My husband gifted me cash years ago. I invested it in shares and deposits. Is the dividend and interest on those investments clubbed with his income, or is the gifted cash the only thing that can be traced?
It is clubbed. The clubbing provision reaches income arising not only directly but indirectly from the assets transferred, so where cash is gifted and then invested, the dividends and interest are income arising indirectly from the transferred asset. There must still be a nexus between the transferred asset and the income, but converting the gifted cash into shares or deposits does not break it.
Decided by the Supreme Court (Hegde J (as printed in the report header; full composition of the Bench not confirmed)) on 1971-09-23, reported as (1972) 83 ITR 208 (SC); (1972) 1 SCR 883; 1972 Tax LR 444; (1972) 2 SCJ 221; Civil Appeals Nos. 1374 and 2146 to 2149 of 1970. It bears on section 64(1)(iv), section 64, section 16(3)(a)(iii) of the Indian Income-tax Act, 1922 of the Income Tax Act 1961, in Gifts, Shares & Angel Tax, Assessment & Scrutiny and How Tax Law Is Read matters.
This is the answer to the most frequent structural question on s.64(1)(iv): how far does clubbing follow the asset when the asset changes form? The Supreme Court's answer is that the words 'directly or indirectly' would be redundant on any narrower reading, so a change of form is not an escape. The limit is the nexus requirement, which the Court accepted in terms — and it is that requirement which, in Prem Bhai Parekh (already in the library), defeated the Revenue where the connection between the transfer and the income was remote. The two decisions have to be read together: conversion of the gifted asset is inside the net, but income whose real source is something else is not.
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The assessee made gifts of cash to his wife, Smt Mohini Devi Thapar. The transfers of the cash were direct transfers. The wife invested the money in shares and in deposits, and derived dividends from the shares and interest from the deposits. The question referred was whether income of Rs 21,225 derived from deposits and shares held by the wife was income from assets directly or indirectly transferred by the assessee to his wife within the meaning of s.16(3) of the Indian Income-tax Act, 1922. The Revenue contended that the dividends and interest were income indirectly received in respect of the cash directly transferred. Counsel for the assessee, Dr Pal, contended that there was no nexus between the income earned and the transfer of the assets, and that only income which could be said to have sprung directly from the assets transferred fell within s.16(3)(a)(iii).
The appeals failed and were dismissed with costs, one set. Section 16(3)(a)(iii) covers income arising indirectly as well as directly from the assets transferred; the assessee's narrower reading would render the words 'as arises directly or indirectly' redundant. The Court agreed that the income brought to tax must have a nexus with the assets transferred directly or indirectly, but held that the income in question had that nexus, being an income with a proximate connection with the transfer of the assets made by the assessee, and distinguished the earlier decision on which the assessee relied as inapplicable on its facts.
The Court identified the asset transferred as the cash gifted, treated the transfers as direct transfers, and reasoned that the dividends from the shares and the interest from the deposits into which that cash was put were income indirectly received in respect of the cash directly transferred — a position it said emerged clearly from the plain language of the section. It rejected the submission that the income must have sprung directly from the transferred assets on the ground that this would make the statutory words 'directly or indirectly' redundant, and described the provision as casting a net that includes both direct and indirect income from the transferred assets. It accepted the nexus requirement pressed by the assessee's counsel but found the requirement satisfied on the facts, holding that the ratio of the decision relied on for the assessee was inapplicable because the income here had a proximate connection with the transfer.
The net cast by section 16(3)(a)(iii) includes not merely the income that arises directly from the assets transferred but also that arises indirectly from the assets transferred.
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Handle my notice → Ask a CA on WhatsAppIt is clubbed. The clubbing provision reaches income arising not only directly but indirectly from the assets transferred, so where cash is gifted and then invested, the dividends and interest are income arising indirectly from the transferred asset. There must still be a nexus between the transferred asset and the income, but converting the gifted cash into shares or deposits does not break it. This was decided by the Supreme Court (Hegde J (as printed in the report header; full composition of the Bench not confirmed)) and bears on section 64(1)(iv), section 64, section 16(3)(a)(iii) of the Indian Income-tax Act, 1922 of the Income Tax Act 1961. It is reported as (1972) 83 ITR 208 (SC); (1972) 1 SCR 883; 1972 Tax LR 444; (1972) 2 SCJ 221; Civil Appeals Nos. 1374 and 2146 to 2149 of 1970. This is the answer to the most frequent structural question on s.64(1)(iv): how far does clubbing follow the asset when the asset changes form? The Supreme Court's answer is that the words 'directly or indirectly' would be redundant on any narrower reading, so a change of form is not an escape. The limit is the nexus requirement, which the Court accepted in terms — and it is that requirement which, in Prem Bhai Parekh (already in the library), defeated the Revenue where the connection between the transfer and the income was remote. The two decisions have to be read together: conversion of the gifted asset is inside the net, but income whose real source is something else is not. If it applies to you, the first step is this: Trace the gifted asset through its conversions and expect the income at the end of that chain to be clubbed; do not advise that reinvestment cleanses the money.
The assessee made gifts of cash to his wife, Smt Mohini Devi Thapar. The transfers of the cash were direct transfers. The wife invested the money in shares and in deposits, and derived dividends from the shares and interest from the deposits. The question referred was whether income of Rs 21,225 derived from deposits and shares held by the wife was income from assets directly or indirectly transferred by the assessee to his wife within the meaning of s.16(3) of the Indian Income-tax Act, 1922. The Revenue contended that the dividends and interest were income indirectly received in respect of the cash directly transferred. Counsel for the assessee, Dr Pal, contended that there was no nexus between the income earned and the transfer of the assets, and that only income which could be said to have sprung directly from the assets transferred fell within s.16(3)(a)(iii). The matter was decided on 1971-09-23 by the Supreme Court (Hegde J (as printed in the report header; full composition of the Bench not confirmed)). On those facts the Supreme Court held as follows. The appeals failed and were dismissed with costs, one set. Section 16(3)(a)(iii) covers income arising indirectly as well as directly from the assets transferred; the assessee's narrower reading would render the words 'as arises directly or indirectly' redundant. The Court agreed that the income brought to tax must have a nexus with the assets transferred directly or indirectly, but held that the income in question had that nexus, being an income with a proximate connection with the transfer of the assets made by the assessee, and distinguished the earlier decision on which the assessee relied as inapplicable on its facts.
The Court identified the asset transferred as the cash gifted, treated the transfers as direct transfers, and reasoned that the dividends from the shares and the interest from the deposits into which that cash was put were income indirectly received in respect of the cash directly transferred — a position it said emerged clearly from the plain language of the section. It rejected the submission that the income must have sprung directly from the transferred assets on the ground that this would make the statutory words 'directly or indirectly' redundant, and described the provision as casting a net that includes both direct and indirect income from the transferred assets. It accepted the nexus requirement pressed by the assessee's counsel but found the requirement satisfied on the facts, holding that the ratio of the decision relied on for the assessee was inapplicable because the income here had a proximate connection with the transfer. In the words reproduced by the source cited on this page: "The net cast by section 16(3)(a)(iii) includes not merely the income that arises directly from the assets transferred but also that arises indirectly from the assets transferred." The decision followed or applied CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC) — distinguished on the facts.
It was decided by the Supreme Court on 1971-09-23 and is reported as (1972) 83 ITR 208 (SC); (1972) 1 SCR 883; 1972 Tax LR 444; (1972) 2 SCJ 221; Civil Appeals Nos. 1374 and 2146 to 2149 of 1970. 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 64(1)(iv), section 64, section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals failed and were dismissed with costs, one set. Section 16(3)(a)(iii) covers income arising indirectly as well as directly from the assets transferred; the assessee's narrower reading would render the words 'as arises directly or indirectly' redundant. The Court agreed that the income brought to tax must have a nexus with the assets transferred directly or indirectly, but held that the income in question had that nexus, being an income with a proximate connection with the transfer of the assets made by the assessee, and distinguished the earlier decision on which the assessee relied as inapplicable on its facts. It arises in Gifts, Shares & Angel Tax, Assessment & Scrutiny and How Tax Law Is Read matters, on section 64(1)(iv), section 64, section 16(3)(a)(iii) of the Indian Income-tax Act, 1922 of the Income Tax Act 1961, and was decided by Hegde J (as printed in the report header; full composition of the Bench not confirmed). 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. Where the case is arguable, put it on nexus rather than on form — identify what actually produced the income and show that the transferred asset was not its proximate source. Keep a clear record of which investments were made out of the gifted funds and which out of the transferee's own funds or out of income already clubbed and taxed, because only the former have the nexus. Note the decision was given on s.16(3)(a)(iii) of the 1922 Act; s.64(1)(iv) of the 1961 Act uses the same 'directly or indirectly' formula in both limbs, so check the words of the clause you are applying before carrying the reasoning across.
Still good law. A citator search returns 27 later decisions citing this judgment. The Supreme Court referred to it approvingly in CIT v Smt Pelleti Sridevamma (11 October 1995), recording that the decision in Prem Bhai Parekh was explained and distinguished by the Court in Mohini Thapar. The Calcutta High Court took its proximate-connection test as the governing principle in P.R. Mukherjee v CIT (2 March 1978), though it decided that case on the footing that the business was benami. Two other decisions engage with it without applying it: Prahladrai Agarwala v CIT (Calcutta High Court, 24 April 1973) held it inapplicable to profits received from a partnership, the nexus with the original gift being too remote, and CWT v A.S. Rathore (Rajasthan High Court, 22 September 1993) mentions it in passing and decides under section 4(1)(a)(ii) of the Wealth-tax Act on other authority. Nothing overruling or doubting it was found. 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 judgment was decided under s.16(3)(a)(iii) of the Indian Income-tax Act, 1922; the corresponding provision is s.64(1)(iv) of the 1961 Act, which likewise speaks of income arising directly or indirectly from assets transferred directly or indirectly. The copy read prints the judgment without numbered paragraphs, so the key quotation is located by reference to the passage rather than a paragraph number. The report distinguishes CIT v. Prem Bhai Parekh, which is already in the library. The header printed by the source names only one Judge (Hegde, J.), and the composition of the Bench could not be confirmed. The case is titled by the name of the transferee wife, but the assessee was her husband: the judgment opens 'All these appeals by certificate are filed by the legal representatives of Late Karam Chand Thapar who was the assessee in this case. He died after the assessments were made.' The assessment years are 1949-50 to 1953-54 and the appeals are against Calcutta High Court references Nos. 48 of 1959 and 69 of 1961. The report states 'The Judgment of the Court was delivered by Hegde, J.', so the Bench was of more than one Judge even though indiankanoon names only Hegde, J.; the full composition could not be established. 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 appeals failed and were dismissed with costs, one set. Section 16(3)(a)(iii) covers income arising indirectly as well as directly from the assets transferred; the assessee's narrower reading would render the words 'as arises directly or indirectly' redundant. The Court agreed that the income brought to tax must have a nexus with the assets transferred directly or indirectly, but held that the income in question had that nexus, being an income with a proximate connection with the transfer of the assets made by the assessee, and distinguished the earlier decision on which the assessee relied as inapplicable on its facts.
TaxSphere, “Mohini Thapar (Dead) by LRs v CIT”, https://taxnotice.vittsphere.com/caselaw/case/mohini-thapar-clubbing-follows-cash-into-shares/ (validity last checked 2026-09-08)
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