1971 (11) TMI 37 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the gift made by Sri Phool Chand to his wife was invalid ? - If the answer to the above question is in the affirmative, whether the amount of interest credited to the account of the wife of Sri Phool Chand, a partner in the assessee-firm, was rightly includible in the income of the assessee under section 40(b) of the Income-tax Act, 1961

Summary

Issues:
Validity of a gift made by a partner to his wife.
Inclusion of interest credited to the wife in the income of the assessee under section 40(b) of the Income-tax Act, 1961.

Analysis:
The High Court was presented with two questions for consideration. Firstly, whether a gift made by a partner to his wife was valid, and secondly, if the interest credited to the wife should be included in the income of the assessee under section 40(b) of the Income-tax Act, 1961.

The case involved an assessee, a registered partnership firm, with one of the partners being Phool Chand. The Income-tax Officer found that certain sums were credited to the account of Phool Chand's wife as interest for specific years. The Income-tax Officer initially held the gift invalid, disallowing the claimed interest. However, the Appellate Assistant Commissioner allowed the amounts as an expense in the hands of the assessee, noting that the interest had been assessed in the wife's hands. The Income-tax Appellate Tribunal later overturned this decision, stating that the gift was invalid due to the firm not being engaged in a banking business.

The High Court referred to previous cases to determine the validity of the gift. It was established that the nature of the business conducted by the partnership firm was not a crucial factor in determining the validity of the gift. The court emphasized that the presence of sufficient funds in the donor's account and the acceptance of the gift by the donee were significant considerations. The Tribunal's reliance on certain observations from prior judgments was deemed misplaced, as subsequent cases clarified that the absence of a banking business did not impact the validity of a gift.

Ultimately, the High Court held that the gift made by Phool Chand to his wife was valid, answering the first question in the negative. Therefore, no response was required for the second question. The assessee was awarded costs, assessed at Rs. 200, with the counsel's fee set at the same amount.