Kantawala, C.J:— This reference relates to a question pertaining to inclusion of the income of a wife as a partner of a firm on the ground that the requisite capital to be subscribed by her was contributed out of gifts made by the assessee, her husband, in favour of the wife. The matter relates to the assessment year 1960-61, for which the corresponding accounting year is the calendar year 1959. Assessee, Bhaichand, carried on business in partnership with his brother, Mathuradas, in the name and style of Chandravadan & Co. some time in August, 1953, and the terms of the partnership were reduced to writing by a partnership deed dated July 24, 1954. In this partnership the assessee, Bhaichand, was entitled and liable to bear 10 annas share in the profits and losses, while his brother, Mathuradas, was entitled and liable to bear 6 annas share in the profits and losses. There was no term in the deed of partnership relating to ownership of goodwill and tenancy rights of the premises where the partnership business was carried on. The assessee retired from this partnership with effect from October 23, 1957. A deed of retirement was actually drawn up between the parties on April 11, 1958. With effect from October 24, 1957, a new partnership firm consisting of the continuing partner, Mathuradas, Tarabai, wife of the assessee, Bhaichand, Mukundlal and Sumanlal, was constituted. The partnership deed for the new partnership was executed on April 11, 1958. The deed of partnership for the new firm provided that the partnership shall carry on business in the name and style of Chandravadan & Co.; that the assets and liabilities of the old firm were taken over by the new partnership. Mathuradas, the brother of the assessee, was a working partner in the new partnership and was not to contribute any amount towards the capital of the firm. The capital of the new partnership was to be contributed by Tarabai, wife of the assessee, and the other two partners, Mukundlal and Sumanlal. It was to comprise of an amount of Rs. 2 lakhs. Interest at the rate of 6% per annum was to be paid to the partner upon his capital contribution in the new firm standing to the credit. The partners of the new firm were entitled to share the profits and liable to bear the losses in the following proportion, namely:

Mathuradas … 6 annas share. Tarabai, wife of the assessee … 4 “ Mukundlal … 3 “ Sumanlal … 3 “

2. Mathuradas, the brother of the assessee, was to be a working partner and was to devote his entire time and attention to the business of the firm. He was not to engage in any business competing with the business of the firm directly or indirectly except with the consent in writing of the other parties. Upon the dissolution of the new firm, Tarabai was entitled to take over the godown and the shop but she was liable to pay to the partnership the value thereof. So far as the firm name was concerned, she was entitled thereto upon dissolution without paying any amount to the partnership.

3. On May 7, 1957, and August 21, 1958, the assessee gifted two sums of Rs. 50,000 each to his wife, Tarabai. She first deposited the amount in her bank account with the Union Bank of India and thereafter withdrew the said amount and invested it in the new firm as and by way of her capital contribution. For the assessment year 1959-60, for which the accounting year was Samvat year 2014, Tarabai was credited with a sum of Rs. 2,633 as and by way of interest towards her contribution in the firm and a sum of Rs. 26,394 as her share of the profits by reason of her four annas share in the partnership. These two amounts aggregated to the sum of Rs. 29,027. While assessing the assessee for the assessment year 1959-60, this aggregate sum of Rs. 29,027 was included in computing the total income of the assessee in view of the provisions of section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. Such inclusion was accepted by the assessee without any controversy.

4. For the assessment year in question, namely, 1960-61, a sum of Rs. 1,45,604 was the amount standing to the credit of Tarabai in the capital account. By reason of this capital contribution she was credited with a sum of Rs. 7,653 by way of interest at the end of the year and she was credited for her share of profit the sum of Rs. 24,125. These two sums aggregated to Rs. 31,778. While assessing the assessee for the assessment year 1966-61, the Income-tax Officer included the whole of this amount of Rs. 31,778 in computing the total income of the assessee. Aggrieved by the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner, who, however, upheld the order of the Income-tax Officer and rejected the contention on behalf of the assessee. Before the Tribunal it was contended on behalf of the assessee that the whole of the sum of Rs. 31,778 was not liable to be included in the total income of the assessee but an alternative contention was advanced as regards the quantum of the said amount that should be included in the total income. This alternative contention was rejected by the Tribunal and ultimately the order passed by the Income-tax Officer was confirmed. On these facts the question referred for our determination is as under:

“Whether, on the facts and in the circumstances of the case, the inclusion of Rs. 31,778 in the total income of the assessee under section 16(3)(a)(iii) is justified?”

5. Even though the question referred to us related to the total sum of Rs. 31,778, Mr. Pandit on behalf of the assessee has fairly conceded that a sum of Rs. 6,000 being the interest on the capital amount of Rs. 1 lakh contributed by wife, Tarabai, in the firm should be included in the total income of the assessee, as this capital contribution of Rs. 1 lakh was out of the sum gifted by the husband to the wife. He has contended that the balance amount of Rs. 25,778 is not liable to be included in the total income of the assessee for the assessment year. His submission is that provisions of section 16(3)(a)(iii) are only attracted when there is a proximate connection between the transfer of an asset by the husband to the wife and the income derived therefrom. His argument was that any income derived by the wife by reason of her share in the profits of the firm or by reason of any capital contribution made by her from her own moneys cannot be included in the total income of the husband by reason of the provisions of section 16(3)(a)(iii). Strong reliance was placed by him upon the decision of the Supreme Court in the case of Commissioner of Income-tax v. Prem Bai Parekh [1970] 77 ITR 27 SC.. Mr. Joshi, on behalf of the revenue, has not been able to meet the contention urged on behalf of the assessee in view of the decision of the Supreme Court. section 16(3)(a)(iii) of the Act, inter alia, provides that:

“16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included—

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly—………

(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart;………”

6. It is not disputed on behalf of the assessee that a sum of Rs. 1 lakh was contributed by the wife, Tarabai, in the new firm from the two sums gifted by the husband to her, but even apart from this sum of Rs. 1 lakh there was an additional capital contribution made by the wife and the argument of Mr. Pandit is that interest attributable to this additional contribution of capital by the wife and her share of profit can never be regarded as includible in the total income of the assessee, her husband. The effect of the provisions of section 16(3)(a)(iii) came to be considered by the Supreme Court in the above case of Prem Bhai Parekh and the Supreme Court has pointed out that section 16(3) of the Act cre???tes an artificial income end it must receive a strict construction. Before an income can be held to come within the ambit of section 16(3)(a)(iii) 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 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.

7. The facts of that case were that the assessee, who was a partner in a firm having 7 annas share therein, retired from the firm on July 1, 1954. Thereafter, he gifted Rs. 75,000 to each of his four sons, three of whom were minors. There was a reconstitution of the firm with effect from July 2, 1954, whereby the major son became a partner and the minor sons were admitted to the benefits of partnership in the firm. The question was whether the income arising to the minors by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessee under section 16(3)(a)(iv). The Tribunal found that the capital invested by the minors in the firm came from the gift made in their favour by their father, the assessee. It was, however, held by the Supreme Court that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that the income arose directly or indirectly from the transfer of the assets. The income arising to the three minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm could not be included in the total income of the assessee. It appears clearly from this judgment that the three minor sons were admitted to the benefits of the partnership because they contributed a sum of Rs. 75,000 each as capital of the firm and this capital contribution was made out of the moneys gifted by their father. None the less the amount coming to the share of these three minors by way of profit was not treated as income to be computed in the total income of their father. The ratio of this case directly applies in the present case. The direct nexus exists only between the sum of Rs. 1 lakh which is brought by the wife as capital in the firm and this amount was gifted to her by her husband. Under the deed of partnership interest on capital contribution was payable at the rate of 6% per annum. So a sum of Rs. 6,000 being the interest on the amount of Rs. 1 lakh will be treated as income of the husband in view of the provisions of section 16(3)(a)(iii), but so far as the balance of the income for the assessment year is concerned, namely, the rest of the interest on the remaining amount contributed by the wife in her capital account and her share in the profits of the firm for the relevant year cannot be included in the total income of her husband by reason of the provisions of section 16(3)(a)(iii) or any other provision of the Act.

8. Accordingly, our answer to the question referred is as under:

On the facts and in the circumstances of the case, the inclusion of Rs. 25,778 in the total income of the assessee under section 16(3)(a)(iii) was not justified but the amount to the extent of Rs. 6,000 representing the interest on Rs. 1 lakh was to be included in the total income of the assessee. The revenue shall pay the costs of the assessee.