Spouse gift exemption does not protect a later transfer funded from the same earlier gift, making it taxable under the deeming rule.

Section 5(3) of the Gift-tax Act applies where a spouse makes a later gift out of the very amount earlier received as a spouse gift, even though the earlier receipt was exempt under section 5(1)(viii). The decisive factor is the factual link between the two transactions: an account entry showing that the later payment was made to return the earlier gift established that the money was not independent of the exempt spouse gift. On that footing, the later gift was treated as taxable under the deeming rule.

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Issues: Whether section 5(3) of the Gift-tax Act, 1958, applied to the assessee's gift to his wife so as to make it a taxable gift notwithstanding the exemption under section 5(1)(viii).

Analysis: Section 5(3) operates where a spouse makes gifts out of gifts previously received within the spouse exemption under section 5(1)(viii). The decisive question was whether the earlier gift by the wife and the later gift by the assessee were independent transactions or whether the later payment was merely a return of the same money. The account entry in the assessee's books expressly referred to the wife's earlier gift and stated that cash was taken for returning that gift to her. That entry established a direct link between the two gifts and showed that the assessee's payment was made out of the gift earlier received from his wife.

Conclusion: Section 5(3) applied, and the assessee's gift was taxable; the reference was answered against the assessee and in favour of Revenue.

Ratio Decidendi: Where a spouse makes a subsequent gift out of the very amount earlier received as a spouse gift, section 5(3) deems that subsequent gift taxable notwithstanding the exemption in section 5(1)(viii).

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