Income Arising Directly From Transferred Assets must be distinct from trustees' independent business income; business income is not includible under section 16(3)(b).

Trustees' frequent purchases and sales, high turnover, disposals of new scrips and transactional patterns supported an inference that the trustees were carrying on a business of dealing in shares, and the Tribunal's conclusion to that effect was sustainable. Separately, section 16(3)(b) requires income to arise directly from transferred assets; income generated by an independent trading business carried on by trustees is sourced in the business and not the transferred assets, so such business income cannot be included in the settlor's assessment under section 16(3)(b). The reference produced a split outcome accordingly.

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Issues: (i) Whether there was evidence before the Tribunal to conclude that the trustees of the trusts were carrying on business in shares; (ii) Whether income from the trustees' dealings in shares could be included in the settlor's assessment under section 16(3)(b) of the Income-tax Act, 1961.

Issue (i): Whether there was evidence before the Tribunal to conclude that the trustees of the trusts were carrying on business in shares.

Analysis: The transactions for the relevant years show frequent purchases and sales, significant turnover of capital (approximately two-thirds turnover up to a specified year), sales of newly purchased scrips rather than original holdings, disposals at losses within short intervals, and augmentation and diminution of holdings inconsistent with nursing investments. The settlor was a prominent dealer and a trustee with decisive influence and the trust instruments conferred wide powers to deal with and vary investments. The transactional pattern and surrounding circumstances constitute material supporting an inference of dealing in the nature of business.

Conclusion: The question is answered in the affirmative; there was evidence and material before the Tribunal to conclude that the trustees were carrying on business in shares (against the assessee).

Issue (ii): Whether income from the trustees' dealings in shares could be included in the settlor's assessment under section 16(3)(b) of the Income-tax Act, 1961.

Analysis: Section 16(3)(b) requires that income be that which arises from assets transferred otherwise than for adequate consideration to the person or association for the benefit of the transferor's wife or minor child. Clause (b) omits the words "directly or indirectly" used elsewhere in the section, indicating that income included must arise directly from the transferred assets. Income generated by a business activity carried on by trustees is derived from the business as the source; the business activity is distinct from the assets even if the assets enable the activity. No transfer of the business as a going concern was shown under the trusts; therefore the business income does not qualify as income arising directly from the transferred assets within clause (b).

Conclusion: The question is answered in the negative; income from the trustees' business dealings in shares is not includible in the settlor's assessment under section 16(3)(b) (in favour of the assessee).

Final Conclusion: One referred question is answered against the assessee and the other in favour of the assessee, producing a mixed decision on the reference; no order as to costs was made.

Ratio Decidendi: For the purposes of section 16(3)(b) of the Income-tax Act, 1961, only income that arises directly from the transferred assets qualifies as income of those assets; business income earned by trustees through an independent trading activity using the assets is income from the business (the source) and not income arising directly from the transferred assets.

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