It is said that Marriages are made in Heaven but separation happens much closer to tax authorities! The crux of the matter is, whether the alimony and maintenance payments made to a spouse are taxable in that spouse's (recipient's) hands? To answer this question, I analyze some of the income tax ramifications involved in receiving such alimony and/or maintenance as a result of a divorce.
1. What is income: The term income has been defined in Section 2(24) of the Income Tax Act 1961. The term income simply means something which comes in. It is a periodical return with regularity or expected regularity. It’s nowhere mentioned that income refers to only monetary return. It includes value of benefits and perquisites. Anything which can reasonably and properly be described as income is taxable under this Act unless specifically exempted under the various provisions of this Act. [Gopal Saran Narian Singh v. C.I.T. (1935) 3 I.T.R. 237, (PC)].
2. Capital Receipt and Revenue Receipt: The Income Tax Act, 1961 does not define the term “Capital receipt” & “Revenue receipt”. Also, it has not laid down the criterion for differentiating the capital and revenue receipt. A general principle followed is that all revenue receipts are taxable unless as exempted by the Act and all Capital receipts are not taxable unless as provided by the Act. An interesting analogy that can be adopted to determine capital and revenue receipts is that of a fruit and a tree. Where an amount represents income from the disposal of the income-producing asset (ie the tree), the amount is of a capital nature. However, where an amount represents the fruit of the tree, such amount is not of a capital nature. ‘Income’ is what ‘capital’ produces, or is something in the nature of interest or fruit as opposed to principal or tree. This economic distinction is a useful guide in certain matters, but its application is very often a matter of great difficulty, for what is principle or tree in the hands of one man may be interest or fruit in the hands of another Let us look at section 28 to understand this idea better; certain receipts have been made chargeable to income-tax under the head “profits and gains of business or profession”. The Supreme Court in Oberoi Hotel (P) Ltd. Vs. CIT (1999) XI SITC 109 (SC), has held that the question whether the receipt is the capital or the revenue has to be determined by drawing the conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. Also the Supreme Court, in CIT Vs. Prabhu Dayal (1971) 82 ITR 804, has held that the question whether a particular receipt is capital or income is not one of fact though it is dependant to a very great extent on the particular facts of each case, the question does involve conclusion of law to be drawn from those facts.
3. What is Alimony or Maintenance: Alimony or maintenance is a U.S. term signifying a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the exspouse upon divorce. It is established by divorce law or family law in many countries and is based on the premise that both spouses in theory have a legal obligation to support each other during their marriage or upon separation or/and divorce. Alimony can also be said to be the allowances which husband or wife by court order pays to other spouse for maintenance while they are separated or after they are divorced.
4. Is Alimony ‘Consideration’: The Income Tax Act does not contain specific provisions relating to Alimony. Analogous provisions along with relevant case laws must be studied for taxation of alimony. Let us try to understand the relevant provisions in detail. Under circumstances where there is NO divorce; when an asset is transferred by one spouse to another, for inadequate consideration, the same shall be a gift exempt from taxation u/s 56(2). Any income from the same will be ‘clubbed’ (i.e. included) in the hands of the transferring spouse as if the asset had not been transferred at all. However, in the case of a divorce, the relationship between the husband and the wife ceases to exist and they will no longer be spouses. The question that arises now is if the transfer of assets or monetary funds, as alimony will be consideration? The word consideration has not been defined under the Income Tax Act. Therefore, we need to verify its meaning from the law which govern principles of contract. Consideration has been defined u/s 2(d) of Indian Contract Act which reads as follows: “That at the desire of the promisor, the promise 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.” In India, the law of the land places an obligation on the husband to maintain his wife which arises out of the status of a marriage. Right to maintenance forms a part of the personal law. Under the Code of Criminal Procedure, 1973 (2 of 1974), right of maintenance extends not only to the wife and dependent children, but also to indigent parents and divorced wives. Therefore, in a divorce the wife relinquishes her personal right of claiming monthly maintenance as provided under law. This relinquishment will be consideration of the wife for the receipt of alimony/maintenance and hence will not be a gift of inadequate consideration.
5. Taxation of Alimony: As stated earlier, the Income Tax Act does not contain provisions regarding the taxation of alimony. The definition of the term "income" contained in the said Act is merely an inclusive definition and it does not throw any direct light on the question whether the payment of monthly alimony under a decree could be regarded as "income" under the said Act. Nor is any clear guidance to be obtained from looking at the scheme of the Act and the other provisions of the said Act. If, therefore, we are to look for light, it is to the decided cases that we must turn. In CIT vs Shaw Wallace and Co, the Privy Council held that the object of the Indian Act is to tax 'income'. And ‘Income’ connotes a periodical monetary return coming in with some sort of regularity or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, of the crop of field. In the landmark case of Princess Maheshwari Devi of Pratapgarh vs CIT (1983) 33 CTR Bom 117, the Appellant was married to Maharaja of Kotah and had later obtained a decree of nullity of the marriage from a Court of Law. She had claimed monthly alimony and gross sum as permanent alimony and the same was directed by the court. When taxation of alimony was brought into question, the Bombay High Court held that Alimony is an extension of the husband’s obligation under Hindu Law to maintain his wife. The Hon’ble Bombay High Court further stated that to constitute a revenue receipt, a source for the receipts must be established and it is established in the form of the decree. Therefore, 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. With regard to the lump-sum receipt of alimony the Hon’ble High Decided as follows: “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. It is, in our view, beyond doubt that, had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee a larger monthly sum would have been awarded to her on account of alimony. It is not as if the payment of Rs. 25,000 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 payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, of this we do not think it necessary to consider whether the said receipt could be regarded as casual receipt or in the nature of a windfall.” Therefore, it is clear from the above that a lump-sum receipt in the form of Alimony will not be taxable in the hands of the recipient. Whereas, monthly alimony payments will be treated as income in the hands of the recipient. The same ratio was upheld in the case of ACIT vs Meenakshi Khanna (2013- TIOL880ITATDEL) wherein the agreement for custody, separation and divorce was entered into on 01.12.1989 with the divorce finally taking place on 20.04.19090 and money pursuant to this agreement was agreed to be paid in monthly installments by the husband which he did not honour, on which the wife threatened to take legal action against husband resulting in a one-time settlement by him to her. The Tribunal held this one-time payment, though delayed, as a lumpsum payment relating to the divorce agreement and not taxable in the hands of the recipient (wife).
6. What if the alimony were in the form of a share in immovable property: Take an example of a husband owning a house and as alimony settlement gives the wife 50% right in the house. In such a case, the transfer of the 50% right in the house to the wife itself is not a taxable event as it is nothing but in the nature of gift/settlement deed and not taxable u/S.47 of the Act as a transfer. In other words, treatment of assets received in kind, as alimony, should be treated similar to that of an asset received on settlemt/gift or family partition. In other words, it will be a “transaction not regarded as transfer” of a capital asset u/s S.47 r.w. 2(47) of the IT Act and S.49 will further detail the cost of acquisition of the asset on subsequent sale (i.e. it will relate to the previous owner's cost and date of acquisition) What is the alimony were paid to wife from proceeds of a sale of a house by husband? This is again nothing but a lumpsum payment to be treated as capital receipt in the hands of the recipient i.e wife. This is the view taken by the recent decision in Roma Sengupta vs Commissioner of Income Tax (2016-TIOL-553-HC-KOL-IT) where the HC, while sidestepping the issue of ownership by assessee and her consequent S.54 exemption claim which was the issue decided on by the lower authorities, held that the assessee had only received 50% of sale consideration with respect to her matrimonial house and such consideration was to be treated as capital receipt in her hands and hence was not taxable in her hands. While the Hon'ble High Court in the Roma case (supra) did not aver on the taxability of the sale of house in hands of the owner (presumably the husband in the Roma case supra), it implicitly follows that the seller ought to be taxed for capital gains on the sale of the house while the payments made by seller (husband) to recipient (wife) is a capital receipt on account of alimony and is not taxable in the recipient's (wife's) hands. The question of diversion of income at source by overriding title in the form of alimony payments made to wife (recipient) may not hold good here as the sale of the property by seller (husband) is the initial and separate taxable event and consequent payment is to the recipient (wife) is the non-taxable event.
7. More case laws with specific observations:
i. The Bombay High Court in Princess Maheshwari Devi of Pratapgarh v. Commissioner of Income-tax 147 ITR 258 (Bom) answered the two questions raised before it (a) Whether, alimony received by the assessee under section 25 of the Hindu Marriage Act, 1955, on nullity of marriage, is income in her hands and liable to tax? The Court held: No. The reasons were as under - In our view, 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. By the decree that right has been diminished or partly extinguished by the payment of the lump sum of Rs. 25,000 and balance of that right has been worked out in the shape of monthly payments of alimony of Rs. 750 which, as we have pointed out, could be regarded as income. It is, in our view, beyond doubt that, had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee, a larger monthly sum would have been awarded to her on account of alimony. It is not as if the payment of Rs. 25,000 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 payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, the receipt of that amount must be looked upon as a capital receipt. (b) Whether, on the facts and in the circumstances of the case, the alimony of Rs. 750 per month received by the assessee from her ex husband on the nullity of marriage is income in her hands liable to tax? The amount of Rs. 750 per month 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. The word "return", in our view, in a case like this, can never be interpreted as meaning only a return for labour or skill employed on capital invested. Such a definition of "return" would be too narrow and would exclude the case of voluntary payments, when it is the 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 effort 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 the said term in the said Act.
ii. In CIT v. Shaw Wallace and Co., AIR (1932) PC 138; (1932) 2 Comp. Cases 276; it has been held that: "The object of the Indian Act is to tax income, a term which it does not define. It is expanded, no doubt, into income, profits and gains, but the expansion is more a matter of words than of substance. Income, in this Act connotes a periodical monetary return coming in with some sort of regularity, or expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree or the crop of a field."
iii. 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.
iv. 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."
v. 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)]
vi. In CIT 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."
vii. 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 a 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 not constitute any trade or an adventure in the nature of trade.
viii. 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 capital receipt and a receipt in lieu of income is a revenue income.
ix. 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 case of diversion of income by overriding title."
x. In the judgment of the Board in the case of Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT  11 ITR 513 (PC), delivered by Lord Russell of Killowen, their Lordships of the Privy Council, after referring to the aforesaid two decisions, have observed as follows (p. 522): "The word 'income' is not limited by the words 'profits' and 'gains'. Anything which can properly be described as income is taxable under the Act unless expressly exempted. It is not in their Lordship's opinion correct to regard as an essential element in any of these or like definitions a reference to the analogy of fruit, or increase or sowing or reaping or periodical harvests."
xi. In Maharajkumar Gopal Saran Narain Singh v. CIT  3 ITR 237 (PC), the assessee, who owned a nine-annas share in an estate, with the object of discharging his debts and of obtaining for himself an adequate income for his life, conveyed the greater portion of his estate to his son-in-law's mother who owned the remaining seven-annas share in the estate. The consideration for the transfer was: (i) the payment of the assessee's debts amounting to Rs. 10,26,937 ; (ii) a cash payment of Rs. 4,73,063 ; and (iii) an annual payment of Rs. 2,40,000 to the assessee for his life. It was held by the Privy Council, inter alia, that this was clearly a case where the owner of an estate (the assessee) had exchanged a capital asset for (inter alia) a life annuity which was income in his hands and not a case in which he had exchanged his estate for a capital sum payable in instalments and that this income was taxable under the I.T. Act, even though the annuity did not constitute or provide a profit or gain to the assessee. After referring to the aforesaid decision of the Privy Council in the case of Shaw Wallace & Co., their Lordships observed as follows (p. 242): "The word 'income' is not limited by the words 'profits' and 'gains'. Anything which can properly be described as income is taxable under the Act unless expressly exempted. In their Lordships' view the life annuity in the present case is 'income' within the words used in the judgment of this Board which was delivered in the case of CIT v. Shaw Wallace & Co. ."
As per the provision of section 192 of the Income Tax Act 1961, the husband in this case, is liable for TDS at the average rate i.e. the rate of income tax applicable to the recipient on the total prospective receivable by the recipient (Monthly payment x 12 months);
The husband in this case is liable to deduct tax @10% if the recipient discloses his/her PAN and @ 20% if the recipient does not disclose his/her PAN;
The husband may be subject to penalty under section 276B of the Income Tax Act which reads as follows: “……………….If a person fails to collect tax, he shall be liable to pay the tax to the Central Government account and also required to pay simple interest @ 1% per month from the date of such amount of tax was collectable to the date on which the tax was actually paid. Moreover, the tax and interest thereon shall be a charge upon the assets of the seller………………..”
From the above with reference to Income Tax Act, at the time of payment of Alimony or maintenance the paying spouse is liable to deduct Tax at Source @10% and is also liable to deposit the same against PAN of the recipient (if the recipient discloses his or her PAN) and if the recipient spouse refuses to disclose his or her PAN the paying spouse shall have to deduct TDS @20% and deposit the same to the Central Government. In both cases, the paying spouse has to issue TDS certificate. Failure to deduct TDS will expose the paying spouse for penalty under section 276B of the Income Tax Act.
4. CIT vs Shaw Wallace and Co, the Privy Council