed or undertaken to pay as per the wishes of the assessee the sum of Rs.650 per month to his ex-wife. The employers have only agreed to deal with the amount of salary accrued to the assessee in such a manner as directed by him. It is a clear case of application of income which has accrued in the hands of the assessee. This is not a :ase of diversion of income by overriding title.”

Just because the alimony is based on the income of the payer, it cannot make the receipt a revenue receipt. There is no relation between the measure that is used for the purpose of calculating a particular receipt and the quality of the figure that is arrived at by means of application of the test. – Glenboig Union Fireclay Co. Ltd. v. IRC, (1922) 12TC 427. It is the quality of payment that is decisive of the character of the payment and not the method of payment or its measure. – Sevairam Doongarmall v. CIT, (1961) 42 ITR 392 (SC).

2.2 It flows from above that at the first instance we have to decide whether the concerned receipt is revenue in nature or not. Once a receipt is considered as revenue, it is not material whether it is received in parts or it is received in lump sum.

2.3 S. 25 of the Hindu Marriage Act, 1995 deals with permanent alimony and maintenance. Ss.(1) of the said Section runs as follows:

“Any court exercising jurisdiction under this Act may, at the time of passing any decree or at any time subsequent thereto, on application made to it for the purpose by either the wife or the husband, as the case may be, order that the respondent shall, while the applicant remains unmarried, pay to the applicant for her or his maintenance and support such gross sum or such monthly or periodical sum for a term not exceeding the life of the applicant as, having regard to the respondent’s own income and other property, if any, the income and other property of the ap-plicant and the conduct of the parties, it may seem to the Court to be just, and any such payment may be secured, if necessary, by a charge on the immovable property of the respondent.”

2.4  Case Law:

In a landmark decision on this issue in the case of Princess Maheshwari Devi of Pratapgarh v. CIT, (1984) 147 ITR 258 (Bom.), the Bombay High Court observed that:

“The decree is the source of the payment of alimony. It cannot be said that the decree is a mere recognition or continuation of an earlier obligation. If the decree were set aside, the assessee could not claim the monthly alimony from her ex-husband. If the ex-husband failed to pay the amount, it is the decree which the assessee would have to execute. It is clear that the decree is the definite source of these receipts. The amount is what the assessee periodically and regularly gets and entitled to get under this decree. This amount must, therefore, be looked upon as a return from the said decree which is the definite source thereof.

The word ‘return’, in a case like this, can never be interpreted as meaning only a return for labour or skill employed or capital invested. Such a definition of ‘return’ would be too narrow and would exclude the case of voluntary payments, when it is settled position in law that in some cases even voluntary payments can be regarded as income. Although it is true that it could never be said that the assessee entered into the marriage with any view to get alimony, on the other hand, it cannot be denied that the assessee consciously obtained the decree and obtaining the decree did involve some efforts on the part of the assessee. 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 S. 2(24).

The monthly payments of alimony have their origin in a definite source, viz., they are regular in nature and the said decree was obtained by some efforts on the part of the assessee. Hence these payments can never be regarded as a series of windfall or casual payments.

So far as a lump sum payment is concerned, the decree must be regarded as a transaction in which the right of the assessee to get maintenance from her ex-husband was recognised and given effect to. That right was undoubtedly a capital asset. By the decree, that right has been diminished or partly extinguished by the payments of the lump sum alimony, and the balance of that right has been worked out in the shape of monthly payments of alimony, which could be regarded as income. Had the amount not been awarded in a lump sum under the decree of the assessee, a larger monthly sum would have been awarded to her on account of alimony. It is not as if the payment can be looked upon as a commutation of any future monthly or annual payments, because there was no pre-existing right in the assessee to obtain any monthly payments at all. Nor is there anything in the decree to indicate that the lump sum alimony was paid in commutation of any right to any periodic payments. In these circumstances, the receipt of that amount must be looked upon as a capital receipt.”

3. Conclusion  and author’s  views on this issue:

3.1 In my personal opinion alimony cannot be said to be from any particular ‘source’. Nor can it be said to be return for any past service or any definite consideration. It is merely a personal payment and not income.

3.2 Decree is a legal process of pronouncement. The right to claim alimony originates from the relationship of marriage. There can be no decree of alimony without marriage.

3.3 Alimony should not be regarded as ‘return’ from the decree, because it has its roots in the relationship of marriage and NOT in the decree. A husband may agree to pay alimony to his wife with mutual consent without existence of decree.

3.4 If alimony were to be treated as income, then money given by husband to wife every month could also be treated as income applying the same analogy as given in the case of Princess Maheshwari Devi (supra).

3.5 The intention of the statute governing alimony is to provide for ‘Maintenance and support’ of the dependant and certainly not to create a ‘source of income’ in the common parlance.

3.6 As a matter of law, so far as the jurisdiction of Bombay High Court is concerned the decision of Princess Maheshwari Devi (supra) holds good and accordingly monthly alimony shall remain taxable and one-time alimony shall be treated as capital receipt. However owing to reasons cited above, with due respect to the Honourable High Court, the decision is worth a second thought.