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Gopal Jalan v. Commissioner Of Income-Tax, U.P
Judgment Summary — Pathak, J.
Factual and Procedural Background
This reference arises from an assessment of a Hindu undivided family (HUF) for the assessment year 1961-62 and was referred by the Income-tax Appellate Tribunal. The background facts, as stated in the opinion, are:
- Originally a Hindu undivided family carrying on Banarsi cloth business (Messrs. Harchandrai Hari Bux Rai) underwent partition on or about 22 October 1938, converting the family business into a partnership comprising the father, Hari Bux Rai Jalan, and his two sons, Sri Gopal Jalan and Vishwanath Prasad Jalan.
- Out of the assets received on partition, Hari Bux Rai purportedly created a Dharmada Trust of Rs. 25,000 by a trust deed dated 26 September 1939, which was registered on 28 September 1939. An account of the Dharmada Trust was opened in the books of the partnership on that same day and interest was credited to that account annually.
- Hari Bux Rai retired from the firm on 10 November 1939 and died on 18 November 1939. The trust funds remained deposited with the firm in the name of the trust.
- The partnership was dissolved on 1 November 1956, and apparently each brother took over one half of the liability to the trust fund. By 9 September 1957, the trust fund had grown (by accumulation of interest) to Rs. 76,932-7-9.
- For the year relevant to assessment 1961-62, the assessee paid Rs. 2,624 as interest to the trust and claimed that payment as an allowable deduction. The Income-tax Officer rejected the deduction. The Appellate Assistant Commissioner affirmed the rejection and the Tribunal dismissed the subsequent appeal. The Tribunal referred two questions to the High Court, which are reproduced in the opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, it could be said that a valid charitable trust was created by the settlor, Sri Hari Bux Rai, and whether the payment of interest to the trust by the assessee was rightly disallowed?
- Whether, in the facts and circumstances of the case, the execution by the settlor of the deed of trust and registering the same would amount to a complete transfer and delivery of the possession and divesting of the amount mentioned therein from the settlor to the trustees of the trust?
Arguments of the Parties
Assessee's Position
- The assessee relied on the registered trust deed and the entries made in the partnership books debiting the settlor's account and crediting the Dharmada Trust account to show creation of the trust and appropriation of the funds for trust purposes.
- The assessee pointed out that the department had previously allowed the interest as an allowable deduction in past assessments.
- It was also noted by the assessee that interest had been deducted by the other brother who had taken over half the liability to the trust.
Revenue's Position
- The Revenue (as reflected in the Tribunal's reasoning and submissions) contested the validity of the trust on the ground that the firm’s cash balance on the date of creation was only about Rs. 1,915, which was insufficient to cover the Rs. 25,000 purportedly settled on trust; and that the entries in the firm's books alone did not show actual setting apart or delivery of the specific sum to the trustees.
- The Revenue relied upon authorities (for example Hanmantram Ramnath and Commissioner of Income-tax v. Smt. Shyamo Bibi) distinguishing situations where entries are in the assessee’s own books and where there was no appropriation or ownership divestment.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Hanmantram Ramnath v. Commissioner Of Income-Tax [1946] 14 I.T.R 716 (Bom.) | Held that where transfer/entries were in the assessee's own books and there was nothing making him liable to anyone, those accounts remained the assessee's and did not constitute trust accounts; the court observed that transfers did not prevent the assessee from claiming beneficial interest thereafter. | The court treated Hanmantram as distinguishable: in that case entries were in the assessee's personal books and the funds were not shown to be available. In the present case, the entries were in the partnership books and the circumstances differ. |
| Commissioner of Income-tax v. Smt. Shyamo Bibi | Found that transfer entries made in the assessee's own accounts did not effect vesting of possession, dominion and control in the donee; the assessee could reverse such entries and they did not amount to appropriation of partnership funds to the donee. | The court relied on Shyamo Bibi as a case where entries were in personal accounts and therefore insufficient, and again distinguished that factual setting from the present case. |
| Commissioner of Income-tax v. New Digvijaysinhji Tin Factory | cited among authorities supporting that a valid gift can be effected by a partner via appropriate debit/credit entries in the firm's books. | The court cited this authority as part of a line of cases affirming that partners can effect gifts by instructing the firm to make entries in the firm's books even where cash was not available. |
| South Indian Lucifer Match Works v. Commissioner of Income-tax [1961] 43 I.T.R 319 (Mad.) | cited as part of the jurisprudence that entries in firm books can effect a valid gift/appropriation by a partner. | Used to support the principle that the mere insufficiency of cash in the firm’s books on the date of transfer is not decisive where appropriation in the firm's books is shown. |
| E.S. Hajee Abdul Kareem and Son v. Commissioner of Income-tax [1963] 50 I.T.R 396 (Mad.) | cited for the same principle regarding gifts effected by entries in partnership books. | Relied on as part of authorities affirming the validity of appropriation by entries in the firm's books. |
| Balimal Nawal Kishore v. Commissioner of Income-tax [1966] 62 I.T.R 669 (Punj.) | cited for the principle that a partner may effect a gift by entries in the firm's books. | Used by the court to support the view that entries in partnership books can effect a transfer for trust purposes. |
| Naunihal Thakar Dass v. Commissioner Of Income-Tax [1970] 77 I.T.R 332 (Punj.) | cited similarly as authority on gifts/appropriations made by partners through firm-book entries. | Cited by the court as part of the line of cases supporting appropriation by entries in firm accounts. |
| Gopal Raj Swarup v. Commissioner of Wealth-tax [1970] 77 I.T.R 912 (All.) | Decision of this Court cited in support of the proposition that appropriate entries in the firm’s books can effect transfers/gifts by a partner. | The court relied on this decision of the court itself to reinforce the principle applied to the facts before it. |
Court's Reasoning and Analysis
The court's analysis proceeds in several discrete steps, staying strictly within the facts and law as set out in the opinion:
- The Tribunal had addressed the three certainties necessary to create a charitable trust: (1) declaration binding on the settlor, (2) setting apart definite property with the settlor divested of ownership, and (3) statement of objects. The Tribunal found that declaration and objects were present but doubted whether the settlor had divested beneficial interest.
- The Tribunal focused on the fact that the only material on record, besides the registered deed, were entries in the partnership books opening a Dharmada Trust account and crediting interest year to year. The Tribunal concluded that mere passing of entries did not show setting apart of a specific sum or delivery to trustees; and noted the firm's cash balance on 26 September 1939 was only about Rs. 1,915 — insufficient to cover Rs. 25,000 — and relied on Hanmantram Ramnath.
- The court accepted the uncontested facts that the settlor executed and registered a trust deed in which he stated he was setting apart Rs. 25,000 for education or a hospital; that he named trustees (remaining trustee in life and five trustees after death, inclusive of his sons and named individuals); and that detailed directions for carrying out the trust's objects were provided. The court noted the Tribunal did not find any sham or absence of intention to create a trust.
- The court then considered the line of authorities establishing that where partners effect transfers by appropriate debit and credit entries in the firm's books upon the partner's instructions, a valid gift/appropriation can be effected even if the firm did not have the cash in hand on the date — i.e., that entries in partnership books can constitute appropriation. The court cited several Madras, Punjab and other decisions and its own decision in Gopal Raj Swarup in support of that principle.
- The court distinguished Hanmantram Ramnath and Commissioner of Income-tax v. Smt. Shyamo Bibi: in those cases the entries were made in the assessee's own books (personal accounts) and there was nothing to make the assessee liable to another; therefore the courts in those cases held that mere entries in personal books did not vest the donee with possession or divest the transferor's beneficial interest. The present case differed because the entries were in the partnership (firm's) books and the Dharmada Trust account was opened in the firm’s books in the name of the trust.
- On this basis the court concluded that the factual and legal distinctions warranted finding that a valid charitable trust had been created by Hari Bux Rai and that the Tribunal's reliance on the firm's inadequate cash balance was not sufficient to invalidate the trust given the applicable principles and authorities regarding transfers effected through partnership book entries.
Holding and Implications
Holding: The court answered the first question in the affirmative for the assessee: it held that a valid charitable trust was created by the settlor, Hari Bux Rai, and therefore the payment of interest to the trust by the assessee had been wrongly disallowed by the assessing authorities and the appellate bodies.
The court explicitly declined to answer the second question because, in the circumstances, the assessee's counsel did not press for an answer to it.
Consequences and immediate effects:
- The payment of interest to the Dharmada Trust which had been disallowed must be regarded as wrongly disallowed — i.e., the assessee is entitled to the deduction for the interest paid for the assessment year in question (as reflected by the conclusion that a valid charitable trust existed).
- The assessee was awarded costs in the amount of Rs. 200; the counsel's fee was assessed at the same figure.
- The opinion does not purport to lay down any broader novel legal principle beyond applying existing precedent distinguishing entries in partnership books from entries in a transferor's own books; the court relied on established authorities to reach its conclusion. Therefore, no new precedent beyond the application of the cited authorities was announced in this opinion.
This summary was prepared solely from the contents of the provided opinion and does not add facts or inferences beyond the text of that opinion.
Pathak, J.:— The questions referred by the Income-tax Appellate Tribunal are:
“1. Whether, on the facts and in the circumstances of the case, it could be said that a valid charitable trust was created by the settlor, Sri Hari Bux Rai, and whether the payment of interest to the trust by the assessee was rightly disallowed?
2. Whether, in the facts and circumstances of the case, the execution by the settlor of the deed of trust and registering the same would amount to a complete transfer and delivery of the possession and divesting of the amount mentioned therein from the settlor to the trustees of the trust?”
2. This reference arises out of the assessment of a Hindu undivided family for the assessment year 1961-62. Originally, a Hindu undivided family, Messrs. Harchandrai Hari Bux Rai, carried on business in Banarsi cloth. The family consisted of Hari Bux Rai Jalan, and his two sons, Sri Gopal Jalan and Vishwanath Prasad Jalan. The business suffered partition on or about October 22, 1938, and the assets were divided between the father and his two sons. After partition, the former Hindu undivided family business was converted into a firm of the same name and style with the father and the two sons as partners. Out ???f the assets received on partition, Hari Bux Rai created a Dharmada Trust of Rs. 25,000 on September 26, 1939, under a trust deed of that date registered on September 28, 1939. On November 10, 1939, Hari Bux Rai retired from the partnership business and the two sons, Sri Gopal and Vishwanath Prasad, and an outsider, Vishwanath Prasad Tandon, now carried on the partnership business. On November 18, 1939, Hari Bux Rai died. The trust money remained throughout in deposit with the firm in the name of the trust, and interest was credited from year to year in that account. Some years later on November 1, 1956, the firm was dissolved and the two brothers, Sri Gopal and Vishwanath Prasad, started their own separate business. It is said that each brother, apparently as karta of his Hindu undiyided family, took over one half of the liability to the trust fund, which on September 9, 1957, had swollen with the accumulation of interest to Rs. 76,932-7-9. In the previous year relevant to the assessment year 1961-62, the assessee paid Rs. 2,624 as interest to the trust. In assessment proceedings in that year it claimed the payment as an allowable deduction. The Income-tax Officer rejected the claim. On appeal by the assessee, the Appellate Assistant Commissioner affirmed the decision. Thereafter, a second appeal was filed to the Tribunal, and that appeal was also dismissed. At the instance of the assessee, the Tribunal has now made this reference.
3. At the outset in its appellate order the Tribunal had addressed itself to the question whether a valid charitable trust was created by the settlor, Hari Bux Rai, and whether the liability to the trust fund was taken over by the assessee in respect of which interest was paid and claimed by the assessee as a deduction. The Tribunal referred to the three certainties required to create a charitable trust, namely, (1) a declaration of the trust binding on the settlor, (2) setting apart definite property and the settlor depriving himself of the ownership thereof, and (3) a statement of the objects for which the property is thereafter to be held by the beneficiaries. The Tribunal found that there was a declaration of the trust binding on the settlor according to the terms of the trust deed and that the objects of the trust were also specified. The only point, it said, that required determination was whether the property had been clearly specified and the settlor had divested himself of his beneficial interest in it. It found that upon partition of the parent Hindu undivided family business the settlor had been given a one-third share in the total capital of the family business which amounted to Rs. 1,09,400. The share of Hari Bux Rai was, therefore, Rs. 36,466. Hari Bux Rai was given credit for this amount in the books of the partnership firm which came into existence after the partition of the family business. Subsequently, a trust was purportedly created by Hari Bux Rai by the registered trust deed and by debiting the accounts of Hari Bux Rai in the firm with the sum of Rs. 25,347, representing Rs. 25,000 as trust money and Rs. 347 as expenses of execution and registration. An account of the Dharmada Trust was opened in the books of the firm the same day. Thereafter, every year interest was credited by the firm to this account. The Tribunal has taken the view that, as there was nothing on the record beyond the entries in the account of the Dhar-mada Trust in the books of the firm, there was no evidence to show how the trust was created by Hari Bux Rai and how the amount of the trust money was handed over to the trustees. It has observed that the mere passing of those entries did not amount to setting apart a specific sum for the purposes of the trust and the settlor could not thereby be said to have divested himself of his beneficial interest therein. It has pointed out that on September 26, 1939, the cash balance in the books of the firm was about Rs. 1,915 only, which was not at all sufficient to cover the amount of Rs. 25,000 said to have been settled on trust. It was pointed out by the assessee that the department had all along allowed the interest as an allowable deduction and also that the interest had been deducted in the hands of the other brother who had taken over the other half of the liability of the trust. The Tribunal, however, proceeding on the view that the cash balance available with the firm on the date of the creation of the trust was insufficient to cover the amount of Rs. 25,000 held that a valid trust did not come into existence. In coming to this conclusion, the Tribunal relied on Hanmantram Ramnath v. Commissioner Of Income-Tax [1946] 14 I.T.R 716 Bom...
4. There is no dispute that Hari Bux Rai did execute a trust deed, which was subsequently registered, and that he specifically stated therein that he was setting apart in trust a sum of Rs. 25,000 to be spent either towards the education of students or on a hospital. He was to remain the trustee, but after his death the management of the trust would be vested in five trustees who included, according to the terms of the trust deed, the sons of the settlor as well as Thakurdas, a vakil, Ram Ballabh Ladia and Brijmohan Das Kejariwal. Detailed directions were given in the trust deed as to the manner in which the objects of the trust were to be carried out. The Tribunal has not found that the transaction was a sham and that there was no intention on the part of the settlor to create a valid trust. The only consideration which prevailed with the Tribunal in deciding against the validity of the trust is that the partnership firm, in which the account of the trust was opened, did not have an adequate cash balance to make Rs. 25,000 available in cash on the date the trust was created. We think that this consideration is insufficient. In the case of the gifts, the courts in India have repeatedly affirmed that a valid gift can be effected by a partner by the firm making upon his instructions, appropriate debit entries in his account in the books of the firm and corresponding credit entries in the account of the donee, in those books. And that is so, it has been pointed out, even where the cash balance in the books of the firm on the date of the gift was not large enough to enable actual delivery in cash to the donee of the amount gifted. Reference may be made to Commissioner of Income-tax v. New Digvijaysinhji Tin Factory, South Indian Lucifer Match Works v. Commissioner of Income-tax [1961] 43 I.T.R 319 Mad.., E.S Hajee Abdul Kareem and Son v. Commissioner of Income-tax [1963] 50 I.T.R 396 Mad.., Balimal Nawal Kishore v. Commissioner of Income-tax [1966] 62 I.T.R 669 Punj.. and Naunihal Thakar Dass v. Commissioner Of Income-Tax, Punjab.* [1970] 77 I.T.R 332 Punj... Finally, there is the decision of this court in Gopal Raj Swarup v. Commissioner of Wealth-tax [1970] 77 I.T.R 912 All..
5. The Tribunal relied upon Hanmantram v. Ramnath [1946] 14 I.T.R 716, 720 Bom... In that case the entries were made by the assessee in his own books and there was nothing to make him liable to anyone. The learned judges pointed out:
“It is not disputed that till the transfer of Rs. 41,000 and Rs. 11,000 from the two accounts, those accounts did not constitute trust accounts. They were only accounts in the books of the assessee. The assessee was entitled to deal with the amounts standing to the credit of those accounts as he thought right, without being liable to account to anyone. By making these three transfer entries, was any property so separated as to prevent the assessee from claiming any beneficial interest therein thereafter? In our opinion the answer to that is in the negative.”
6. It is true that the learned judges then went on to consider whether the entire amount settled in trust was available in cash on the date when the trust was created, and holding that it was not available they concluded that no valid trust had come into existence. This circumstance, we think, was adverted to by the learned judges for the purpose of showing that on the relevant date the assessee was not possessed of sufficient funds. In the case before us the facts are different.
7. Reference was made on behalf of the revenue to Commissioner of Income-tax v. Smt. Shyamo Bibi. That is a case which also turned on the circumstance that the transfer entries were made by the assessee in her own accounts and, therefore, it could not be said that there was any setting apart or appropriation of the fund. The learned judges observed:
“She might have had assets in the partnership but she did not transfer them or any interest in them. The partnership might have been owing money to her but she did not transfer any money out of that to Om Nath; she did not instruct the partnership to transfer Rs. 1,00,000 out of the money due to her to the account of Om Nath. If she wanted to make a gift of the money due to her from the partnership the most reasonable way was to instruct the partnership to debit her account, and credit that of Om Nath, with the amount of the money. Simply making transfer entries in own accounts cannot be said to be the most direct and effective method of vesting him with possession, dominion and control. As the account books were in her own possession, dominion and control, so were the entries and simply by making entries in them she did not vest Om Nath with possession, dominion and control over the money. It was open to her to delete or reverse the entries, at any time she liked subsequently.”
8. Upon the aforesaid considerations we are of opinion that a valid charitable trust was created by the settlor, Hari Bux Rai, and therefore, the payment of interest to the trust by the assessee was wrongly disallowed. The first question is answered accordingly.
9. In the circumstances, learned counsel for the assessee does not press for an answer to the second question. Therefore, we return no answer to that question.
10. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.
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