I gifted shares to my wife years ago. She has now sold them at a profit. Is that capital gain clubbed with my income, or is it only the dividends that come back to me?
It is clubbed. The Supreme Court held that the capital gain of Rs 70,860 made by the wife on selling shares her husband had gifted her was income arising to her from assets transferred by him, and fell within section 16(3)(a)(iii) of the 1922 Act. There is no logical distinction between income arising from the transferred asset and income arising from its sale: the gain springs from the asset, the operation that produces it being sale rather than investment. Although capital gains were not within the definition of income when the clubbing provision was enacted in 1937, they were brought in later and the word must be read as amended.
Decided by the Supreme Court (Supreme Court of India - J.C. Shah and V. Ramaswami, JJ (judgment delivered by Ramaswami, J)) on 1967-11-22, reported as 1968 AIR 697; 1968 SCR (2) 360. It bears on section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, section 2(6C) of the Indian Income-tax Act, 1922, section 12B of the Indian Income-tax Act, 1922, section 64(1)(iv), section 45 of the Income Tax Act 1961, in Capital Gains and Gifts, Shares & Angel Tax matters.
This is the answer to the argument that clubbing reaches only the yield of a transferred asset while it is held, and stops when the asset is sold. The Court's image is the useful one: investment makes income spring from the asset while title is retained, sale makes gain spring from it while title is parted with, but in each case the gain has sprung from the asset. It also settles a question of statutory construction that recurs whenever an old provision is read against a later amended definition - the amended definition governs unless the context excludes it - and it applies the mischief rule expressly, the object of the provision being to prevent avoidance or reduction of tax by transfers to a spouse or minor child.
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In 1951 the assessee, Maneklal Ujamshi, gifted his wife Bai Laxmibai 1,184 ordinary and 155 preference shares in Changdeo Sugar Mills Ltd, worth Rs 68,730 at the date of transfer. The company later converted the preference shares into ordinary shares at eight for one, so that by 31 December 1954 she held 2,424 ordinary shares. On 1 August 1956 she sold 2,400 of them for Rs 1,54,800, producing a capital gain of Rs 70,860 computed under section 12B. She deposited the whole of the sale proceeds with A.H. Bhivandiwalla & Co., a firm in which her husband and their son were partners, and the deposit earned interest of Rs 9,288 a year. For assessment year 1957-58 the Income-tax Officer included the Rs 70,860 in Maneklal's total income under section 16(3)(a)(iii), and for 1958-59 and 1959-60 he included the interest of Rs 9,288 in each year on the same footing. The Appellate Assistant Commissioner upheld the first assessment but held that only the interest attributable to the value of the shares at the date of gift could be clubbed, working that out at Rs 4,138. On cross appeals the Tribunal upheld the inclusion of the capital gain and allowed the Department's appeals so that the whole interest was clubbed. Four questions were referred. The Bombay High Court answered the first against the assessee, the second and fourth in his favour, and the third against him because his counsel did not press it. Only the first question came to the Supreme Court.
The appeal was dismissed with costs; the High Court had rightly held that Rs 70,860 was properly included in the assessee's total income under section 16(3)(a)(iii). The provision requires the inclusion of so much of the income of a wife as arises directly or indirectly from assets transferred to her by her husband otherwise than for adequate consideration. Two arguments were rejected. The first, that the provision catches only income which the asset produces while it remains in the transferee's hands and not the gain made by selling it, was held to rest on no logical distinction: profits arising on sale spring from the asset just as investment income does, the difference being only in the operation which causes them to arise and in whether title is parted with. The second, that the provision was enacted in 1937 when income did not include capital gains, was met by holding that once capital gains were brought within the definition of income the word must be construed according to the amended definition, there being nothing in the context or language to exclude them.
The Court reasoned from the words 'arises directly or indirectly from assets transferred'. It set the two situations side by side. Where the asset is employed by way of investment and produces income, the income arises from the asset and the operation producing it is the investment; where the asset is sold, gain is produced and the operation is the sale, with the title being parted with in the process. The processes differ but in each case the gain has sprung from the asset, so there is no warrant for saying that a capital gain arises from a source different from the asset itself. On the definitional point the Court applied the ordinary rule that an amended definition governs the whole Act unless the context otherwise requires, and it looked for and failed to find anything in the context or language of the clubbing provision excluding capital gains. It then reinforced the conclusion with purpose: the object of the section is to prevent avoidance or reduction of tax by transferring assets to a wife or minor child, and it is a sound rule of interpretation that a statute should be construed so as to suppress the mischief and advance the remedy according to the true intention of its makers. A restricted reading would defeat that object.
there is no logical distinction between income arising from the asset transferred to the wife and income arising from the sale of the assets so transferred
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Handle my notice → Ask a CA on WhatsAppIt is clubbed. The Supreme Court held that the capital gain of Rs 70,860 made by the wife on selling shares her husband had gifted her was income arising to her from assets transferred by him, and fell within section 16(3)(a)(iii) of the 1922 Act. There is no logical distinction between income arising from the transferred asset and income arising from its sale: the gain springs from the asset, the operation that produces it being sale rather than investment. Although capital gains were not within the definition of income when the clubbing provision was enacted in 1937, they were brought in later and the word must be read as amended. This was decided by the Supreme Court (Supreme Court of India - J.C. Shah and V. Ramaswami, JJ (judgment delivered by Ramaswami, J)) and bears on section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, section 2(6C) of the Indian Income-tax Act, 1922, section 12B of the Indian Income-tax Act, 1922, section 64(1)(iv), section 45 of the Income Tax Act 1961. It is reported as 1968 AIR 697; 1968 SCR (2) 360. This is the answer to the argument that clubbing reaches only the yield of a transferred asset while it is held, and stops when the asset is sold. The Court's image is the useful one: investment makes income spring from the asset while title is retained, sale makes gain spring from it while title is parted with, but in each case the gain has sprung from the asset. It also settles a question of statutory construction that recurs whenever an old provision is read against a later amended definition - the amended definition governs unless the context excludes it - and it applies the mischief rule expressly, the object of the provision being to prevent avoidance or reduction of tax by transfers to a spouse or minor child. If it applies to you, the first step is this: Assume the clubbing follows through a sale of the transferred asset, and plan the disclosure accordingly rather than waiting for the officer to find it.
In 1951 the assessee, Maneklal Ujamshi, gifted his wife Bai Laxmibai 1,184 ordinary and 155 preference shares in Changdeo Sugar Mills Ltd, worth Rs 68,730 at the date of transfer. The company later converted the preference shares into ordinary shares at eight for one, so that by 31 December 1954 she held 2,424 ordinary shares. On 1 August 1956 she sold 2,400 of them for Rs 1,54,800, producing a capital gain of Rs 70,860 computed under section 12B. She deposited the whole of the sale proceeds with A.H. Bhivandiwalla & Co., a firm in which her husband and their son were partners, and the deposit earned interest of Rs 9,288 a year. For assessment year 1957-58 the Income-tax Officer included the Rs 70,860 in Maneklal's total income under section 16(3)(a)(iii), and for 1958-59 and 1959-60 he included the interest of Rs 9,288 in each year on the same footing. The Appellate Assistant Commissioner upheld the first assessment but held that only the interest attributable to the value of the shares at the date of gift could be clubbed, working that out at Rs 4,138. On cross appeals the Tribunal upheld the inclusion of the capital gain and allowed the Department's appeals so that the whole interest was clubbed. Four questions were referred. The Bombay High Court answered the first against the assessee, the second and fourth in his favour, and the third against him because his counsel did not press it. Only the first question came to the Supreme Court. The matter was decided on 1967-11-22 by the Supreme Court (Supreme Court of India - J.C. Shah and V. Ramaswami, JJ (judgment delivered by Ramaswami, J)). On those facts the Supreme Court held as follows. The appeal was dismissed with costs; the High Court had rightly held that Rs 70,860 was properly included in the assessee's total income under section 16(3)(a)(iii). The provision requires the inclusion of so much of the income of a wife as arises directly or indirectly from assets transferred to her by her husband otherwise than for adequate consideration. Two arguments were rejected. The first, that the provision catches only income which the asset produces while it remains in the transferee's hands and not the gain made by selling it, was held to rest on no logical distinction: profits arising on sale spring from the asset just as investment income does, the difference being only in the operation which causes them to arise and in whether title is parted with. The second, that the provision was enacted in 1937 when income did not include capital gains, was met by holding that once capital gains were brought within the definition of income the word must be construed according to the amended definition, there being nothing in the context or language to exclude them.
The Court reasoned from the words 'arises directly or indirectly from assets transferred'. It set the two situations side by side. Where the asset is employed by way of investment and produces income, the income arises from the asset and the operation producing it is the investment; where the asset is sold, gain is produced and the operation is the sale, with the title being parted with in the process. The processes differ but in each case the gain has sprung from the asset, so there is no warrant for saying that a capital gain arises from a source different from the asset itself. On the definitional point the Court applied the ordinary rule that an amended definition governs the whole Act unless the context otherwise requires, and it looked for and failed to find anything in the context or language of the clubbing provision excluding capital gains. It then reinforced the conclusion with purpose: the object of the section is to prevent avoidance or reduction of tax by transferring assets to a wife or minor child, and it is a sound rule of interpretation that a statute should be construed so as to suppress the mischief and advance the remedy according to the true intention of its makers. A restricted reading would defeat that object. In the words reproduced by the source cited on this page: "there is no logical distinction between income arising from the asset transferred to the wife and income arising from the sale of the assets so transferred"
It was decided by the Supreme Court on 1967-11-22 and is reported as 1968 AIR 697; 1968 SCR (2) 360. 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)(iii) of the Indian Income-tax Act, 1922, section 2(6C) of the Indian Income-tax Act, 1922, section 12B of the Indian Income-tax Act, 1922, section 64(1)(iv), section 45, 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 appeal was dismissed with costs; the High Court had rightly held that Rs 70,860 was properly included in the assessee's total income under section 16(3)(a)(iii). The provision requires the inclusion of so much of the income of a wife as arises directly or indirectly from assets transferred to her by her husband otherwise than for adequate consideration. Two arguments were rejected. The first, that the provision catches only income which the asset produces while it remains in the transferee's hands and not the gain made by selling it, was held to rest on no logical distinction: profits arising on sale spring from the asset just as investment income does, the difference being only in the operation which causes them to arise and in whether title is parted with. The second, that the provision was enacted in 1937 when income did not include capital gains, was met by holding that once capital gains were brought within the definition of income the word must be construed according to the amended definition, there being nothing in the context or language to exclude them. It arises in Capital Gains and Gifts, Shares & Angel Tax matters, on section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, section 2(6C) of the Indian Income-tax Act, 1922, section 12B of the Indian Income-tax Act, 1922, section 64(1)(iv), section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India - J.C. Shah and V. Ramaswami, JJ (judgment delivered by Ramaswami, 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. Trace the substitution: here the gain on sale was clubbed and the interest on the sale proceeds was fought over separately, so identify each successive receipt and deal with it on its own footing. Where you argue that a later amendment does not colour an earlier provision, be ready to point to something in the context or language that excludes it; the Court found nothing here. Do not expect a restricted reading of a clubbing provision; the Court treated it as remedial and construed it to advance the remedy.
Still good law. Applied on clubbing of gains on transferred assets; the harvested page records it as cited in later decisions. No later decision doubting it was read as part of this exercise. The clubbing provision of the 1961 Act is in different words from section 16(3)(a)(iii), and the 1961 Act also contains its own rules for the cost and period of holding of assets acquired by gift, none of which was before the Court. 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.
Decided under the Indian Income-tax Act, 1922 on section 16(3)(a)(iii) read with the definition in section 2(6C) and the capital gains charge in section 12B; the batch line's sections 64, 64(1)(iv) and 45 of the 1961 Act are the corresponding provisions but were not construed. Only the first referred question was before the Supreme Court; the treatment of the interest on the reinvested sale proceeds - decided partly for and partly against the assessee below, with the third question not pressed - was not decided here, so nothing settles how far clubbing follows into the fruits of the sale proceeds. The judgment gives the value of the shares at the date of gift as Rs 68,730 in its narrative and the page's headnote gives Rs 69,730, and the interest figure appears both as Rs 4,138 and as Rs 4,183; the discrepancies are in the source. The appellant is named Sevantilal Maneklal Sheth while the assessee throughout is Maneklal Ujamshi; the judgment does not explain the relationship, though it records that Sevantilal was a partner in the firm with which the sale proceeds were deposited. The headnote on the page has been ignored. 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 with costs; the High Court had rightly held that Rs 70,860 was properly included in the assessee's total income under section 16(3)(a)(iii). The provision requires the inclusion of so much of the income of a wife as arises directly or indirectly from assets transferred to her by her husband otherwise than for adequate consideration. Two arguments were rejected. The first, that the provision catches only income which the asset produces while it remains in the transferee's hands and not the gain made by selling it, was held to rest on no logical distinction: profits arising on sale spring from the asset just as investment income does, the difference being only in the operation which causes them to arise and in whether title is parted with. The second, that the provision was enacted in 1937 when income did not include capital gains, was met by holding that once capital gains were brought within the definition of income the word must be construed according to the amended definition, there being nothing in the context or language to exclude them.
TaxSphere, “Sevantilal Maneklal Sheth v CIT”, https://taxnotice.vittsphere.com/caselaw/case/sevantilal-maneklal-sheth-v-cit/ (validity last checked 2026-08-29)
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