Clubbing of income under gifted asset rules: only interest linked to the transferred asset's value is includible, not sale surplus gains.

For clubbing under section 64(1)(iv) of the Income-tax Act, income must arise from the transferred asset and bear a proximate nexus with the transfer. Where gifted property was sold by the transferee and the sale proceeds were invested in fixed deposits, interest attributable to the original value of the gifted asset could be included in the transferor's hands. Interest referable to the surplus arising on sale, being capital accretion distinct from the transferred asset itself, lacked the required nexus and was not includible.

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Issues: Whether, for the purpose of clubbing under section 64(1)(iv) of the Income-tax Act, 1961, interest earned on fixed deposits made out of sale proceeds of property gifted by the assessee to his wife was includible in the assessee's hands in full or only to the extent relatable to the value of the property as transferred.

Analysis: The clubbing provision applies only where the income in question arises from the transferred asset and there is a proximate connection between the transfer and the income. The earlier decision relied upon established that, in the case of a transferred asset sold by the transferee, interest attributable to the original value of the gifted asset could be clubbed, but interest attributable to the accretion represented by capital gains on sale stood on a different footing. The surplus realised on sale was treated as income arising from the sale of the transferred asset, not as part of the transferred asset itself, and the income earned on investing that surplus lacked the necessary proximate nexus with the original transfer.

Conclusion: Only the interest attributable to the value of the asset transferred by the assessee could be included under section 64(1)(iv), and the interest referable to the surplus realised on sale of the property was not includible in the assessee's hands.

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