[1994] 75 TAXMAN 217 (ART)

TAX LITERATURE/CLUBBING PROVISIONS

EXCLUSION OF HANDICAPPED CHILDREN FROM THE CLUBBING PROVISIONS OF THE INCOME-TAX AND
WEALTH-TAX ACTS
Mrs. Seema Seth
The Finance Act, 1994 provided much-needed relief to the parents of handicapped minor children by amending section 64(1A) of the
Income-tax Act, 1961 and section 4(1)(a) of the Wealth-tax Act, 1957 so as to exclude the income and the wealth, respectively, of such
children from the ambit of the aforementioned clubbing provisions on fulfilment of certain conditions. In this article, the author brings out
the scope of the newly-granted relief by explaining the expressions 'permanent physical disability' and 'mental retardation 'as used in
section 80U of the Income-tax Act, 1961, read with rule 11D of the Income-tax Rules, 1962. She also makes the point that there should be
no apprehension of the new provisions leading to an opening of floodgates of tax avoidance schemes - EDITOR
Legal provisions
1. Under the provisions of section 64(1A) of the Income-tax Act, 1961, in computing the total income of an individual, barring a few
exceptions, all income of his minor child used to be clubbed with the income of the parent. This provision was introduced in the Finance
Act, 1992 on the ground that the exclusion of minor child's income from that of the parent resulted in tax avoidance and in any case such
children were not capable of administering their property or taking decisions on the disposal of income arising therefrom. The Finance Act,
1994 has amended section 64(1A) to exclude handicapped minor children from the clubbing provisions. Corresponding amendment has
been made in sub-clause (a) of sub-section (1) of section 4 of the Wealth-tax Act, 1957 to, likewise, exclude the wealth of such children.
The amendments will be effective from the assessment year 1995-96.
The relevant provisions of the Income-tax/Wealth-tax Acts read as under:
Section 64( 1A) of the Income-tax Act:
"(1A) In computing the total income of any individual, there shall be included all such income as arises or accrues to his minor child,
not being a minor child suffering from any disability of the nature specified in section 80U."
Section 4( 1)(a)( ii) of the Wealth-tax Act:
"In computing the net wealth—
(a )of an individual, there shall be included, as belonging to that individual, the value of assets which on the valuation date are held
—
(i)******
(ii)by a minor child, not being a minor child suffering from any disability of the nature specified in section 80U of the
Income-tax Act or a married daughter, of such individual, to whom such assets have been transferred by the individual,
directly or indirectly, otherwise than for adequate consideration, or"
Who is a handicapped child?
2. Every handicapped child is not excluded from the clubbing provisions, but only those who satisfy the conditions laid down in section
80U of the Income-tax Act and rule 11D of the Income-tax Rules, 1962. Section 80U allows an extra deduction of Rs. 20,000 from the
income of a resident individual who is suffering from permanent physical disability (including blindness) or is subject to mental retardation
which has the effect of reducing considerably such individual's capacity for normal work or engaging in a gainful employment or
occupation. The permanent physi cal disability or mental retardation has to be of the nature specified in rule 11D, and is to be certified by a
physician, a surgeon, an oculist or a psychiatrist, as the case may be, working in a Government hospital. The certificate from the doctor
would need to be produced before the Assessing Officer in respect of the first assessment year for which deduction is claimed.
'Permanent physical disability' and 'mental retardation' explained
3. Rule 11D of the Income-tax Rules defines permanent disabilities for the purposes of section 80U and reads as under:
"11D. Permanent physical disabilities for the purposes of deduction under section 80U.— For the purposes of section 80U,—
(i )permanent physical disability shall be regarded as a permanent physical disability if it falls in any one of the categories specified
below, namely:—
(a )permanent physical disability of more than 50 per cent in one limb; or
 (b)permanent physical disability of more than 60 per cent in two or more limbs; or
(c )permanent deafness with hearing impairment of 71 decibels and above; or
(d)permanent and total loss of voice;
(ii)mental retardation shall be regarded as a mental retardation if intelligence quotient is less than 50 on a test with a mean of 100
and a standard deviation of 15 such as the Wechsle scale;
(iii)blindness shall be regarded as a permanent physical disability, if it is incurable and falls in any one of the categories specified
below, namely:—
All with corrections  
Better eye Worse eye
(a)6/60 - 4/60 3/60 to Nil
or  
Field of vision 110-20  
(b)3/60 to 1/60 F.C, at 1 foot to Nil
or  
Field of vision  
100  
(c)F.C. at 1 foot F.C. at 1 foot to Nil
to Nil or Or
Field of vision Field of vision
100 100
(d)Total absence of sight Total absence of sight."

It will be seen that definite criteria have been laid in the rule to ensure that only a person with substantial permanent physical disability or
mental retardation or blindness is covered. The permanent physical disability has to be such as has the effect of reducing substantially a
child's capacity to engage in gainful employment or occupation.
The word 'permanent' is to be distinguished from 'eternal' and would be limited to physical disability as is considered permanent according
to the existing state of knowledge. For example, a person suffering from AIDS has his body's immune system permanently destroyed
according to the present knowledge in medical science and would be inching towards a sure death. As all the limbs of his body are affected,
his case would appear to be covered by sub-clause (b) of clause (i) of rule 11D. If in a few years from now, a cure is found for AIDS, it
would not imply that for the earlier years the claim for deduction was wrongly made.
Meaning of 'limb'
4. The word 'limb' in sub-clauses (a) and (b) of clause (i ) of rule 11D has not been defined. It has, therefore, to be understood as in
common parlance. The Shorter Oxford Dictionary defines 'limb' as:
"Any organ or part of the body; a part of an animal body distinct from head or trunk, e.g., a leg, arm, wing."
The word 'organ' is defined in that Dictionary as under:
"A part or member of an animal or plant body adapted by its structure for a particular vital function, as seeing, hearing, speaking,
digestion, respiration, etc.
(b) The human organs of speech or voice collectively; the larynx and its accessories as used in singing."
The word 'limb' also came in for judicial interpretation by the Calcutta High Court in Lipton India Ltd. v. Gokulchand Mandal [1981] (
Lah. IC 1300) (Cal.) (FB). It was a case under the Workmen's Compensation Act, 1923. It was held that the word 'limb' means an organ and
included part of an organ and, therefore, an eye was held to be a limb.
In view of the foregoing discussion, the word 'limb' for the purpose of rule 11D will also have to be equated to an organ or a part of an
organ and will not be confined to any particular part of the body, say, legs or arms. If it is given a restrictive meaning, it will lead to
anomalous results and will also not carry out the object of section 80U. For example, if the meaning of the word 'limb' is restricted to, say, a
leg or arm, a person suffering from cancer of the leg may have got it amputed and may have permanent disability of more than 50 per cent
in one limb. But another person suffering from leukaemia, i.e., cancer of bone marrow, requiring change of blood every now and then, may
not be covered under the rule if bone marrow is not treated as a limb of the body. This may be so despite the fact that the person in the latter
category may be requiring a much larger expenditure on his treatment and his capacity for normal work or engaging in a gainful
employment or occupation may be impaired to a much larger extent than that of the former. Likewise, failure of kidneys requiring a heavy
expenditure on dialysis or non-functional bone marrow of a thalassaemiac child requiring costly blood transfusions and daily disferal
injections to remove iron from his system may not entitle a person to claim the benefit of section 80U if kidney and bone marrow are not
held to be limbs of the body. Besides, the restrictive interpretation will go against the object of section 80U which is to allow the benefit for
such permanent disability as adversely affects the capacity for normal work or gainful employment and will suffer from the vice of
excessive delegation.
Doctor's certificate
5. Normally, the certificate of a doctor about the permanent physical disability, including mental retardation and blindness, should be an
adequate proof of the minor child being excluded from the clubbing provisions because the Parliament itself has provided the manner or
proof that would be acceptable to the Assessing Officer. The certificate will also satisfy the condition that the disability has the effect of
substantially reducing his capacity to engage in gainful employment.
Income of a handicapped child
6. Because of the proviso to section 64(1A) a minor child, whether handicapped or not, is excluded from clubbing provisions in respect of
such income as arises or accrues to him on account of any manual work done by him or from activity involving application of his skill,
talent or specialised knowledge and experience. In actual practice, however, in the case of handicapped children, such type of self-earned
income will arise in very few cases. In fact, such children would be requiring substantial recurring expenditure on their medical treatment
which is increasing due to increase in the cost of medicines and medical care. For example, a child suffering from Thalassaemia Major with
his non-functional bone marrow may be requiring between Rs. 7,000 to Rs. 8,000 per month as expenditure on blood transfusion, daily
disferal injections to remove iron from the system and on other items to enable him to survive. Thus, normally, the income of the
handicapped children would need to be in the nature of investment income from assets transferred from his parents or other relatives or
from his being a partner entitled to the benefits of a partnership firm or being a beneficiary under a private or public trust. Fortunately, it
will be permissible to do so with the amendments in section 64(1) by the Finance Act, 1992, removing the clubbing provisions such as
arising on account of admission of the minor to the benefits of a partnership or of income arising out of assets transferred directly or
indirectly to him and replacing them by an omnibus sub-section (1A) to section 64 clubbing the income of a minor, other than self-earned,
with that of his parent.
Conclusion
7. There should be no apprehension that the exclusion of handicapped minor children from the clubbing provisions would open a floodgate
of tax avoidance schemes. This is so because of the stringent tests laid down for making a handicapped child eligible for such exclusion. In
fact, this is a welcome measure which has removed some anxiety and worry of the unfortunate parents having substantially handicapped
children requiring heavy expenditure on their treatment for which enough funds could not be saved after suffering heavy tax through the
clubbing of the income of the child with that of his parent - and that too with the income of that parent whose total income excluding the
minor's income was higher. Mercifully, an iniquitous provision has been set right.
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