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June 8, 2020

Alimony received on Divorce is Taxable under the Income Tax Act?

Alimony received on Divorce is Taxable under the Income Tax Act?

Introduction

Divorce is an official and legal way to end a marriage. Alimony is generally the amount that one has to pay by law to their spouse on account of getting divorced. The alimony so received will it be taxable, if yes under what conditions. In order to understand  about the taxability provision if any on alimony we will see 2 very interesting case of Princess Maheshwari Devi Pratapgarh vs Commissioner Of Income-Tax and the case of Meenakshi Khanna vs ACIT.

On occasion of divorce, will such alimony received be taxable under the income tax provisions?

Let us understand the same by referring to case of Princess Maheshwari Devi Pratapgarh vs Commissioner Of Income-Tax.

Facts of the Case

  1. Assessee had obtained a decree of nullity of her marriage and had claimed monthly alimony as well as a gross sum as permanent alimony.
  2. If a periodic or monthly sum as permanent alimony was granted the same to be secured by a charge on the immovable property of the ex-husband.
  3. Assessee claimed exemption from tax in respect of the aforesaid amounts but the claim was rejected by the ITO.

Issues of the case:

  1. Whether lump sum alimony received is considered as income to be taxed under Income Tax Provisions?
  2. Whether monthly alimony received is considered as income to be taxed under Income Tax Provisions?

Proceedings of the Case

  1. It could never be said that the assessee entered into the marriage with a view to obtain a decree for nullity and the alimony provided thereunder.
  2. There was, therefore, no conscious effort or any return expected by the assessee for the labour or skill bestowed by the assessee and hence the amount of alimony may not be regarded as the income of the assessee.
  3. However, even a voluntary payment can constitute income and where the payment comes with a regularity or expected regularity from a definite source it must be regarded as a return from that source.
  4. It is not necessary that in order to constitute income, there must be a return expected by the assessee for labour or skill bestowed or capital invested.
  5. Therefore, it is not possible to contend that the decree is not the source of the payment of alimony. Her right to obtain a particular amount in lump sum and an amount per month as alimony are definitely cystallised in the decree.
  6. If the decree were set aside, the assessee would be unable to claim the monthly alimony from her ex-husband. If the ex-husband failed to pay the amount, the assessee would have to execute the decree. Therefore, it is clear that the decree is the definite source of these receipts.
  7. The monthly alimony is what the assessee periodically and regularly gets and is 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.
  8. Although the assessee did not enter into the marriage with any view to get alimony, it also cannot be denied that the assessee consciously obtained the decree and obtaining the decree did involve some effort on the part of the assessee.
  9. 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 said Act.
  10. Capital asset can be exchanged for receipts which may be in part income receipts and in part capital receipts.
  11. From the point of view of taxability the decree must be regarded as a transaction in which the right of the assessee to get maintenance from her ex-husband was recognized and given effect to. That right was undoubtedly a capital asset.
  12. By the decree that right has been diminished or party extinguished by lump sum payment and balance of that right was worked out in monthly payments of alimony (which is regarded as income)
  13. If lump sum payment had not been awarded to the assesse then, a larger monthly sum would have been awarded to her on account of alimony. The lump sum payment is to be considered as a capital receipt and therefore provisions of Income Tax Act are not applicable.

Conclusion

It was held that lump sum alimony received would not be taxable but the monthly alimony received will be taxable under the Income Tax Law.

Let us also refer to a similar ruling which was passed in the case of Meenakshi Khanna vs ACIT

Facts of the case

  1. Return of income was filed disclosing a total income which did not include alimony received from ex-husband.
  2. According to the AO, alimony received is to be added to the income of assessee as per section 56(2)(vi) of the Income Tax Act, 1961 (taxation of gifts – amount received without consideration is to be taxed)
  3. Assessee was not covered under the definition of relative provided in exceptions to section 56(2)(vi). Therefore, the amount received is taxable.

What do you mean by consideration?

  1. As per Indian Contract Act, if at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
  2. Thus, it cannot be said that the appellant received the money without consideration which is a prerequisite condition for invoking Section 56(2)(vi)
  3. Appellant received the amount against consideration of relinquishing her personal right of claiming monthly maintenance as provided under law.
  4. The amount was received by the appellant from the husband as condition of separation and the amount was paid by way of alimony only because they were husband and wife. Therefore, the payment received amounts to have been received from the spouse of the individual and hence falls within the exception clause of relative.

Proceedings of the Case

  1. Divorce agreement was though entered in 1989-90 and monthly payments were promised to be paid to the assessee by husband
  2. When the husband did not pay the same, the assessee threatened to take legal action against husband who therefore, paid a lump-sum amount for settlement of all her claims.
  3. It was held that amount was paid by way of alimony only because they were husband and wife and therefore, payment received from spouse did fall within the definition of relative.
  4. Amount was received against consideration of relinquishing her personal right of claiming monthly payments as provided under the divorce agreement.
  5. Though the assessee was to receive monthly alimony which was to be taxable in the each year from conclusion of divorce agreement but in this case monthly payments were not received and, therefore, were not offered tax.
  6. The receipt by the assessee represents accumulated monthly installments of alimony which has been received by the assessee as a consideration for relinquishing all her past and future claims.
  7. Moreover, if the Revenue’s arguments are to be accepted of it being monthly payments liable for tax as per Bombay High Court order, then also the amounts represented by past monthly payments cannot be taxed in this year.

Conclusion:

Therefore, it was held that that the alimony lump sum amount was a capital receipt which is not liable to tax.

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