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The Madras High Court in CIT v. M S S Rajan (120TAX680) held that interest on fixed deposit made out of rentals income derived from property transferred by the husband is assessable in the hands of the wife. Similarly the capital gains arising from sale of property transferred would also be subject to clubbing provisions. The High Court further observed that section 64 could only be applied in the following situations:
a) to the income directly or indirectly realized from assets transferred ;
b) to the income realized from the transferred asset;
c) to the income substituted for the transferred asset. Any accretion such as bonus shares would be outside the ambit of clubbing provisions.

The Delhi High Court in Dalmia (R.) Vs. Commissioner of Income-tax (133ITR169) however held that it is only the income arising out of the originally transferred assets (not substituted), which can be assessed in the husband’s name. It would have to be ascertained as to what was the value of the transferred property and only that element which can be attributed to that transfer can be taxed in the husband’s name.

A wife can thus make savings out of household expenses paid to her by her husband and the savings cannot be deemed to be assets transferred to the wife. Income from such savings cannot be deemed to be income, which is earned from assets directly or indirectly transferred to her. In the case of Dalmia (supra) the assessee’s wife, had invested a sum of Rs. one lakh in certain debentures and received an income of Rs. 10,104. The sum of Rs. 1 lakh included Rs. 90,000 being the sale proceeds of a house gifted to her by the assessee and valued at Rs. 88,100: held that that only that part of the sum of Rs. 10,104 arising out of an investment of Rs. 88,100 could be taxed in the hands of the assessee and the balance had to be excluded.

Further in the application of clubbing provisions it may be worth noting the decision of the Supreme Court in CIT v. Prem Bhai Parekh [1970] 77 ITR 27. In this case the Apex Court held that “the connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it”. The proximity referred to is the proximity between the assets transferred and the income in question. The time lag, if any, is of no significance under section 64(1)(iv) of the Act. In the case of Damodar K Shah v. CIT (119TAX882) the assessee made payments of premium on policy taken in the name of his wife. The maturity proceeds were invested and income earned thereon in the name of his wife. The assessing officer clubbed such income in the hands of the assessee. The Gujarat High Court upheld such action in the ultimate. Following the principle laid down by the Apex Court the High Court held that proximity between asset and income has to be considered irrespective of time lag between transfer of asset and actual income derived. Thus the Gujarat High Court view is in consonance with the Madras High Court view. The Delhi High Court view is however different fro the two.

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