Maintenance:
Maintenance signifies the legal obligation to provide financial support to one spouse from another spouse after marital separation or divorce. Law on divorce has been previously covered by Legal Parley here.
Taxability of Maintenance:
Whether this Maintenance in the hands of the receiver is taxable can be ascertained after understanding the meaning of ‘income’ under Section 2(24) of Income Tax Act, 1961. While, maintenance is not specifically mentioned under the Section, Income Tax Act divides income into ‘capital receipts,’ which is taxed under capital gains and ‘revenue receipts’ which are taxable under other heads.
Maintenance cannot be said to have any one particular source as it cannot be treated as consideration for past service, business or vocation. However, the Bombay High Court has answered the question of whether maintenance received by wife on nullity of marriage is considered as income and whether it can be taxed.
Case Laws
Princess Maheshwari Devi of Pratapgarh v. Commissioner of Income-tax
In this case, the assessee received Rs. 25,000 in lump sum and Rs. 750 periodically per month.
The Bombay High Court observed that the lump sum amount of Rs.25,000 paid to the assessee must be regarded as a transaction in which the right of the assessee to get maintenance from her ex-husband was recognized. It must be considered as a capital asset. This payment of Rs. 25,000 cannot be looked as a commutation of any further monthly or annual payments. Therefore, this amount is not taxable.
However, Rs. 750 that the assesse received periodically or monthly must be considered as a return from the said decree, which is a definite source. The court further observed that return cannot be interpreted as mere return for labour or skill employed, as voluntary payments are also considered as returns. Besides, the assessee did invest some effort and time in obtaining this decree. Therefore, the monthly maintenance of Rs. 750 must be considered as income and is taxable.
Meenakshi Khanna, New Delhi vs Department Of Income Tax on 17 November, 2011
More recently, in a case before the Income Tax Appellate Tribunal, Delhi Bench, the Tribunal considered whether alimony paid to the tune of Rs. 38 lakhs by ex-husband is taxable.
The assessing officer stated that the ex-husband does not fall under the definition of ‘relative’ under Section 56(2)(vi) of Income Tax Act and the amount received is therefore taxable.
However, the CIT observed that the assessee has not received the sum without any consideration. She received the amount against the consideration of relinquishing her personal right of claiming monthly maintenance as provided under law. Also, the amount was received from husband as a condition of separation and the amount was received because they were husband and wife. Maintenance received from ex-husband therefore falls under the exception clause of relative.
The court held that the assessee was to receive monthly payments which is taxable. However, the husband did not pay due to which the assessee threatened to take legal action. Therefore, husband paid a lump sum amount for settlement of all her claims. Making reference to Princess Maheshwari Devi case, the court held that the amount received is considered as capital receipt and cannot be taxed.
Conclusion:
Maintenance paid in lump sum amount is considered as a capital amount, which can be utilized by the recipient for investment, from which she can receive regular income. Such a receipt would be a capital income, which is again not taxable. Therefore, maintenance received in lump sum is not taxable.
However, monthly maintenance is taxable as it is considered to be an income, the source of which is the divorce decree. Instead of paying monthly maintenance, if the spouse had borne certain expenses such as payment of school fees, payment towards rent of the house etc., then such amount would not be taxable.
It is rather unfortunate that just because the spouse chooses to have the safety of receiving alimony every month, he or she would be taxed for the amount received. The right to claim any kind of maintenance originates from the relationship of marriage and not from the court decree. Alimony is provided with an intention to provide maintenance and support and not to act as a source of income. Besides, a spouse may choose to pay maintenance every month even without a court decree. Therefore, the law on taxability of maintenance needs serious consideration.
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