Clubbing of insurance-linked interest income where husband's premium payments are treated as transferred assets to wife

Premiums paid by a husband for a life insurance policy taken for his wife's benefit may amount to a transfer of cash assets to the spouse for section 64(1)(iv) of the Income-tax Act, 1961. The Married Women's Property Act, 1874 does not prevent application of that clubbing provision, because it only protects policy proceeds as the wife's separate property. Where the maturity proceeds represent transformed premiums, interest earned on investment of those proceeds retains an indirect nexus with the transferred assets and is includible in the husband's income.

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Issues: Whether interest earned by the wife on the maturity value of a life insurance policy taken by the husband for her benefit was includible in the husband's income under section 64(1)(iv) of the Income-tax Act, 1961.

Analysis: For section 64(1)(iv) to apply, there must be a transfer of assets by the individual to the spouse otherwise than for adequate consideration and the income must arise directly or indirectly from such transferred assets. The premium paid by the husband under the policy was treated as a transfer of cash asset to the wife through the policy arrangement. The fact that the policy operated under the Married Women's Property Act, 1874 did not prevent application of section 64(1)(iv), because that Act only protected the policy proceeds as the wife's separate property. The maturity proceeds represented the transformed form of the premiums paid, and the interest earned on investment of those proceeds retained a sufficient indirect nexus with the transferred cash assets.

Conclusion: The interest income was includible in the husband's income under section 64(1)(iv), and the answer was in favour of the Revenue.

Ratio Decidendi: Premiums paid by a husband for a policy taken for the wife's benefit can constitute a transfer of cash assets to the spouse, and income earned from investment of the maturity proceeds is taxable in the husband's hands if it arises indirectly from those transferred assets without adequate consideration.

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