Clubbing of partnership income turns on the real source of a spouse's profit share, not a remote capital transfer.

Income arising to an assessee's wife from a partnership firm was analysed under the clubbing rule in section 64(iii) of the Income-tax Act, 1961. The decisive point was whether her admission to the firm and resulting profit share flowed from capital transferred by the assessee, or from her own status as an active partner. On the facts accepted by the appellate authorities, she was not admitted because of the capital contribution, and the link between the transfer and the profit share was too remote to justify clubbing. Accordingly, the wife's share of profits was not includible in the assessee's assessment, apart from the separate interest component.

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Issues: Whether the share of profits earned by the assessee's wife in a partnership firm, together with the interest on the capital contributed by her from funds transferred by the assessee, could be included in the assessee's assessment under section 64(iii) of the Income-tax Act, 1961.

Analysis: The decisive question was whether the wife became a partner in the firm by reason of the capital transferred by the assessee, or whether her income arose from her own status and participation in the partnership. The finding accepted by the appellate authorities was that she had not been admitted as a partner because of the capital contribution and that she was an active partner in the conduct of the business. On that footing, the connection between the transfer made by the assessee and the profit share was too remote to attract clubbing under the provision. The reasoning followed the principle that income is not includible in the transferor's hands unless it arises directly or indirectly from the transfer in the statutory sense.

Conclusion: The share of profits, apart from the interest component, was not includible in the assessee's assessment. The question was answered in the affirmative and in favour of the assessee.

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