Clubbing of wife's partnership income fails where transfer of assets to generate the income is not proved

A wife's partnership share income was not taxable in the husband's hands under clubbing provisions because the Revenue failed to prove that the income arose from assets transferred directly or indirectly by him. The court accepted the concurrent factual finding that the wife's admission as a partner and her capital contribution were not shown to be the source of the share income in the manner required by section 64(1)(iii), and that capital contribution was not established as a necessary condition for becoming a partner. The reference was therefore answered in favour of the assessee.

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Issues: Whether the wife's share of profit from the partnership firm was includible in the assessee's income under section 64(1)(iii) of the Income-tax Act, 1961, on the footing that it arose from assets transferred directly or indirectly by the assessee.

Analysis: The wife became a partner in the firm and the capital said to have been invested by her was alleged to have come from funds gifted by the assessee. The finding of the authorities below was that the Revenue failed to establish that the share income arose because of such transfer of assets or that capital contribution was a necessary condition for becoming a partner. On the record, no material was shown to displace the concurrent factual finding that the alleged investment by the wife was not proved to be the source of the share income in the manner required by section 64(1)(iii).

Conclusion: The reference was answered in favour of the assessee and against the Revenue; the wife's share income was not includible in the assessee's income under section 64(1)(iii).

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