Jagjit Singh, J.:— The following question of law has been referred by the Income-tax Appellate Tribunal (Delhi Bench “B”), under provisions of section 66(1) of the Indian Income Tax Act, 1922 (hereinafter referred to as “the Income Tax Act”) :—

“Whether on the facts and in the circumstances of the case, the interest credited to the accounts of the four donees was a permissible deduction ?”

Messrs New India Colour Co., Delhi, a partnership firm registered under section 26A of the Income Tax Act, is the assessee in the case. The assessment years under reference are 1957-58 and 1958-59; the relevant previous years being the years ending on the 31st January 1957 and the 31st January 1958 respectively.

The assessee-firm had two partners, Kartar Singh and one of his sons named Kahan Chand. The share of Kartar Singh was twelve annas in a rupee while that of Kahan Chand was four annas in a rupee.

By a letter dated the 31st January 1956 Kartar Singh requested the assessee firm to debit his account by Rs. 69,000 and to credit the accounts of his sons and daughter as under :—

Kahan Chand .. .. .. Rs. 15,000

Hari Chand .. .. .. Rs. 15,000

Kundan Lal .. .. .. Rs. 15,000

Raj Kumar .. .. .. Rs. 15,000

Vidya .. .. .. Rs. 9,000

Total : .. .. .. Rs. 69,000

According to the above-mentioned letter of Kartar Singh he had gifted the amounts which were to be credited to the accounts of the persons named therein. The letter was as well signed by the donees in token of acceptance of the gifts in their favour.

On January 31, 1956 the account of Kartar Singh with the assessee-firm showed a balance of Rs. 1,03,963. In pursuance of the letter a debit entry of Rs. 69,000 was made in that account and the balance was shown at Rs. 34,963 A credit entry of Rs. 15,000 was made in the account of Kahan Chand. Accounts in the names of Hari Chand, Kundan Lal, Raj Kumar and Vidya were started with credit entries showing the amounts gifted in their favour by their father. Gifts were also made in favour of them by their mother, Hans Kaur, but with her gifts we are not concerned in this reference.

For the assessment years 1957-58 and 1958-59 the assessee-firm credited to the accounts of Hari Chand, Kundan Lal, Raj Kumar and Vidya certain amounts by way of interest and claimed that the interest so credited to the account of donees was a permissible deduction within the meaning of sub-section (2) of section 10 of the Income Tax Act as representing interest on amounts invested by the donees with the firm.

The claim of the assessee-firm having been disallowed by the Income Tax Officer appeals were filed to the Appellate Assistant Commissioner, which were accepted on October 23, 1961. The Appellate Assistant Commissioner took the view, by differing from the Income Tax Officer, that the gifts were valid as “delivery” could be symbolical and it was not a material consideration “that on the day of the entry the firm did not have sufficient cash in hand”. An appeal was then filed by the Department to the Income Tax Appellate Tribunal. The Tribunal allowed the Revenue's appeal by holding that the gifts were not valid. It was considered that there was nothing besides the book entries and an un-registered letter written by the donor to the assessee-firm and on the material date the assessee-firm, which is not a banking firm, had a cash balance of Rs. 3,429 only. The Tribunal also took the view that though the capital account stood at more than rupees one lakh on January 31, 1956, Kartar Singh, as a partner, was not free to withdraw his capital from the firm any time he desired to do so but had a right “to receive a share of the profits and a right to receive on dissolution of the firm the share in the assets of the firm in proportion to the share held by him after all debts and liabilities of the firm are satisfied”. As such no constructive delivery of the gift amounts was regarded to have been made and, therefore, the gifts were not to be valid. In the result it was found that no loans could be said to have been advanced by the donees to the assessee-firm and it had no liability to pay any interest to the said donees.

The correctness of the view taken by the Appellate Tribunal was assailed by Mr. N.D Karkhanis, learned counsel for the assessee. It was urged that the gifts were made by adopting a natural method of transfer and it was not necessary for the donor to withdraw the gifted amount in cash from the assessee-firm to be re-invested by the donees in the same firm. The provisions of section 123 of the Transfer of Property Act, which provides that a gift of movable property may be affected either by a registered instrument or by delivery of possession, were as well submitted to have been complied with by symbolic delivery of the amounts by making credit entries in their accounts. Reliance was placed on Chimanbhai Lalbhai v. Commissioner Of Income-Tax (Central), Bombay), Bombay (34 I.T.R 259),(1) Balimal Nawal Kishore v. Commissioner of Income Tax Punjab (62 I.T.R 669),(2) and Naunihal Thakar Dass v. Commissioner of Income-Tax, Punjab (77 I.T.R 332).(3)

In the case of Chimanbhai Lalbhai the assessee had made a gift of Rs. 5 lakhs to his son and of Rs. 2 lakhs to his daughter on November 17, 1952 and he made the necessary entries in his account books on that date. On November 8, 1953 he instructed a joint family firm carrying on the business of banking and with which he had an account to debit him with the two sums and interest earned upto that date and credit the accounts of his son and daughter with the corresponding amounts. The firm carried out the instructions and submitted a voucher which the assessee signed. On a reference being made by the Income Tax appellate Tribunal it was held that the gifts were valid as it was not necessary for the assessee to have drawn the cash amounts from the banker and to hand them over to his son and daughter. The gifts were considered to have been completed by the issue of directions by the assessee and the firm making the transfers in its account books by allowing overdraft facilities. The fact that there was not enough money to the assessee's account was remarked not to be relevant and not to affect the validity of the gift.

Falshaw, C.J while delivering the judgment of the Bench in the case of Balimal Nawal Kishore, after noticing many cases including Chimanbhai Lalbhai's case observed that the principle deducible from the study of various decisions appeared to be that the validity of a gift made by way of debit and credit entries in the account books of a firm of which the donor is a partner must depend entirely on whether, in the circumstances, this is a natural method of transfer, and it is certainly not necessary for the donor to withdraw such sums in cash from the firm to be re-invested by the donee or donees in the firm. In that case there were five partners of the firm, Messrs Balimal Nawal Kishore. The Partners were Nawal Kishore and his three sons and another son of Nawal Kishore who had been adopted by some-one-else. On December 5, 1956 Nawal Kishore made an entry in his own hand in the account books of the firm to the effect that he was making gift of Rs. 60,000 out of an amount of Rs. 81,000 standing to his credit in his capital account with the firm in favour of thirteen donees. The gifted amounts were credited on the same day in the accounts of the donees in the firm's books and at the close of the financial year each donee was credited with the interest on the gifted sum due upto that date as well as in the following year. On the date of the gift the cash balance shown in the books of the firm was Rs. 3,665 and the bank balance was Rs. 4,299 but at the same time the un-utilised drawing power of the firm on its bank was Rs. 1,27,088. In view of the un-utilised drawing power of the firm on its bank it was considered that if the parties had wished the cash could have been realised and given to the donees but this was not necessary and the amounts of the gifts were credited in their already existing accounts.

Balimal Nawal Kishore v. Commissioner of Income Tax, Punjab (62 I.T.R 669) (2) was followed in the case of Naunihal Thakur Dass, referred to above. Naunihal and his two sons Parshotam Singh and Iqbal Singh had constituted a registered firm. Naunihal who had sufficient credit balance in his capital account had issued instructions that certain sums be transferred to his daughter and daughter-in-law. The method adopted was that amounts mentioned by him were debited in the accounts of the registered firm and were credited in the names of the ladies concerned. nO the credit-balance of the donees, the firm paid interest and claimed deduction thereof. The learned Judges of a Bench of the Punjab and Haryana High Court held the gifts to be valid. D.K Mahajan, J. while delivering the judgment of the Court made the following observations :—

“In our opinion, the matter really stands concluded by the decision of this Court in Balimal Nawal Kishore v. Commissioner () of Income-tax where on somewhat similar circumstances, this court took the view that from the mere fact that there were no cash balances, it could not be held that the gift would be invalid. The most significant fact is that there is no attack by the department that the gift was a sham transaction. The only ground, on which the Tribunal proceeded to hold that the gift was not valid was that there were no cash balances and that there was neither any proof of acceptance of these gifts by the donees. I was a party to the decision in Balimal Nawal Kishore's() case; and the judgment in this case was rendered by Falshaw C.J”

In the present case there is no dispute about the acceptance of the gifts. It was, however, urged by the learned counsel for the Revenue that the cases of Chimanbhai Lalbhai and Belimal Nawal Kishore() are distinguishable. A further submission made was that the account from which gifts amounting to Rs. 69,000 were made being capital account it had ceased to be the exclusive property of Kartar Singh and, therefore, he had no exclusive right over the amounts which he had brought in the said account.

The cases of Chimanbhai Lalbhai and Balimal Nawal Kishore() appear to be distinguishable. The first of those cases was that of a banking firm which had transferred the gifted amounts to the donees in its account books by allowing over-draft facilities. Chief Justice Chagla had, therefore, observed that if the bankers give over-draft facilities to their constitutents and accept orders and give credit to a third party for an amount which exceeds the amount to the credit of their constituents, as far as the third party is concerned, the bankers became liable to that party to pay that amount. In those circumstances the fact of the assessee not having sufficient fund to his credit with the bank naturally became of no consequence. In the other case as well (Balimal Nawal Kishore) Falshaw, C.J remarked that if the parties had wished the cash could have been realised and given to the donees, but this was not necessary if the amounts of the gifts were credited in their already existing accounts.

The Supreme Court in the case of Addanki Narayanappa and another v. Bhaskara Krishnappa and others (A.I.R 1966 S.C 1300) (4) had an occasion to consider the rights of a partner in the trading assets of a partnership with reference to the provisions of the Indian Partnership Act, 1932. Their Lordships observed as follows :—

“It seems to us that looking to the scheme of the Indian Act no other view can reasonably be taken. The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already stated his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case what the assignee would get would be only that which is permitted by S. 29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners.”

Admittedly Kartar Singh had not assigned his share in the partnership but what he wanted to do was to make gifts of specified amounts, the total of which came to Rs. 69,000, in favour of his four sons and one daughter. The cash with the firm was only a paltry amount of Rs. 3,429, which was not sufficient to satisfy the gifts. There is also nothing to show that the assessee firm could, as in the case of Balimal Nawal Kishore, avail of any un-utilised drawing power on a bank to enable the parties, if they had wished, to realise cash to the extent of the amount of gifts and to give it to the donees. In these circumstances the gifts could not be considered to have been completed by any symbolic delivery of the amounts and the transaction was no better than that of mere book entries. It is well settled that mere entries in books of accounts are not sufficient for completing a gift of movable property. In this connection reference may be made to Mrs. Ida L. Chambers and others v. Kelland Huxford Chambers (A.I.R 1941 Madras 154) (5), E.M.V Muthappa Chettiar v. Commissioner of Income-Tax, Madras (13 I.T.R 311) (6), S.A.S Rm. Ramanathan Chettiar v. M.P Palaniappa Chettiar and others (A.I.R 1945 Madras 473) (7), S.P Jain v. Commissioner of Income-Tax, Bihar and Orissa (51 I.T.R 6)(8), Commissioner of Income-Tax, U.P v. Smt. Shyamo Bibi (59 I.T.R 1)(9), and Virji Devshi v. Commissioner Of Income-Tax, Bombay. (65 I.T.R 291) (10). In the last mentioned case V.S Desai, J. observed that just “as the entries in his own accounts by a person would not constitute a valid transfer, even the entries in the accounts of the partnership would not be sufficient to constitute a valid transfer”.

With very great respect we may say that the decision in the case of Naunihal Thakar Dass can be of no help to the assessee as the nature of the rights of a partner during the subsistence of the partnership with respect to capital account of the partnership were not taken into consideration.

The learned counsel for the assessee also tried to raise a contention that the capital account was in fact a composite account of deposits and sums brought in as trade assets of the partnership and withdrawals from that account were also made off and on by Kartar Singh. It will, however, be noticed that the case was dealt with by the Appellate Tribunal on the basis that the account was a capital account as distinguished from loan or deposit account. In the agreed statement of the case as well the account has not been referred to as a composite or mixed account but as capital account. The incidents of partnership as applicable to trading assets or capital account have, therefore, to be applied. As a partner Kartar Singh was not free to claim or exercise any exclusive right over the property which he had brought in as trading assets of the partnership for making gifts of specified amounts.

The view taken by the Appellate Tribunal, in our opinion, was correct. The gifts made by Kartar Singh were not valid and consequently there was no liability on the assessee-firm for payment of any interest to the donees by treating the amounts of the gifts in their favour as loan as to the firm.

The question posed for our opinion is, therefore, replied in the negative. In the circumstances of the case we leave the parties to bear their own costs of this reference.

ABS Reference answered accordingly.