MUMBAI: Marriages are made in heaven, but adivorce happens on earth and with it comes the inevitable question of alimony and its tax implications. In a recent decision the DelhiIncome-tax Appellate Tribunal (ITAT) has held that a lump sum payment received from a former husband, against relinquishment of monthly maintenance is a capital receipt and is not taxable.
The case relates to a Delhi-based woman, who had received a lump sum of $99,000 from her ex-husband based in the United States, but had not shown the amount in her tax declaration. Based on current exchange rate this sum translates to approximately Rs. 60 lakh.
Under Indian tax laws, any sum of money received by an individual without any consideration (without getting anything in return), in excess of Rs 50,000 in a year, is taxable. But if the same is received from a relative, such as a spouse, or on certain occasions such as marriage, it is exempt.
The tax officer, in this case, had held that as the divorce had taken place several years ago, the Delhi-based resident was not a 'relative' and hence such payment was not exempt but taxable as 'income from other sources' in her hands. This approach adopted by the tax officer, was rejected at the first level of appeal - commissioner of income-tax (appeals).
The commissioner held that the amount was paid by way of alimony only because they were husband and wife. Thus the payment received was from a relative (which includes spouse).
Further it cannot be said that the lump sum amount was received without any consideration. It was received against relinquishment by the wife of her right to receive monthly alimony payments (both past arrears and future payments). Such monthly payments were provided for in the divorce agreement.
Hearing an appeal filed by the tax officer, the Delhi ITAT upheld the order of the CIT (appeals). It observed that: "In this case, the taxpayer was to receive monthly alimony which was to be taxable in each year. As such monthly payments were not received they were not offered for tax as income. The lump sum received by the woman was a consideration for relinquishing all past and future claims." It was a non-taxable capital receipt not liable to tax, concluded the ITAT.
"Tax on alimony payment cannot be avoided by merely taking a lump sum consideration. Various facts such as the period of time the monthly alimony was not received, action taken for receipt of such alimony, and the fact pattern of the final settlement by way of lump sum payment will determine whether it will be treated as non-taxable," cautions a civil advocate, attached to the Mumbai high court.
The case relates to a Delhi-based woman, who had received a lump sum of $99,000 from her ex-husband based in the United States, but had not shown the amount in her tax declaration. Based on current exchange rate this sum translates to approximately Rs. 60 lakh.
Under Indian tax laws, any sum of money received by an individual without any consideration (without getting anything in return), in excess of Rs 50,000 in a year, is taxable. But if the same is received from a relative, such as a spouse, or on certain occasions such as marriage, it is exempt.
The tax officer, in this case, had held that as the divorce had taken place several years ago, the Delhi-based resident was not a 'relative' and hence such payment was not exempt but taxable as 'income from other sources' in her hands. This approach adopted by the tax officer, was rejected at the first level of appeal - commissioner of income-tax (appeals).
The commissioner held that the amount was paid by way of alimony only because they were husband and wife. Thus the payment received was from a relative (which includes spouse).
Further it cannot be said that the lump sum amount was received without any consideration. It was received against relinquishment by the wife of her right to receive monthly alimony payments (both past arrears and future payments). Such monthly payments were provided for in the divorce agreement.
Hearing an appeal filed by the tax officer, the Delhi ITAT upheld the order of the CIT (appeals). It observed that: "In this case, the taxpayer was to receive monthly alimony which was to be taxable in each year. As such monthly payments were not received they were not offered for tax as income. The lump sum received by the woman was a consideration for relinquishing all past and future claims." It was a non-taxable capital receipt not liable to tax, concluded the ITAT.
"Tax on alimony payment cannot be avoided by merely taking a lump sum consideration. Various facts such as the period of time the monthly alimony was not received, action taken for receipt of such alimony, and the fact pattern of the final settlement by way of lump sum payment will determine whether it will be treated as non-taxable," cautions a civil advocate, attached to the Mumbai high court.
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