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Inclusion of wife's income as a partner of a firm due to capital contributed from gifts made by the husband. Interpretation of section 16(3)(a)(iii) of the Indian Income-tax Act, 1922 regarding income inclusion. Analysis: The judgment pertains to the assessment year 1960-61, involving the inclusion of the wife's income as a partner in a firm due to capital contributed from gifts made by her husband. The husband, Bhaichand, had initially partnered with his brother, Mathuradas, in a firm named Chandravadan & Co. The wife, Tarabai, later joined the new partnership where she contributed capital from gifts received from her husband. The dispute arose when the Income-tax Officer included the wife's entire income in the husband's total income for the assessment year. The Appellate Assistant Commissioner and the Tribunal upheld this decision, leading to the issue being referred to the High Court. The main contention was whether the entire sum of Rs. 31,778, representing the wife's interest and profit share in the new firm, should be included in the husband's total income. The husband's representative argued that only the interest on the capital amount contributed by the wife should be included, as per section 16(3)(a)(iii), which requires a proximate connection between assets transferred by the husband to the wife and the income derived. Reference was made to the Supreme Court decision in Commissioner of Income-tax v. Prem Bai Parekh, emphasizing the strict construction of the provision. The High Court analyzed the facts and the legal precedent cited. It noted that while a portion of the wife's capital contribution was from the husband's gifts, there was an additional capital contribution made by the wife herself. The Court emphasized the need for a direct nexus between the transferred assets and the derived income for inclusion under section 16(3)(a)(iii). Drawing parallels with the Supreme Court's decision in Prem Bai Parekh's case, where income of minors from a partnership was not included in the father's total income, the High Court concluded that only the interest on the capital directly gifted by the husband should be included in the husband's income. Therefore, the High Court ruled that the inclusion of Rs. 25,778 in the husband's total income under section 16(3)(a)(iii) was not justified. However, it held that the amount of Rs. 6,000, representing the interest on the capital directly gifted by the husband, should be included in the husband's total income. The Court directed the revenue to bear the costs of the assessee.
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