Cross-gift clubbing under tax law extends to income earned from a spouse's deposit funded by the other spouse.

Cross-gifts between spouses were treated as indirect transfers of assets when the recipient spouse invested the gifted amount and earned income from it. The interest generated on the wife's deposit was therefore regarded as income arising from assets transferred indirectly by the assessee, bringing it within the clubbing provision in section 64(iii) of the Income-tax Act, 1961. The income was held includible in the assessee's total income, and the Revenue's position was accepted.

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Issues: Whether income arising to a from a deposit made out of a cross-gift by the assessee's brother was includible in the assessee's total income under section 64(iii) of the Income-tax Act, 1961.

Analysis: The gifts made by the assessee and his brother to each other's wives were accepted as cross-gifts. On that basis, the amount received by the assessee's wife and deposited by her with the firm represented an asset transferred indirectly to her by the assessee. The interest earned on that deposit was therefore income arising from the indirectly transferred asset. The reasoning was supported by the earlier authority treating a direct cash gift followed by investment as attracting the clubbing provision, and by the view that capital contributed by a spouse from money received from the other spouse brings the resulting income within the statutory mischief.

Conclusion: The income from the wife's deposit was rightly includible in the assessee's hands under section 64(iii) of the Income-tax Act, 1961, and the question was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: Where a spouse receives a cross-gift from the other spouse and invests it so as to earn income, the resulting income is treated as arising from assets transferred indirectly by the donor spouse and is liable to be clubbed in the donor spouse's total income under section 64(iii) of the Income-tax Act, 1961.

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