Gifted property and accrued income are taxed only in the transferee's hands once the transfer is complete.

For tax purposes, income and wealth are assessable in the hands of the person to whom they accrue or belong, and not merely in the hands of a transferor who may still have a legal challenge to the transfer. Where a karta gifted property to donees and the amount passed into their hands, the interest earned on that amount was not taxable in the Hindu undivided family's hands because the family did not earn the income. On wealth-tax, the gifted amount and estimated interest ceased to be the family's asset once transferred, and a possible right of recovery did not keep it within its net wealth.

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Issues: (i) Whether the interest accruing on the amount of Rs. 4 lakhs gifted by the karta of the Hindu undivided family was taxable in the hands of the assessee family for income-tax purposes if the gift was void or voidable. (ii) Whether the gifted amount of Rs. 4 lakhs together with the estimated interest thereon ceased to be an asset of the assessee family for wealth-tax purposes if the gift was void or voidable.

Issue (i): Whether the interest accruing on the amount of Rs. 4 lakhs gifted by the karta of the Hindu undivided family was taxable in the hands of the assessee family for income-tax purposes if the gift was void or voidable.

Analysis: The gift was in fact made and the amount passed into the hands of the donees, who thereafter earned income from it. The relevant principle applied was that income-tax is levied on the person whose income it is, not merely on a person who may retain title to the property from which income is earned. Even if the gift were treated as void, the assessee family did not earn the income arising from the gifted amount. The transfer was not a case of settlement or reserved enjoyment within the anti-avoidance provision relied on by the Revenue.

Conclusion: The interest accruing on the gifted amount did not accrue to the assessee family for income-tax purposes, and the answer was in favour of the assessee.

Issue (ii): Whether the gifted amount of Rs. 4 lakhs together with the estimated interest thereon ceased to be an asset of the assessee family for wealth-tax purposes if the gift was void or voidable.

Analysis: Wealth-tax is charged on the net wealth of the assessee, meaning assets belonging to the assessee on the valuation date. The amount had been transferred to the donees and had left the assessee family's hands. A possible right of recovery, if any, did not keep the amount within the assessee's assets for wealth-tax purposes. The transfer was treated as not attracting the provision concerning assets transferred otherwise than under an irrevocable transfer, as the facts did not justify treating the gift as a revocable transfer for wealth-tax purposes.

Conclusion: The amount of Rs. 4 lakhs together with the estimated interest thereon ceased to be an asset of the assessee family for wealth-tax purposes, and the answer was in favour of the assessee.

Final Conclusion: Both references were answered against the Revenue and in favour of the assessee on the common principle that the gifted amount had gone out of the assessee family's hands and the income or asset could not be assessed in its hands merely because the gift might be questioned in law.

Ratio Decidendi: For tax purposes, income and wealth are assessable only in the hands of the person to whom they accrue or belong in law and fact; once property is transferred and the transferee enjoys the income or holds the asset, a mere possibility of the transfer being impeachable does not by itself make the income or asset taxable in the transferor's hands.

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