Section 64 clubbing of partnership income from daughters-in-law was held inapplicable on gifted capital facts

Income arising to the assessee's daughters-in-law from partnership firms was not clubbed in the assessee's hands under section 64(1)(vi) where the funds used to acquire the partnership interests were said to have been gifted by the assessee. The Tribunal followed the principle in Prem Bhai Parekh and the Calcutta High Court's explanation of that ratio, and it also noted that Explanation 3 to section 64 expressly referred to clauses (iv) and (v) but not clause (vi). On that basis, the clubbing provision was held inapplicable and the addition was deleted.

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Issues: Whether income arising to the assessee's daughters-in-law from partnership firms could be clubbed in the assessee's hands under section 64(1)(vi) of the Income-tax Act, 1961 when the amounts invested in the firms were alleged to have been gifted by the assessee.

Analysis: The assessee's two daughters-in-law became partners in the firms with funds said to have been gifted to them. The revenue sought to apply section 64(1)(vi) on the footing that the partnership income was traceable to the assessee's transfer of funds. The Tribunal held that this approach was contrary to the principle laid down by the Supreme Court in Prem Bhai Parekh and as explained by the Calcutta High Court, and that the ratio of those decisions had been correctly applied by the Appellate Assistant Commissioner. The Tribunal also accepted the additional contention based on the structure of section 64, noting that Explanation 3 expressly referred to clauses (iv) and (v) and not to clause (vi).

Conclusion: The clubbing provision in section 64(1)(vi) did not apply to the partnership income in the hands of the assessee, and the deletion of the addition was upheld.

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