QUESTION: Apropos the answer to the first question regarding clubbing of wife's income in the hands of the husband, you have referred to the decision of the Supreme Court in the case of Sevantilal Maneklal Sheth v CIT (1968) 68 ITR 503 (SC) and have observed that “the clubbing will not extend to the income from such clubbed income as was decided in Sevantilal Maneklal Sheth v CIT (1968) 68 ITR 503 (SC) ” but the observations of the Supreme Court are otherwise.
Please see my enclosed write-up. You may like to reconsider your views.
ANSWER: The above letter is received from S. Krishnan, Chartered Accountant, Chennai, with reference to the answer in Tax Forum in The Hindu dated September 19, 2011. The decision in Sevantilal Maneklal Sheth v CIT (1968) 68 ITR 503 (SC) was cited as an exception to the principle that income from income could not be clubbed.
In this case, clubbing was upheld because capital gains were held to be not an income from an income, but capital gains on conversion of preference shares into ordinary shares, so that such capital gains was not, therefore, income from income.
The Supreme Court itself explained this decision in CIT v Smt. Pelletti Sridevamma (195) 216 ITR 826 (SC) , that capital gains is occasioned only substituting the gifted asset and is not income from income.
The second generation income, where the assessee had received income from the income of transferred assets as in a case where the wife derives income from deposits out of interest or other income on gifts from husband, such income cannot be clubbed as decided in Smt. Nisha Rani Agrawal v CIT (2007) 294 ITR 46 (All) . Similar view was taken in CIT v M. S. S. Rajan (2001) 252 ITR 126 (Mad) and CIT v Chandanmal Kasturchand (1978) 112 ITR 296 (Bom) . The law in the answer referred to is, therefore, well-settled.
