Clubbing of dividend income follows where transferred funds remain traceable in substituted shares under income-tax law

Dividend income from shares acquired with funds supplied by the husband was treated as income arising directly or indirectly from assets transferred to the wife under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. The Court held that the later exchange of the original shares for shares in the purchasing company did not sever the traceable connection between the transferred funds and the dividend-producing asset; it was only a substitution of one form of property for another. Authorities on bonus shares, capital gains, and interest on sale proceeds were distinguished because they involved different factual chains.

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Issues: Whether dividend income arising from shares received in exchange for shares purchased out of funds supplied by the husband is assessable in the husband's hands under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.

Analysis: The statutory test was whether the wife's dividend income arose directly or indirectly from an asset transferred by the husband. The funds supplied by the assessee enabled the wife to acquire the original shares, and the later exchange of those shares for shares in the purchasing company did not break the connection between the transferred asset and the dividend-producing shares. The transaction was treated as a substitution of one form of the asset for another, not as a real sale by the wife followed by a fresh independent purchase. Authorities dealing with bonus shares, capital gains, and interest on sale proceeds were distinguished because they involved income of an income or a different factual chain.

Conclusion: The dividend on the 988 shares was income arising directly from assets transferred by the husband to his wife and was assessable in his hands.

Ratio Decidendi: Where transferred funds are traceable into substituted property, income from the substituted property is treated as income arising directly or indirectly from the transferred asset for purposes of clubbing under section 16(3)(a)(iii).

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