I gifted money to my children, who put it into a firm and were admitted to the benefits of partnership. Is their share income clubbed with mine as arising from the gift?
No, on the provision then in force. The Supreme Court held that a clubbing provision creates an artificial income and must be strictly construed. Before income can be brought within it, the income must be proved to have arisen directly or indirectly from the transfer of assets made by the assessee, and the connection between the transfer and the income must be proximate: the income must arise as a result of the transfer, not merely be connected with it in some manner. Here the minors' income arose from their admission to the benefits of the partnership, so the connection with the gift was remote.
Decided by the Supreme Court (Supreme Court of India - J.C. Shah, K.S. Hegde and A.N. Grover JJ; judgment by Hegde J) on 1970-04-20, reported as 1970 AIR 1518; 1971 SCR (1) 308; 1970 (3) SCC 784; Civil Appeal No 2272 of 1966. It bears on section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, section 64 of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Gifts, Shares & Angel Tax matters.
The proximate connection test comes from this case, and it is the answer to every attempt to trace income back through a chain to an original transfer. The Court accepted the two facts the Revenue relied on - that the father had gifted Rs 75,000 to each son, and that the capital the minors put into the firm came from those gifts - and still held the section inapplicable, because what produced the income was their admission to the benefits of partnership. That is the distinction to hold on to: the source of the funds is not the source of the income. The strict construction principle, taken from Keshavlal Lallubhai Patel, is the ground for it - a provision that deems one person's income to be another's is an artificial charge and is not to be extended by tracing.
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Ajitmal Parekh was a partner in the firm Ajitmal Kanhaiyalal. He remained a partner until 1 July 1954, the last day of the firm's accounting year relevant to assessment year 1955-56, when he retired. He then gifted Rs 75,000 to each of his four sons, three of whom were minors. The firm was reconstituted with effect from 2 July 1954 by a partnership deed of 5 July 1954. The major son became a partner with a two annas share, and the three minor sons were admitted to the benefits of the partnership with two annas each. For assessment year 1956-57 the Income-tax Officer held that the income arising to the minors from their admission to the benefits of the partnership fell within section 16(3)(a)(iv) and included it in the father's total income. The Appellate Assistant Commissioner substantially upheld the assessment but held the minors entitled to a smaller share, and the Tribunal upheld him. The Tribunal found as a fact that the capital the minors put into the firm came from the gifts, a finding not questioned before the High Court and not departed from by it. On a reference the Calcutta High Court, by judgment of 6 January 1966, answered in the assessee's favour. Of the two questions referred, the first - whether the clubbing provision was ultra vires the Central Legislature - was not pressed by the assessee and was not dealt with. The Commissioner appealed by certificate.
The appeal was dismissed. The provision applies only where so much of the income of a wife or minor child arises directly or indirectly from assets transferred directly or indirectly by the individual otherwise than for adequate consideration. It was not disputed that the assessee had transferred Rs 75,000 to each minor son, and it may also be that the amounts they contributed as their share in the firm came from those sums. But the connection between the gifts and the income in question is remote. The minors' income arose as a result of their admission to the benefits of the partnership; it is true that they were admitted because of the contribution they made, but there is no nexus between the transfer of the assets and the income, and it cannot be said that the income arose directly or indirectly from the transfer. Section 16(3) creates an artificial income and must receive strict construction, as the Court had held in CIT, Gujarat v Keshavlal Lallubhai Patel. Before income can come within its ambit it must be proved to have arisen, directly or indirectly, from a transfer of assets made by the assessee in favour of his wife or minor children; the connection between the transfer and the income must be proximate, and the income must arise as a result of the transfer and not in some manner connected with it.
The reasoning is short and turns on separating two questions that the Revenue had run together. The first is where the capital came from, and on that the Tribunal's finding was against the assessee and was accepted throughout - the money the minors put into the firm was the money their father had given them. The second is what produced the income, and the answer is the minors' admission to the benefits of the partnership under the reconstituted firm's deed. The capital contribution was the occasion for the admission but not the source of the income; the income is the fruit of a share in a partnership, and a share in a partnership is not the asset that was transferred. Because the section deems income of one person to be the income of another, it creates an artificial income and cannot be stretched by tracing through intermediate steps. That is why the words directly or indirectly, which might otherwise invite an unlimited chain of causation, are confined by a requirement of proximity: the income must arise as a result of the transfer, not merely be connected with it in some manner.
The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it.
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Handle my notice → Ask a CA on WhatsAppNo, on the provision then in force. The Supreme Court held that a clubbing provision creates an artificial income and must be strictly construed. Before income can be brought within it, the income must be proved to have arisen directly or indirectly from the transfer of assets made by the assessee, and the connection between the transfer and the income must be proximate: the income must arise as a result of the transfer, not merely be connected with it in some manner. Here the minors' income arose from their admission to the benefits of the partnership, so the connection with the gift was remote. This was decided by the Supreme Court (Supreme Court of India - J.C. Shah, K.S. Hegde and A.N. Grover JJ; judgment by Hegde J) and bears on section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, section 64 of the Income Tax Act 1961. It is reported as 1970 AIR 1518; 1971 SCR (1) 308; 1970 (3) SCC 784; Civil Appeal No 2272 of 1966. The proximate connection test comes from this case, and it is the answer to every attempt to trace income back through a chain to an original transfer. The Court accepted the two facts the Revenue relied on - that the father had gifted Rs 75,000 to each son, and that the capital the minors put into the firm came from those gifts - and still held the section inapplicable, because what produced the income was their admission to the benefits of partnership. That is the distinction to hold on to: the source of the funds is not the source of the income. The strict construction principle, taken from Keshavlal Lallubhai Patel, is the ground for it - a provision that deems one person's income to be another's is an artificial charge and is not to be extended by tracing. If it applies to you, the first step is this: Identify what actually produced the income and show that it is a step removed from the transfer - a partnership admitted, a business carried on, a fresh investment decision - rather than the transferred asset itself yielding a return.
Ajitmal Parekh was a partner in the firm Ajitmal Kanhaiyalal. He remained a partner until 1 July 1954, the last day of the firm's accounting year relevant to assessment year 1955-56, when he retired. He then gifted Rs 75,000 to each of his four sons, three of whom were minors. The firm was reconstituted with effect from 2 July 1954 by a partnership deed of 5 July 1954. The major son became a partner with a two annas share, and the three minor sons were admitted to the benefits of the partnership with two annas each. For assessment year 1956-57 the Income-tax Officer held that the income arising to the minors from their admission to the benefits of the partnership fell within section 16(3)(a)(iv) and included it in the father's total income. The Appellate Assistant Commissioner substantially upheld the assessment but held the minors entitled to a smaller share, and the Tribunal upheld him. The Tribunal found as a fact that the capital the minors put into the firm came from the gifts, a finding not questioned before the High Court and not departed from by it. On a reference the Calcutta High Court, by judgment of 6 January 1966, answered in the assessee's favour. Of the two questions referred, the first - whether the clubbing provision was ultra vires the Central Legislature - was not pressed by the assessee and was not dealt with. The Commissioner appealed by certificate. The matter was decided on 1970-04-20 by the Supreme Court (Supreme Court of India - J.C. Shah, K.S. Hegde and A.N. Grover JJ; judgment by Hegde J). On those facts the Supreme Court held as follows. The appeal was dismissed. The provision applies only where so much of the income of a wife or minor child arises directly or indirectly from assets transferred directly or indirectly by the individual otherwise than for adequate consideration. It was not disputed that the assessee had transferred Rs 75,000 to each minor son, and it may also be that the amounts they contributed as their share in the firm came from those sums. But the connection between the gifts and the income in question is remote. The minors' income arose as a result of their admission to the benefits of the partnership; it is true that they were admitted because of the contribution they made, but there is no nexus between the transfer of the assets and the income, and it cannot be said that the income arose directly or indirectly from the transfer. Section 16(3) creates an artificial income and must receive strict construction, as the Court had held in CIT, Gujarat v Keshavlal Lallubhai Patel. Before income can come within its ambit it must be proved to have arisen, directly or indirectly, from a transfer of assets made by the assessee in favour of his wife or minor children; the connection between the transfer and the income must be proximate, and the income must arise as a result of the transfer and not in some manner connected with it.
The reasoning is short and turns on separating two questions that the Revenue had run together. The first is where the capital came from, and on that the Tribunal's finding was against the assessee and was accepted throughout - the money the minors put into the firm was the money their father had given them. The second is what produced the income, and the answer is the minors' admission to the benefits of the partnership under the reconstituted firm's deed. The capital contribution was the occasion for the admission but not the source of the income; the income is the fruit of a share in a partnership, and a share in a partnership is not the asset that was transferred. Because the section deems income of one person to be the income of another, it creates an artificial income and cannot be stretched by tracing through intermediate steps. That is why the words directly or indirectly, which might otherwise invite an unlimited chain of causation, are confined by a requirement of proximity: the income must arise as a result of the transfer, not merely be connected with it in some manner. In the words reproduced by the source cited on this page: "The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it."
It was decided by the Supreme Court on 1970-04-20 and is reported as 1970 AIR 1518; 1971 SCR (1) 308; 1970 (3) SCC 784; Civil Appeal No 2272 of 1966. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, section 64, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed. The provision applies only where so much of the income of a wife or minor child arises directly or indirectly from assets transferred directly or indirectly by the individual otherwise than for adequate consideration. It was not disputed that the assessee had transferred Rs 75,000 to each minor son, and it may also be that the amounts they contributed as their share in the firm came from those sums. But the connection between the gifts and the income in question is remote. The minors' income arose as a result of their admission to the benefits of the partnership; it is true that they were admitted because of the contribution they made, but there is no nexus between the transfer of the assets and the income, and it cannot be said that the income arose directly or indirectly from the transfer. Section 16(3) creates an artificial income and must receive strict construction, as the Court had held in CIT, Gujarat v Keshavlal Lallubhai Patel. Before income can come within its ambit it must be proved to have arisen, directly or indirectly, from a transfer of assets made by the assessee in favour of his wife or minor children; the connection between the transfer and the income must be proximate, and the income must arise as a result of the transfer and not in some manner connected with it. It arises in Assessment & Scrutiny, How Tax Law Is Read and Gifts, Shares & Angel Tax matters, on section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, section 64 of the Income Tax Act 1961, and was decided by Supreme Court of India - J.C. Shah, K.S. Hegde and A.N. Grover JJ; judgment by Hegde J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not concede the case merely because the funds are traceable to your gift; tracing establishes the source of the capital, not the source of the income. For a minor child, check the clubbing provision now in force before relying on this outcome; the position for minors has been changed by statute since 1970 and no longer depends only on tracing the income to a transfer. Where the clubbing is sought on the spouse limb, this reasoning still bites, and the argument should be framed on proximity rather than on the genuineness of the gift, which was not in doubt here.
Superseded by amendment. I read the full judgment to the dismissal of the appeal, and checked no later authority or statutory history in this session. The outcome on these facts would not be reached today for a minor child. Sub-section (1A) was inserted in section 64 by the Finance Act, 1992 with effect from 1 April 1993, and provides that in computing the total income of any individual there shall be included all such income as arises or accrues to his minor child, with a proviso excepting income arising to the minor child on account of manual work done by him or an activity involving the application of his skill, talent or specialised knowledge and experience. The question therefore no longer turns on tracing the income to a transfer. The proximate connection test itself remains good and continues to govern the transfer limbs, including transfers to a spouse, where the tracing question still arises. A reader must read the clubbing provision in force for his own year, and its further exceptions, before using this case. The proximate connection test itself remains good and continues to govern the transfer limbs, including transfers to a spouse, where the tracing question still arises. A reader must read the clubbing provision in force for his own year before using this case. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The library had carried a second page for this same judgment at /caselaw/case/cit-v-prem-bhai-parekh-proximate-connection-in-clubbing/; the two have been merged and that address now redirects here. The Court decided only the second referred question; the first, on the constitutional competence of the clubbing provision, was not pressed and remains unanswered by this judgment. The judgment does not examine the timing - the father retired from the firm on the last day of its accounting year and the sons came in on the next day - and does not consider whether that sequence could support any other line of attack; the Revenue's case was put solely on the tracing of the gifted funds. It also does not say what the assessment consequence was for the major son. The harvested page carries an editorial headnote before the judgment, which is not used here, and the source page's citation list does not include an ITR reference. The batch line's sections are those of the 1961 Act; the provision construed is section 16(3)(a)(iv) of the 1922 Act. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed. The provision applies only where so much of the income of a wife or minor child arises directly or indirectly from assets transferred directly or indirectly by the individual otherwise than for adequate consideration. It was not disputed that the assessee had transferred Rs 75,000 to each minor son, and it may also be that the amounts they contributed as their share in the firm came from those sums. But the connection between the gifts and the income in question is remote. The minors' income arose as a result of their admission to the benefits of the partnership; it is true that they were admitted because of the contribution they made, but there is no nexus between the transfer of the assets and the income, and it cannot be said that the income arose directly or indirectly from the transfer. Section 16(3) creates an artificial income and must receive strict construction, as the Court had held in CIT, Gujarat v Keshavlal Lallubhai Patel. Before income can come within its ambit it must be proved to have arisen, directly or indirectly, from a transfer of assets made by the assessee in favour of his wife or minor children; the connection between the transfer and the income must be proximate, and the income must arise as a result of the transfer and not in some manner connected with it.
TaxSphere, “CIT v Prem Bhai Parekh”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-prem-bhai-parekh-proximate-connection-in-clubbing/ (validity last checked 2026-08-29)
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