Philip John Plasket Thomas v. CIT: clubbing needs a spouse at the time of transfer (as set, 1961 Act, AY 2018-19)

Source of the case: the Supreme Court's own text of the judgment, Philip John Plasket Thomas v. Commissioner of Income Tax, Calcutta, decided on 22 March 1963 (1964 AIR 587; 1964 SCR (2) 480).

The provision in question

Section 64(1)(iv) of the 1961 Act includes in an individual's total income the income that arises to his or her spouse from assets the individual transferred to the spouse, directly or indirectly, where the transfer was neither for adequate consideration nor connected with an agreement to live apart. The case arose under its forerunner, s.16(3)(a)(iii) of the Indian Income-tax Act, 1922, which spoke of assets transferred to the wife by the husband. The question was whether that clause reaches a transfer made before the marriage.

The case

• The assessee held 750 'A' shares of J. Thomas & Co. Ltd., Calcutta, and was engaged to Mrs. Judith Knight; the engagement was announced on 3 September 1947.
• On 10 December 1947 he transferred the shares to her by a deed that recited their forthcoming marriage as its consideration. The company registered her as the holder on 15 December, and they married on 18 December 1947.
• The dividends she later received were added to his income for the assessment years 1949-50 to 1952-53. The Tribunal and the Calcutta High Court upheld the addition: in their view the transfer took effect only with the marriage, or the relationship was to be tested when the income accrued or was assessed, not when the shares were transferred.

What the Supreme Court held

The Supreme Court allowed the assessee's appeals:

1. The clause sets two conditions. The income must be the wife's, so the marriage must subsist when the income arises; and it must come from assets transferred to the wife by the husband, so the two must already be married when the transfer is made. A wife's income from her other assets is not added to the husband's income.
2. The words wife and husband have their ordinary meaning, a lawful marriage, and do not include an intended spouse; a provision that creates an artificial income is read strictly.
3. Nothing in the deed postponed the transfer to the wedding. Whether it was a transfer for the promise to marry or a gift on a condition subsequent, it took effect on 10 December 1947, before the marriage. So the dividends were not the husband's income, and the Court left open whether the transfer was for adequate consideration.

Effect on clubbing today

• Section 64(1)(iv) applies only where the transferee was already the transferor's spouse on the date the transfer took effect, and only to income arising while the marriage subsists.
• An asset given to a fiancee or fiance stays outside the clause, and so does the income from it after the wedding; a transfer made after the marriage, without adequate consideration, is caught.
• If the marriage ends, by divorce for instance, income arising afterwards is not clubbed, because it is no longer the income of a spouse.

Illustration (our own figures)

Mr. A gifted ₹10,00,000 of bonds to Ms. B in January 2016 and married her in March 2017. Interest of ₹80,000 on the bonds in the previous year 2017-18 is Mrs. B's own income for assessment year 2018-19, not Mr. A's: she was not his wife when he made the gift. Had he made the gift in April 2017, after the marriage, the ₹80,000 would be included in his income under section 64(1)(iv).