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  • S. Ranganathan
  • Leila Seth, JJ.
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  • S. Ranganathan
  • Leila Seth, JJ.
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Smart Summary

Structured Summary — Ranganathan, J. (Reference under the Income-tax Act, 1961)

Factual and Procedural Background

These are three references under the Income-tax Act, 1961, at the instance of Shri Gopal Dass, proprietor of M/s. Prominent Motors (India), Delhi, relating to the assessment years 1967-68, 1968-69 and 1969-70. The questions referred were common to all three years and concerned (1) the validity of an alleged gift of Rs. 1,00,000 purportedly made by the assessee to his wife on 20 March 1963 and the admissibility of interest claimed as deductions in the years in question, and (2) whether the Income-tax Officer was debarred from challenging the validity of that gift for the assessment years under consideration.

Core factual chronology (as stated in the opinion):

  • The assessee claimed to have gifted Rs. 1,00,000 to his wife, Smt. Shanta Rani, on 20 March 1963, and thereafter treated himself as borrowing that amount from her; the assessee's balance-sheet as at 31 March 1963 showed his wife as a creditor to the extent of Rs. 1,00,000.
  • For assessment year 1964-65 the assessee claimed to have paid interest of Rs. 12,000 to his wife; that interest was treated as assessee's income under s.64 so that effectively the interest claim and the addition balanced each other.
  • For assessment years 1965-66 and 1966-67 interest claimed were Rs. 13,440 and Rs. 15,908 respectively; the portion attributable to the original Rs. 1,00,000 gift (Rs.12,000) was not allocable as a deduction, while the smaller balances were allowed as deductions.
  • For assessment year 1967-68 the ITO held there had been no valid gift — citing absence of a written deed, lack of sufficient cash or identifiable assets on the relevant date, and the insufficiency of mere book entries — and therefore added back the entire interest credited to the wife's account, resulting in specified additions for the three years.
  • The AAC allowed relief to the assessee on consolidated grounds but did not consider the validity of the gift; the Department (Revenue) appealed to the Income-tax Appellate Tribunal which accepted the Revenue's appeal and held that the alleged gift by book entries in the sole proprietor's books was not a valid gift.
  • The Tribunal also held that the Department was not precluded from challenging the gift in later years; the assessee referred questions of law to the High Court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the gift of Rs. 1 lakh said to have been made by the assessee to his wife on March 20, 1963, was invalid and the entire claim of interest allegedly paid by the assessee in his wife's account were inadmissible deduction for the assessment years 1967-68, 1968-69 and 1969-70?
  2. Whether, on the facts and in the circumstances of the case, the Income-tax Officer was debarred from challenging the validity of the gift for the assessment years in question?

Arguments of the Parties

Assessee's Arguments (summarized)

  • The assessee asserted that a gift of Rs. 1,00,000 was made to his wife on 20 March 1963, and relied on book entries (debit to assessee's capital account and credit to wife's account) to support the assertion.
  • Counsel for the assessee (Mr. B.B. Ahuja) contended that the decision in Shyamo Bibi could be distinguished because that case involved accounts made up by a private individual for private sources of income, whereas here the entry was made in business books.
  • It was also contended that the alleged gift should be treated as a gift of business assets to the extent of Rs. 1,00,000 rather than a gift of cash.
  • Implicitly, the assessee relied on earlier years in which the ITO had accepted the claim (permitting interest claims in earlier assessments) to support the validity or consistency of the position.

Revenue's / Department's Arguments (summarized)

  • The Department contended there had been no valid gift, relying on precedent authorities cited to show that mere book entries in the donor's control do not constitute a valid gift.
  • The Revenue pointed out the absence of a written deed of gift, the absence of sufficient cash or tangible assets on the relevant date, and that mere entries in the assessee's books (which the assessee wholly controlled) could not constitute delivery or transfer required for a valid gift.
  • The Department also maintained that it was entitled to challenge the validity of the gift in the assessment years before the Tribunal despite earlier treatment in prior years; it relied on Supreme Court authority to that effect.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
S.P. Jain v. CIT, [1964] 51 ITR 6 (Pat) The opinion records this decision as one of the authorities relied on by the Revenue; the text does not state the specific principle from this case beyond that it was relied upon to challenge the validity of gifts evidenced by entries. The Tribunal and the High Court treated this decision as part of the body of authority supporting the proposition that mere book entries by a proprietor do not necessarily effect a valid gift. The opinion records the precedent as relied upon by the Department.
CIT v. Shyamo Bibi, [1966] 59 ITR 1 (All) Cited for the proposition that entries in books maintained by an individual (under his control) do not by themselves constitute a valid gift. The Tribunal relied on Shyamo Bibi to hold that entries in the sole proprietor's books were insufficient to constitute a valid gift; the High Court rejected the assessee's attempt to distinguish Shyamo Bibi on the basis that the present entries were in business books.
New India Colour Co. v. CIT, [1971] 80 ITR 206 (Delhi) Cited as authority supporting the Revenue's position on the invalidity of gifts effected only by entries without delivery or transfer. The Tribunal relied on this decision (among others) to sustain its conclusion that no valid gift had been made; the High Court agreed with the Tribunal's reliance on it.
CIT v. Beni Prasad Tandon, [1973] 89 ITR 185 (All) [FB] Listed among the decisions relied on by the Department; the opinion does not articulate the precise point taken from this authority beyond its general support for the Revenue's stance. The decision was one of the authorities on which the Tribunal placed reliance in allowing the Revenue's appeal; the High Court records it among the precedents relied upon.
New Jehangir Vakil Mills Co. Ltd. v. CIT, [1963] 49 ITR (SC) 137 (Supreme Court) Cited for the principle that for income-tax purposes each assessment year is separate and a decision in one year does not operate as res judicata in a subsequent year. The Tribunal invoked this Supreme Court decision to reject the assessee's contention that the Department was precluded from challenging the gift in later assessment years; the High Court agreed that the ITO was not debarred.
M/s. Indian Glass Agency…Petitioner v. Commissioner of Income-Tax…, [1982] 137 ITR 245 Referred to by the High Court as its recent judgment discussing in detail the law on gifts attempted by book entries and distinguishing entries in the donor's books from entries in a third party's books. The High Court relied on its own recent judgment to explain the legal position: that gifts cannot be constituted merely by entries in an owner's books unless there is allocation of corresponding funds or delivery; the court applied that analysis to conclude no valid gift existed here.

Court's Reasoning and Analysis

The High Court addressed the two referred questions in turn and gave reasons grounded in the facts and established principles as discussed in the opinion.

On Question No. 2 (whether the ITO was debarred)

  • The court observed there was no evidence that in earlier years the ITO had examined the matter and reached a positive conclusion on validity of the gift; only that interest payments had been allowed.
  • The court applied the principle that for income-tax purposes each assessment year is separate and self-contained and that a decision in one year does not operate as res judicata in subsequent years. It therefore held the ITO was not precluded from taking a different view in later years.
  • The Tribunal's conclusion that the Department was not shut out from raising the validity issue was held to be correct.

On Question No. 1 (validity of the gift and admissibility of interest deductions)

  • The court examined the balance-sheet as at 31 March 1963 and noted it did not show either cash in hand or other tangible assets of Rs. 1,00,000 or above available to be gifted; there was no evidence of delivery of stock or assignment of debts to the wife.
  • The court placed weight on the fact that the alleged gift was supported only by book entries — debit to the assessee's capital account and credit to the wife's account — in books wholly under the assessee's dominion and control.
  • The court relied on its recent judgment in M/s. Indian Glass Agency (cited above) and other decisions to reiterate that an owner cannot effect a valid gift merely by making book entries without allocation of funds or delivery; there is a significant distinction between entries in the donor's own books and entries in the books of a third party.
  • The court rejected the assessee's attempt to distinguish prior authority (Shyamo Bibi) on the ground that the present entries were in business books rather than private ones, holding that the control and dominion of entries was the relevant consideration and that no meaningful distinction arose from the fact the assessee's books were business books.
  • The court also rejected the assessee's later alternative contention that the gift was of business assets rather than cash, noting that throughout the case the assessee had consistently maintained the gift was of cash and no assets had been identified or pointed out as having been transferred.
  • On that basis the court agreed with the Tribunal that the alleged gift of Rs. 1,00,000 was not established and that the interest claimed in the assessment years under reference was not admissible as a deduction.

Holding and Implications

Holding:

  • Question No. 1: Answered in the affirmative and in favour of the Revenue. The court held that no valid gift of Rs. 1,00,000 had been made to the assessee's wife on 20 March 1963 and, accordingly, the interest claimed in the assessment years was not admissible as a deduction (the court clarified the question to state that the interest claimed was not admissible).
  • Question No. 2: Answered in the negative and in favour of the Revenue. The court held that the Income-tax Officer was not debarred from challenging the validity of the gift for the assessment years in question.

Implications / Consequences:

  • The Tribunal's decision allowing the Revenue's appeal was affirmed in respect of the two referred questions: the interest previously claimed was not admissible and the Department could re-open the validity issue in the later assessments.
  • The reference was disposed of accordingly; the Revenue was awarded its costs (one set) and counsel's fee of Rs. 350 was directed to be paid.
  • The opinion does not purport to lay down broader new law beyond application and reaffirmation of the existing principles set out in the authorities cited (the court expressly relied on prior decisions and its own recent judgment for the legal principles applied). The decision's effect is therefore the direct determination of the parties' rights in these assessment years rather than an announced novel precedent in the opinion itself.

Disposition: Reference disposed of. Revenue entitled to costs (one set) and counsel's fee Rs. 350.

Show full summary ...

    Prominent Motors (India) v. Commissioner Of Income-Tax, New Delhi.

    Ranganathan, J.:— There are three references under the I.T Act, 1961, at the instance of Shri Gopal Dass, proprietor of M/s. Prominent Motors (India), Delhi (hereinafter referred to as “the assessee”). They relate to the assessment years 1967-68, 1968-69 and 1969-70, the relevant previous years being the preceding financial years. The questions referred to us are common for all the three years and read as under:

    “1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the gift of Rs. 1 lakh said to have been made by the assessee to his wife on March 20, 1963, was invalid and the entire claim of interest allegedly paid by the assessee in his wife's account were admissible deduction for the assessment years 1967-68, 1968-69 and 1969-70?

    2. Whether, on the facts and in the circumstances of the case, the Income-tax officer was debarred from challenging the validity of the gift for the assessment years in question?”

    2. The facts necessary for the decision of the questions lie in a narrow compass. The assessee was carrying on a business in motor parts. He claimed to have made a gift of Rs. 1 lakh to his wife, Smt. Shanta Rani, on 20th March, 1963, Immediately thereafter it was stated that the assessee borrowed the amount from his wife. In the balance-sheet of the assessee's business as on March 31, 1963, the wife, Smt. Shanta Rani, is shown as a creditor of the assessee to the extent of Rs. 1 lakh. For the assessment year 1964-65, the assessee claimed to have paid interest amounting to Rs. 12,000 to his wife. But since this interest income was earned by her from assets gifted to her by the assessee, the interest income was also to be treated as assessee's income. In other words, the interest payable by the assessee to his wife and the addition under s. 64 balanced each other. For the assessment years 1965-66 and 1966-67, the interest claimed to have been paid by the assessee to his wife came to Rs. 13,440 and Rs. 15,908, respectively. Out of this, the sum of Rs. 12,000 attributable to the original gift of Rs. 1 lakh was not allocable to the assessee as a deduction for the reasons mentioned above. So far as the balance of Rs. 1,440 for the assessment year 1965-66 and Rs. 3,908 for the assessment year 1966-67 were concerned, these represented the income of the wife attributable to the interest which was due to her from the assessee and not to the asset transferred by the assessee to her. These amounts were, therefore, permitted as deductions in the two assessment years above mentioned.

    3. However, when the assessment for 1967-68 was taken up, the ITO took the view that there had been no valid gift made by the assessee to his wife. He pointed out that there was no written deed of gift and he was of the opinion merely placing a portion of the assessee's balance of the capital account under a separate account in the name of his wife did not tantamount to a valid gift. He pointed out that the assessee did not have any cash balance on the relevant date nor even business assets to the extent of Rs. 1 lakh on that date which he could have gifted in favour of his wife. In the view which he took, the ITO was of the opinion that there having been no gift, the question of any interest payment on an amount borrowed from the assessee's wife did not arise and he, therefore, added back the entire interest credited by the assessee to his wife's account. In this manner additions of Rs. 17,929, Rs. 20,238 and Rs. 22,405 respectively were made by the ITO in the three assessment years 1967-68, 1968-69 and 1969-70:

    The AAC, to whom the assessee appealed, allowed the assessee's claim by his consolidated order for the three assessment years in question. But in doing this, he did not discuss the issue of the validity of the gift raised by the ITO. He merely pointed out that in the earlier years the assessee himself surrendered the interest of Rs. 12,000 and observing that the interest in excess of that amount should have been allowed, gave relief to the assessee in respect of Rs. 5,927, Rs. 8,238 and Rs. 10,405 respectively for the three years in question.

    4. The Department preferred an appeal in respect of each of the three years to the Income-tax Appellate Tribunal and contended that in the present case there had been no valid gift made by the assessee in favour of his wife. Reliance was placed on the cases in S.P Jain v. CIT, [1964] 51 ITR 6 (Pat), CIT v. Shyamo Bibi, [1966] 59 ITR 1 (All), New India Colour Co. v. CIT, [1971] 80 ITR 206 (Delhi) and CIT v. Beni Prasad Tandon, [1973] 89 ITR 185 (All) [FB]. The Tribunal accepted the Revenue's appeal. It pointed out that in the present case, the assessee was the sole proprietor of M/s. Prominent Motors (India) and that the account books were entirely in his possession, dominion and control. The Tribunal was of the opinion that by merely making entries in the account books in a separate account of his wife, no valid gift could be said to have been made. It was also pointed out that on 20th March, 1963, there was not sufficient cash balance in the hands of the assessee and there was also no delivery of the cash balance to the alleged donee. Relying on the judgment in the cases of Shyamo Bibi, [1966] 59 ITR 1 (All) and New India Colour Co., [1971] 80 ITR 206 (Delhi) and the other two decisions relied upon by the Department, the Tribunal allowed the Revenue's appeal. The Tribunal also rejected the contention put forward on behalf of the assessee that since the ITO had accepted the validity of the gift in the assessment years 1964-65 to 1966-67, it was not open to the Department to challenge the validity thereof in the assessment years under consideration. In rejecting this contention, the decision of the Supreme Court in the case of New Jehangir Vakil Mills Co. Ltd. v. CIT, [1963] 49 ITR (SC) 137, was relied upon.

    5. At the instance of the assessee, the question of law set out earlier have been referred to us for our decision.

    6. The second question is capable of a simple and easy answer. There can be no doubt that the ITO is not debarred from arriving at a conclusion regarding the validity of the gift different from the view taken in the earlier years. In fact, there is nothing to show that in the earlier years, the ITO examined the matter and came to any positive conclusion in this regard. All that is available on the record is that the interest payments claimed were allowed in the earlier years accepting the claim of gift. Whatever that may be, it is well settled that for purposes of income-tax, each assessment is separate and self-contained and that the decision given in one year does not constitute res judicata in subsequent years. The Tribunal, therefore, was right in coming to the conclusion that the Department was not shut out from raising the question of validity of the gift for the assessment years presently in question.

    7. So far as the first question is concerned, again, we agree with the view taken by the Appellate Tribunal. A copy of the balance-sheet as on March 31, 1963, has been made available to us. As pointed out by the Tribunal, this does not show either cash in hand or other tangible assets of the value of Rs. 1 lakh or above. There was, of course, some stock-in-hand and there were some outstanding dues to the assessee but it is not the case that either the stock was handed over to the wife or that the debts due to the assessee were assigned to her by way of gift. The assessee's case is that a sum of Rs. 1 lakh was gifted by him to his wife. The version of the gift was only sought to be supported by means of book entries which show that the sum of Rs. 1 lakh has been debited to the assessee's capital account and credited to the account of his wife. It may be that the assessee considered himself indebted to the wife to the extent of Rs. 1 lakh. But the question of his having made a gift to the wife does not arise.

    8. This question regarding the validity of the gift made by book entries has been discussed by us at some length in our recent judgment dated 22nd September, 1980, in ITR Nos. 304, 319 and 320 of 1979 and 315 of 1980 (M/S. Indian Glass Agency…Petitioner v. Commissioner Of Income-Tax…, [1982] 137 ITR 245). In this judgment, we have discussed the case law pertaining to this aspect of gifts attempted to be made by book entries. We have pointed out that a gift cannot be said to have been made merely because an owner of the business makes entries in his books of account without allocation of funds corresponding to such entries. We have also pointed out that there is a substantial difference between a case where such entries are made in the books of account belonging to the assessee himself and a case where the gift is evidenced by entries in the books of account of a third party, such as an HUF, a firm or a company. For the reasons discussed in greater detail in that judgment, we are of opinion that the Tribunal was correct in coming to the conclusion that, in the present case, ho valid gift of a sum of Rs. 1 lakh had been made by the assessee to his wife on 20th March, 1963.

    9. Mr. B.B Ahuja, learned counsel for the assessee, sought to distinguish the case of Shyamo Bibi, [1966] 59 ITR 1 (All), on the footing that in that case the accounts were made up by a private individual for her private sources of income whereas in the present case the entry had been made in the books of account pertaining to a business. We are unable to agree that this distinction makes any difference. The distinction is between entries in the books of account maintained by an individual which are under his control and possession and in which it is open to him to make any entries at anytime and a case of entries in books of account maintained by a third party at the instance of the donor. We are unable to see any distinction between a case where the books of account are maintained by an individual for his private purposes and one where they are maintained for business purposes.

    10. Mr. Ahuja also contended that in this case the gift of Rs. 1 lakh should be treated not as a gift of cash but as a gift of the assets of the business to the extent of that amount. This argument cannot be accepted. The case of the assessee throughout was that he had gifted a cash of Rs. 1 lakh. No case was made out at any time that it was not cash but some other assets that had been transferred to the assessee. There Were no other assets which could have been transferred and no such assets were pointed out to us either. From the mere fact that the total assets of the business exceeded the sum of Rs. 1 lakh (taking into account all debts due to the business and bills receivable and so on), it does not follow that the gift made by the assessee was of the assets of the business to the tune of a sum of Rs. 1 lakh. We, therefore, agree with the view taken by the Tribunal and answer the question referred to us as follows:

    Question No. 1 in the affirmative and in favour of the Revenue. Having regard to the fact that there is a mistake in the question framed, we clarify that the interest claimed was not admissible as a deduction.

    Question No. 2 in the negative and in favour of the Revenue.

    11. The reference is disposed of accordingly. The Revenue will be entitled to its costs (one set). Counsel's fee Rs. 350.

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    Comments

    Prominent Motors (India) v. Commissioner Of Income-Tax, New Delhi.
    (Sep 24, 1981)