Clubbing of capital gains from transferred shares upheld where gain was traced to the gifted asset and anti-avoidance applied.

Capital gains realised by a wife on sale of shares gifted by her husband were held to fall within income arising directly or indirectly from transferred assets under section 16(3)(a)(iii) of the Income-tax Act, 1922. The expression "income" was treated as wide enough to include capital gains after the statutory definition expanded, and the provision was not confined to recurring returns from the asset. Because the gain was traced to the transferred shares and the provision was intended to prevent tax avoidance through indirect transfers, the capital gain was includible in the husband's total income, and the assessee failed.

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Issues: Whether capital gains realised by the wife on sale of shares gifted by the husband constituted income arising directly or indirectly from assets transferred to the wife within section 16(3)(a)(iii) of the Income-tax Act, 1922, so as to be included in the husband's total income.

Analysis: The expression "income" in section 16(3)(a)(iii) was held to be wide enough to include capital gains after the statutory definition of income was expanded by section 2(6C)(vi), and there was no sound basis for confining the provision only to recurring income from the asset while excluding gains realised on its sale. The gain on sale was treated as springing from the transferred asset and, in substance, as income arising directly or indirectly from that asset. The provision was read in light of its object of preventing tax avoidance through transfers to a or minor child.

Conclusion: The capital gain was includible in the husband's total income under section 16(3)(a)(iii), and the answer was against the assessee.

Final Conclusion: The appeal failed, and the inclusion of the wife's capital gain in the assessee's taxable income was upheld.

Ratio Decidendi: Under section 16(3)(a)(iii), "income" includes capital gains arising from transferred assets where the gain is traced to the transfer, and the provision must be construed to suppress tax avoidance by indirect transfer of income-producing assets.

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