37. Mrs. Y’ made certain cash gifts for her husband, which he invested in some interest yielding securities. The interest realized in securities was included in the income of Mrs. ‘Y’ by the income tax department, which was objected to by Mrs. ‘Y’. Discuss and decide whether the action of the assessing officer is correct.

1. Facts of the Case

• Mrs. Y made cash gifts to her husband (Mr. Y).
• Mr. Y used the gifted amount to invest in interest-bearing securities.
• The interest earned on these investments was clubbed with Mrs. Y’s income by the Income Tax Department.
• Mrs. Y objected to this action, claiming the income belongs to her husband since he made the investment and is the owner of the securities.

2. Issues in the Case [Questions]

1. Whether the interest income earned by Mr. Y from securities purchased out of gifted money by his wife is taxable in his own hands or in the hands of Mrs. Y?
2. Does the gift from spouse followed by income generation lead to clubbing of income?
3. Is the action of the Assessing Officer (AO) in clubbing the interest income with Mrs. Y’s income legally valid?

3. Legal Principles Covered

A. 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.”

Explanation:

• A cash gift from wife to husband (or vice versa) without consideration is a transfer of asset.
• Any income arising from that transferred asset, even indirectly, is clubbed with the income of the transferor spouse.

B. Application to the Present Case:

• Mrs. Y gifted cash (movable asset) to Mr. Y without consideration.
• Mr. Y invested the gifted cash in interest-yielding securities.
• The interest income is considered to have arisen indirectly from the transferred asset (cash).
• Therefore, Section 64(1)(iv) applies, and the interest is taxable in the hands of Mrs. Y, not Mr. Y.

C. Relevant Case Laws

1. Seventilal Maneklal Sheth v. CIT (1968) 68 ITR 503 (SC)
   • Supreme Court upheld that income derived indirectly from transferred asset by spouse is clubbed with the income of the transferor.
2. CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC)
   • Even if the gifted amount is invested by the recipient spouse, the income remains taxable in the hands of the donor spouse under clubbing provisions.
3. CBDT Circulars have reiterated that clubbing applies even when the asset transferred is cash, and the investment income arises indirectly.

4. Possible Judgement / Conclusion

The action of the Assessing Officer is legally correct.

• Under Section 64(1)(iv), the interest income arising from the cash gifted by Mrs. Y to Mr. Y is indirectly attributable to the transferred asset.
• Hence, the interest income is required to be clubbed with Mrs. Y’s total income.
• The objection raised by Mrs. Y is not sustainable, and her claim must be rejected.