Renunciation of share subscription rights treated as asset transfer, bringing dividend income from allotted shares within clubbing provisions.

A shareholder's renunciation of the right to apply for further shares in favour of minor daughters was treated as a transfer of an asset because the right to acquire the shares was transferable and the renunciation operated as a direction for allotment to another person. The resulting dividend income was held to arise directly from assets transferred by the assessees without adequate consideration, so it was includible in their total income under the applicable clubbing provisions. The reasoning emphasised the proximate link between the renunciation and the dividend income, rather than a remote connection.

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Issues: (i) Whether renunciation of the right to apply for shares in favour of minor daughters amounted to a transfer of an asset. (ii) Whether the dividend income arising from the shares allotted to the minor daughters was includible in the assessees' total income under the relevant clubbing provisions.

Issue (i): Whether renunciation of the right to apply for shares in favour of minor daughters amounted to a transfer of an asset.

Analysis: The right to acquire the new shares was an existing and transferable right. The allotment machinery under section 81 of the Companies Act, 1956, expressly recognised a shareholder's power to renounce the offered shares in favour of another person, and section 82 treated shares as movable property transferable in the manner provided by the articles. The renunciation was not a mere unilateral abstention from purchase: it operated as a method by which the shareholder directed the offer to another person, who then acquired the shares on that basis. The act therefore effected a transfer of the right to acquire the shares.

Conclusion: Renunciation amounted to a transfer of an asset and the answer is against the assessees.

Issue (ii): Whether the dividend income arising from the shares allotted to the minor daughters was includible in the assessees' total income under the relevant clubbing provisions.

Analysis: The minors acquired the shares only because of the assessees' renunciation, and the dividend income arose from those shares. The connection between the transfer of the right and the income was direct and proximate, unlike cases where the link between the transfer and the income was remote. Since the shares were obtained on the strength of the renunciation, the resulting dividends were income arising from assets transferred by the assessees otherwise than for adequate consideration.

Conclusion: The dividend income was rightly included in the assessees' total income under section 16(3)(a)(iv) of the Indian Income-tax Act, 1922 and section 64 of the Income-tax Act, 1961, and the answer is against the assessees.

Final Conclusion: The reference was answered in the affirmative in favour of the Revenue, with costs awarded to the Revenue.

Ratio Decidendi: A shareholder's renunciation of the right to take up further shares in favour of a minor child is a transfer of an asset, and dividends arising from shares obtained on that renunciation are includible in the transferor's total income where the statutory clubbing provision applies.

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