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Interpretation of section 64(1) of the Income-tax Act, 1961 regarding clubbing of income derived from a partnership firm by the spouse of an individual. Application of Explanation 3 to section 64(1) in determining the inclusion of income. Retroactive application of the amended sub-section (1) of section 64 and Explanation 3 to cases where the transfer occurred before the effective date of the amendment. Analysis: The case involved the assessment of an individual by the Income-tax Officer for the year 1982-83, where the income of the individual's wife from a partnership firm was sought to be clubbed with the individual's income. The Commissioner of Income-tax determined that the income of the wife should be included in the individual's income based on Explanation 3 to section 64. The Tribunal upheld this decision, leading to the individual filing an application under section 256(1) with two questions referred to the High Court for opinion. The primary contention by the counsel for the individual was that the profit in the partnership business did not directly result from the gift made to the wife, as required by legal precedent. Reference was made to the Supreme Court decisions in Prem Bhai Parekh's case and CIT v. Prahladrai Agarwala to support this argument. On the other hand, the Revenue's counsel argued that Explanation 3, inserted in 1975, altered the interpretation of section 64 and rendered the earlier Supreme Court decisions inapplicable. The High Court analyzed the legislative intent behind section 64, aimed at preventing tax avoidance through transfers to family members, and the widening scope of the provision over time. The insertion of Explanation 3 in 1975 was crucial, as it specified the inclusion of income derived from assets transferred to a spouse or minor child in certain situations. However, the Court noted that the gift in this case occurred in 1974, before the effective date of the Explanation, and found no retrospective application clause in the law. In conclusion, the High Court held that the Tribunal was not justified in applying clause (iv) of section 64(1) with Explanation 3 to the case and that the amended sub-section (1) of section 64 along with Explanation 3 was not applicable due to the timing of the alleged transfer. The judgment favored the assessee, ruling in their favor against the Revenue. The reference application was disposed of accordingly, with both judges concurring on the decision.
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