1. Facts of the Case
- Mrs. Y, an individual taxpayer, made cash gifts to her husband (Mr. Y) during the financial year.
- Mr. Y invested the gifted amount in interest-yielding securities (e.g., fixed deposits, bonds).
- The interest income earned from those investments was included in the income of Mrs. Y by the Income Tax Department.
- Mrs. Y has objected to this inclusion, arguing that the income was earned by her husband independently using the gifted money.
2. Issues in the Case
- Is the interest income earned by Mr. Y from the invested gifted amount taxable in his hands or in the hands of Mrs. Y (the donor)?
- Does the Income Tax Act permit clubbing of such income under any specific provision?
- Is the Assessing Officer’s action of taxing the interest in Mrs. Y’s hands legally valid?
3. Legal Principles Covered
A. Section 64(1)(iv) – Clubbing of Income of Spouse
As per Section 64(1)(iv) of the Income Tax Act, 1961:
“In computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual, otherwise than for adequate consideration or in connection with an agreement to live apart.”
Applicability in This Case:
- Mrs. Y transferred cash (an asset) to her husband.
- The transfer was a gift (i.e., without any consideration).
- The interest income from securities arises directly from the gifted cash.
- There is no separation agreement between the spouses.
Hence, Section 64(1)(iv) is fully applicable.
B. Distinction Between Income and Income from Income
- Only the first-level income (i.e., the interest earned directly from the gifted money) is clubbed in the hands of the transferor.
- Any income generated from reinvestment of that interest (called “income from income”) is not clubbed (e.g., if interest earned is reinvested and earns more interest, the second-level income is not clubbed).
C. Relevant Judicial Precedents
- Seventilal Maneklal Sheth v. CIT (1968) 68 ITR 503 (SC)
- Clarified that clubbing provisions apply even in indirect transfers and the real test is the source of investment.
- CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC)
- Emphasized that gifting without adequate consideration invites clubbing provisions.
- CIT v. Keshavji Morarji (1967) 66 ITR 142 (SC)
- Reinforced that income must arise from the transferred asset for clubbing to apply.
4. Possible Judgement
Based on the facts and legal provisions, the action of the Assessing Officer is correct.
- The interest income earned by Mr. Y from the investment of the gifted amount is income arising directly from an asset transferred by Mrs. Y without adequate consideration.
- Therefore, under Section 64(1)(iv), the interest must be included in the total income of Mrs. Y, not her husband.
- Mrs. Y’s objection is not tenable in law, and she is liable to be taxed on the interest income arising from the gifted funds.
