The Income Tax Act, 1961 does not contain specific provisions relating to Alimony. Analogous provisions along with relevant case laws must be studied for taxation of alimony. 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 under section 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.
Meaning of Alimony (maintenance, support or sustenance)
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 ex-spouse 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.
Alimony can be a one-time receipt or a periodic receipt or a combination of both.
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.
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.
It was 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. – [Oberoi Hotel (P) Ltd. v. CIT (1999) XI SITC 109 (SC)]
It was held 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. – [Mehboob Production (P) Ltd. v. CIT (1977) 106 ITR 758 (Bom)]
It was 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. – [CIT v. Prabhu Dayal (1971) 82 ITR 804 (SC)]
It was 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.” – [CIT v. Shaw Wallace and Co. AIR (1932) PC 138 : 2 Comp. Cases 276]
ALIMONY IS NOT TAXABLE IF:
It is paid in lump-sum or a one-time receipt in the form of cash. As per a decision by Bombay High Court, this alimony is treated as a capital receipt. Additionally, this does not fall under the head of income as in the Income Tax Act, 1961.
ALIMONY IS TAXABLE IF :
It is paid monthly in the form of cash. In this case, the alimony is treated as a revenue receipt. In certain countries like the USA, a man who pays a monthly alimony to his ex-wife can claim this amount as a tax deduction on his income.
On the other hand, in India, if ex-husband pays to her ex-wife a monthly alimony, he will incur tax on this amount. Additionally, her ex-husband will not be able to claim this amount as a tax deduction.
IN CASE OF AN ASSET TRANSFER
During marriage: If you were given an asset by your spouse without any payment it will be tax-free under Section 56(2)(vii) of the Income Tax Act.
After divorce: The asset will be treated as a gift and hence, will be taxable to you.
Receipt of alimony from ex-husband is nothing but Gift and is exempt
Payment of alimony amount by ex-husband to his wife was nothing more than a gift and was exempt under the proviso to section 56(2)(vi). Assessee received an amount of Rs. 73,60,787/- from her ex-husband Mr. Siguar Erich Zaun, a German citizen. The said amount was claimed to have been received as alimony on divorce with her husband and the same was claimed as exempt. Assessing Officer, however, held that the said amount was taxable as income from other sources. Held: Payment of alimony amount by ex-husband to his wife was nothing more than a gift and was exempt under the proviso to section 56(2)(vi). (Related Assessment year : 2007-08) – [Prema G. Sanghvi v. ITO (2017) TaxPub (DT) 4802 ((ITAT Mumbai)]
Amount realised by assessee from sale of a property received as alimony from her husband, was to be regarded as capital receipt not liable to tax
Assessee married to ‘D’ and subsequently, marriage was dissolved by a decree of divorce. Assessee filed her return disclosing long-term capital gain consequent to sale of 50 per cent of her share in the matrimonial house. She sought to deduct 50 per cent of cost of acquisition contending that matrimonial house was acquired using the sale proceeds of a flat in which she was a co-owner having 50 per cent share therein. On the basis of report of the Inspector deputed for verification of claim, Assessing Officer opined that flat was owned exclusively by the former husband of assessee and the sale proceeds from the said property were utilized to purchase the matrimonial house. He thus rejected assessee’s claim for deduction of cost of acquisition. CIT(A) decided the issue in favour of assessee. Tribunal rejected the contention of assessee as regards computation of capital gains on the basis that 50 per cent of the sale proceeds were received by the assessee on account of alimony from her former husband. Assessee thus filed instant appeal raising a new plea that lump sum alimony being a capital receipt, was not liable to tax. Held: Tribunal had categorically held that it was on account of alimony that the husband mutually agreed to part with 50% as is noted in the decree of divorce. The revenue raised an objection that assessee could not make out a new case. The said objection could not be accepted. It was open to assessee to contend that the receipt was capital in nature and therefore, not taxable. When the revenue did not prefer any appeal against the finding of Tribunal that the payment was ‘on account of alimony’, the revenue must be deemed to have been satisfied by such finding. In view of above, amount received by assessee was a capital receipt and, hence, not taxable. (Related Assessment year : 1997-98) – [Shrimati Roma Sengupta v. CIT: (2016) 238 TAXMAN 682 : 139 DTR 26 (Cal)]
Lump sum amount received from ex-husband as alimony is not taxable
In the case of ACIT v. Meenakshi Khanna, 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). – [ACIT v. Meenakshi Khanna (2013) 158 TTJ 782 : 143 ITD 744 : 96 DTR 220 (ITAT Delhi)]
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.
In the landmark case of Princess Maheshwari Devi of Pratapgarh v. CIT, 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.” – [Princess Maheshwari Devi of Pratapgarh v. CIT (1984) 147 ITR 258 : (1983) 33 CTR 117 : 12 TAXMAN 220 (Bom)]
Amount of Rs. 2,000 per month to the assessee for maintenance of herself and her two children till the assessee did not remarry and continued to perform the other terms and conditions of the deed – Amounts were being received regularly and were based on the agreement, which was an enforceable contract, the income was taxable in her hands
It was held that the allowance received by the assessee constituted her income. Once it is held that the amount constituted the income of the assessee, it is difficult to see how exemption could be claimed on the ground that it is of a casual and non-recurring nature. The amounts in question have been received by her with regularity and they cannot be said to be casual, inasmuch as they are related to an agreement. We are, therefore, of the view that the assessee could not claim exemption in respect of the maintenance allowance under Section 4(3) of the Act. We, therefore, hold that the income was not exempt under Section 4(3)(vii) of the Indian Income-tax Act 1922, and answer the question accordingly. – [CIT v. Smt. Shanti Meattle (1973) 90 ITR 385 (All)]
In view of above facts and circumstances of the case, we can say the amount of lump sum received as permanent alimony on account of divorce is not taxable. It is considered to be a capital receipt and, therefore, the provisions of Income-tax Act 1961 are not applicable. So, the amount of permanent alimony is not treated as income and thus not taxable. Furthe, Monthly alimony payments may be treated as income in the hands of the recipient