1970 (9) TMI 6 - HC - Income Tax

Gift made by the partner by debiting partner s capital account and omitting donees account - gift was not valid, therefore, interest credited to the accounts of the four donees was not a permissible deduction

Issues Involved:
1. Validity of the gifts made by Kartar Singh.
2. Permissibility of interest deduction on the amounts credited to the donees' accounts.

Detailed Analysis:

1. Validity of the Gifts Made by Kartar Singh

Facts and Circumstances:
The assessee-firm, Messrs. New India Colour Co., had two partners, Kartar Singh and his son Kahan Chand. On January 31, 1956, Kartar Singh requested the firm to debit his account by Rs. 69,000 and credit the accounts of his sons and daughter with specified amounts, claiming these as gifts. The firm complied, making the necessary book entries.

Tribunal's Findings:
The Income-tax Appellate Tribunal disallowed the assessee's claim, holding that the gifts were not valid. The Tribunal noted that the firm had only Rs. 3,429 in cash on the material date, far less than the Rs. 69,000 purportedly gifted. It also emphasized that Kartar Singh, as a partner, did not have the right to withdraw his capital at will, but only to receive his share of profits or assets upon dissolution of the firm.

Legal Precedents Considered:
- Chimanbhai Lalbhai v. Commissioner of Income-tax: The court held that gifts were valid even if the donor did not withdraw the cash from the firm, provided the firm made the necessary book entries.
- Balimal Nawal Kishore v. Commissioner of Income-tax: It was held that the validity of a gift made by book entries depends on whether it is a natural method of transfer, and it is not necessary for the donor to withdraw cash.
- Naunihal Thakar Dass v. Commissioner of Income-tax: The court upheld the validity of gifts made by book entries, emphasizing that the absence of cash balances does not invalidate the gift.

Court's Analysis:
The court distinguished the present case from the above precedents. It emphasized that Kartar Singh's capital account was a trading asset of the partnership, over which he had no exclusive right. The court cited the Supreme Court's ruling in Addanki Narayanppa v. Bhaskara Krishnappa, which clarified that a partner cannot claim exclusive rights over partnership property during the partnership's subsistence.

Conclusion:
The court concluded that the gifts made by Kartar Singh were not valid, as they were not completed by any symbolic delivery of the amounts, but were mere book entries. Thus, the transactions did not constitute valid gifts under the law.

2. Permissibility of Interest Deduction on the Amounts Credited to the Donees' Accounts

Claim by Assessee:
The assessee-firm claimed that the interest credited to the accounts of the donees was a permissible deduction under section 10(2) of the Indian Income-tax Act, as it represented interest on amounts invested by the donees with the firm.

Tribunal's Findings:
The Tribunal rejected this claim, holding that since the gifts were not valid, no loans could be said to have been advanced by the donees to the firm. Consequently, the firm had no liability to pay any interest to the donees.

Court's Analysis:
The court upheld the Tribunal's view, reiterating that the gifts were not valid. Therefore, the amounts credited to the donees' accounts could not be treated as loans, and the interest on these amounts was not a permissible deduction.

Conclusion:
The court concluded that there was no liability on the assessee-firm for payment of any interest to the donees, as the amounts credited in their favor were not valid gifts and thus could not be considered loans.

Final Judgment:
The question posed for the court's opinion was answered in the negative. The court held that the gifts made by Kartar Singh were not valid, and consequently, the interest credited to the donees' accounts was not a permissible deduction. Each party was directed to bear their own costs of the reference.

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