Clubbing of partnership profit fails where a gift only funds capital contribution and income arises from partnership status.

Section 64(iii) applies only where income arises directly from the transfer itself, not where the transferred amount merely serves as capital in a partnership business. A daughter-in-law's share of profit from a firm was held not to be clubbed in the assessee's income because the gift only enabled her capital contribution; the profit arose from her partnership status and the firm's earnings. The addition was deleted, and the assessee obtained relief against clubbing of the partnership income.

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Issues: Whether the share of profit earned by the assessee's daughter-in-law from a firm, in which she invested capital out of a gift received from the assessee, could be included in the assessee's total income under section 64(iii) of the Income-tax Act, 1961.

Analysis: The inclusion under section 64(iii) depends on whether the income arises as a direct result of the transfer and not merely because the transferred amount was used as capital in the partnership business. Where the recipient is admitted as a partner and earns profits because of the partnership arrangement and the business's earning of profits, the income is not treated as income arising from the transfer itself. On the facts, the gift only enabled the daughter-in-law to contribute capital; the share of profit arose from her partnership status and the firm's profits.

Conclusion: The share of profit could not be clubbed in the assessee's income; the addition was deleted.

Final Conclusion: The appeal succeeded and the assessee obtained relief against the clubbing of the daughter-in-law's partnership income.

Ratio Decidendi: For section 64(iii), income is includible only when it arises as a direct result of the transfer and not merely because the transferred asset was used to invest capital in a partnership from which profits were earned.

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