1971 (3) TMI 6 - HC - Income Tax

Gift made by transfer entries in the books of the assessee-firm - validity of gift - held that ransfer can be made in the books of the donor by making debit entry in the donor s account and making corresponding credit entry in donee s accounts - therefore, gifts in question were valid gifts

Summary

Issues Involved:
1. Validity of the gifts of Rs. 10,000 each made by Ganpati Devi, Murari Lal, and Brijmohan.
2. Legality of the disallowance of interest on the gifted amounts.

Issue-Wise Detailed Analysis:

1. Validity of the Gifts:
The primary issue was whether the gifts of Rs. 10,000 made by Ganpati Devi to Sita Devi, Murari Lal to Saroj Kumari, and Brijmohan to Pushpa Devi were valid in law. The gifts were effected by transfer entries in the books of the assessee-firm, Messrs. Bhau Ram Jawahar Mal.

The Income-tax Officer initially rejected the validity of the gifts, citing insufficient cash balance in the assessee's books on the dates of the gifts and the absence of registered gift deeds or actual delivery. The Appellate Assistant Commissioner also held that the transactions amounted to indirect transfers attracting the provisions of section 16(3) of the Income-tax Act, thereby justifying the disallowance of interest.

However, the Tribunal rejected the gifts primarily due to the insufficient cash balance and lack of actual delivery, asserting that such transfers could only be valid if the assessee carried on a banking business. The Tribunal did not find any subsequent conduct to support the gifts.

Upon review, the court found that the Tribunal erred in its view. Indian courts have affirmed that a valid gift can be effected through book entries, even without a sufficient cash balance, provided the transactions are bona fide and not sham. The court cited several precedents:
- Commissioner of Income-tax v. New Digvijaysinhji Tin Factory: Validated gifts through book entries despite insufficient cash balance.
- South Indian Lucifer Match Works v. Commissioner of Income-tax and E. S. Hajee Abdul Kareem and Son v. Commissioner of Income-tax: Established that gifts can be valid through book entries without actual cash delivery.
- Balimal Nawal Kishore v. Commissioner of Income-tax and Naunihal Thakar Dass v. Commissioner of Income-tax: Confirmed that insufficient cash balance does not invalidate gifts if the entries reflect a genuine transfer of ownership.

The court concluded that the adequacy of the cash balance is immaterial if the entries in the books result in the transfer of the gifted amount beyond the donor's control, establishing the donee's ownership. The court found no evidence suggesting the transactions were sham or not accepted by the donees.

2. Legality of the Disallowance of Interest:
Given the court's conclusion on the first issue, the second issue concerning the disallowance of interest on the gifted amounts was addressed. The court held that since the gifts were valid, the interest credited to the donees' accounts due to the gifted amounts should not have been disallowed.

Conclusion:
The court answered the first question in the affirmative, validating the gifts, and the second question in the negative, ruling that the interest should not have been disallowed. The assessee was entitled to costs assessed at Rs. 200, with the counsel's fee assessed in the same figure.