1966 (1) TMI 86 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the gift of Rs. 60,000 on December 5, 1956.
2. Compliance with Section 123 of the Transfer of Property Act.
3. Deductibility of interest paid to donees under Section 10(2)(iii) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Gift of Rs. 60,000 on December 5, 1956:
The primary issue was whether the gift of Rs. 60,000 made by Nawal Kishore to 13 donees was valid. The gift was executed by transferring the amount from Nawal Kishore's capital account to the accounts of the donees in the firm's books. The donees were credited with the interest on the gifted sum, and some of them withdrew sums from the amounts standing to their credit. Despite the firm's cash and bank balances being insufficient to cover the gift, the firm had an unutilized drawing power of Rs. 1,27,088.

2. Compliance with Section 123 of the Transfer of Property Act:
The Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal disallowed the interest deduction claimed by the firm, holding that the gift was invalid as it did not comply with Section 123 of the Transfer of Property Act. They argued that there was neither physical nor symbolic delivery, and the available cash was insufficient to satisfy the gift. The Tribunal's decision was based on the technical ground that the gift did not meet the requirements of Section 123, which mandates that a gift of movable property must be effected by a registered document or by delivery.

3. Deductibility of Interest Paid to Donees under Section 10(2)(iii) of the Income-tax Act:
The assessee firm claimed a deduction for the interest paid to the donees. The Tribunal disallowed this deduction, asserting that the gift was invalid. However, the assessee cited various cases to argue that the gift was valid despite the lack of physical cash. Notably, in Commissioner of Income-tax v. New Digvijaysinhji Tin Factory and Chimanbhai Lalbhai v. Commissioner of Income-tax, it was held that mere book entries could suffice for a valid gift if the firm accepted the transaction, paid interest, and allowed withdrawals. The court also considered other relevant cases, such as E.S. Hajee Abdul Kareem & Son v. Commissioner of Income-tax and K.P. Brothers v. Commissioner of Income-tax, which supported the validity of gifts made through book entries in the firm's accounts.

Conclusion:
The court concluded that the validity of a gift made by way of debit and credit entries in the firm's account books depends on whether this is a natural method of transfer. The court emphasized that once the bona fides of the gift are accepted, the validity should follow. In this case, the parties could have realized the cash if they wished, but it was unnecessary. The amounts were credited to the donees' accounts, and some withdrawals were made, indicating the genuineness of the transaction. Therefore, the court answered the question in favor of the assessee and affirmed the validity of the gift, allowing the deduction of interest paid to the donees under Section 10(2)(iii) of the Income-tax Act. The assessee was awarded costs from the Commissioner, with a counsel's fee of Rs. 250.