1970 (2) TMI 7 - HC - Income Tax

Whether, there was a valid gift, by merely transferring from the capital account of L. Nawal Kishore to the account of donees, so that the interest of the various accounts comprises a proper deduction under section 10(2)(iii) - question is answered in the affirmative, that is, in favour of the assessee

Summary

Issues:
1. Validity of deduction claimed for interest paid as gifts in assessment years 1960-61 and 1961-62.
2. Whether the book transfers of gifts constitute valid gifts under the Income-tax Act, 1922.

Detailed Analysis:
The High Court of PUNJAB AND HARYANA was presented with a question regarding the admissibility of deductions claimed by an assessee for interest paid as gifts in the assessment years 1960-61 and 1961-62. The Tribunal had to determine whether the gifts made by the registered firm to the assessee's daughter and daughters-in-law were valid for claiming deductions. The Tribunal's decision was based on the lack of cash or bank balance at the time of the alleged gifts, leading to the disallowance of the deductions by the Income-tax Officer and subsequent affirmations by the Appellate Assistant Commissioner and the Tribunal.

The key contention revolved around whether the gifts constituted valid deductions, with the department arguing against the validity of the gifts due to the absence of cash balances and acceptance by the donees. The court referred to a previous judgment in Balimal Nawal Kishore's case, where a similar situation was analyzed, and the court held that the absence of cash balances did not invalidate the gift if the bona fides of the gift were accepted. The court emphasized that the lack of cash balances alone does not render a gift invalid, especially when there is no evidence of the gift being a sham transaction.

Moreover, the court highlighted the importance of acceptance of the gift by the donee, as evidenced by the payment of interest, indicating the acceptance of the corpus of the gift. Drawing parallels to another case, Virji Devshi v. Commissioner of Income-tax, the court distinguished cases where mere book entries were insufficient to establish a valid gift from cases where interest payments indicated acceptance of the gift. The court reiterated that the acceptance of the gift was crucial, especially when interest was paid to the donee, demonstrating the acknowledgment of the gift by the recipient.

In conclusion, the court held that the gifts made by way of book entries were valid, emphasizing the acceptance of the gifts by the donees through the payment of interest. The court dismissed the department's objections based on previous judgments and ruled in favor of the assessee, allowing the deductions claimed for the interest paid as gifts. The judgment was delivered jointly by Judges S. S. SANDHAWALIA and D. K. MAHAJAN, affirming the validity of the gifts and the admissibility of deductions claimed by the assessee.