Login
  • Bookmark
  • PDF
  • Share
  • CaseIQ

M/S. Indian Glass Agency Petitioner v. Commissioner Of Income-Tax

Delhi High Court
Sep 22, 1981
Important Paras
Please sign up to view Important Paras.
Smart Summary (Beta)

Comprehensive Summary of the Opinion (S. Ranganathan, J.)

Factual and Procedural Background

These references concern income-tax assessments of the firm "Indian Glass Agency" for assessment years 1971-72 to 1974-75 (relevant previous years 1970-71 to 1973-74). The principal factual matrix (set out by the Tribunal for 1971-72) was that Jai Gopal, a partner, purported on 14-5-1970 to make a gift of Rs. 15,000 to Deepankar (the minor son of partner Sushil Kumar). The alleged mechanism was that Jai Gopal instructed the firm to effect the transaction by debiting his account and crediting an account opened in the donee's name, Sushil Kumar accepting on behalf of the minor.

For 1971-72 the firm claimed a deduction of interest (Rs. 1,587) attributable to the credited amount to Deepankar; the Income-tax Officer disallowed it on the short ground that the firm’s cash balance on the gift date was only Rs. 3,187 and therefore a valid gift of Rs. 15,000 could not have been effected. The assessee appealed to the Appellate Assistant Commissioner (contending that cash plus bank balances exceeded Rs. 1,00,000 and relying on precedent), but the disallowance was confirmed. On further appeal to the Tribunal the Tribunal held the gift invalid as being essentially only a book entry, following the decision in New India Colour Co. v. CIT. The assessee sought a reference to the High Court under Section 256(2).

Similar transactions in later years (1972-73, 1973-74 and 1974-75) involved purported gifts by partners by debiting partners' accounts and crediting accounts of relatives/donees (a table of six gifts totaling Rs. 50,000 is set out in the opinion). Interest relating to these amounts was also disallowed by the Income-tax Officer and sustained on appeal following the Tribunal's earlier order. The Tribunal referred specific questions to this Court about the validity of those gifts and the correct application of the ratio in New India Colour Co.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the gift(s) made by the donor(s) (partners of the firm) in favour of the donee relatives were valid gifts such that the assessee-firm was entitled to deduct interest paid to the donees.
  2. Whether the Tribunal correctly applied the ratio of the judgment in New India Colour Co. v. CIT (80 I.T.R. 206) in concluding that such book-entry gifts were invalid.

Arguments of the Parties

Assessee's Arguments

  • The assessee contended there was sufficient cash and bank balance (claimed cash plus bank balances exceeding Rs. 1,00,000) on the date of the alleged gift, contrary to the Income-tax Officer's short finding about cash on hand.
  • The assessee relied on precedents (including a Supreme Court decision, Ramaratnam's case) to support allowance of the interest; it also attempted to distinguish New India Colour Co. on the ground that (a) the firm had adequate cash/bank balances or drawing power and (b) the entries were made in the donors' personal/drawing accounts which had sufficient credit balances (as distinct from a capital account).
  • Before this Court, counsel for the assessee additionally asserted that written letters from the donors instructing the firm to make the entries and written indications of acceptance by the donees existed (i.e., documents in writing to give effect to the gifts).

Department's Arguments

  • The department (and the Tribunal as earlier constituted) treated the alleged transactions as no more than book entries and relied on New India Colour Co. to deny validity of the gifts—particularly where the firm lacked sufficient cash/unutilised drawing power and where the entries were in accounts which could not be treated as the donor's exclusive property (e.g., capital account).
  • Counsel for the department also relied upon Baliram Mathuradas v. CIT (1966-59 ITR 278) to argue that an amount due by a partnership to a partner is a debt or actionable claim which cannot be transferred except by a deed in writing as required by Section 130 of the Transfer of Property Act, and thus book entries alone cannot effect a valid transfer without the prescribed writing.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Ramaratnam's case (1973-91 ITR 1) Cited by the assessee in support of allowance of interest. Referenced as a precedent relied upon by the assessee at earlier stages; the opinion records the reliance but does not analyze it in depth.
New India Colour Co. v. CIT (1971-80 ITR 206) Held that gifts by debit/credit entries from a capital account (where partner could not freely withdraw capital) were not valid; book entries alone insufficient where donor lacked capacity to withdraw cash or firm lacked cash/unutilised drawing power. The Tribunal followed this decision to invalidate the gifts; this Court examined its scope and held the Tribunal misconstrued it as a general prohibition on book-entry gifts, directing that the Tribunal should instead examine surrounding facts (cash/bank balances and nature of account).
E. M.V. Muthappa Chettiar v. CIT (13 ITR 311) Used to show that book entries alone are insufficient to establish a gift. Cited as authority for the proposition that there must be more than mere book entries to show a gift of movable property.
Smt. Shyama Bibi (1966-59 ITR...) Another decision indicating book entries alone may not suffice. Listed among authorities to support the point that identification/delivery/acceptance are relevant and book entries alone will often be insufficient.
Sukhlal Sheco Narain v. CWT (1973-89 ITR 157) Decision treating book entries as generally insufficient unless accompanied by other circumstances indicating real transfer. Cited to support the general rule requiring more than mere book entries for a valid gift.
P.A.C. Ratanswamy Nadar & Sons v. CIT (1962-46 ITR 1148) Example where doneee's admission into partnership after gift evidenced implementation of the gift. Used as an example of circumstances where book entries plus subsequent admission of donees into partnership indicated a real gift.
A.M. Abdul Rahman Rowther & Co. v. CIT (1965-56 ITR ...) Authority showing additional acts (e.g., admission to partnership) can evidence a genuine gift effected by book entries. Referred to in support of the principle that book entries may be adequate if accompanied by acts showing implementation.
CIT v. Ashok Glass Works (1976-103 ITR 379) In commercial concerns (firm, HUF, company) it is not always necessary to insist upon withdrawal of cash in specie; book entries can validly evidence gifts where the entity has enough funds and the donor sufficient credit balance. Relied upon by this Court to illustrate that, in dealings with commercial entities, book-entry gifts can be treated as valid where the surrounding circumstances make such a method of transfer natural.
Chimanbhai Lalbhai v. Commissioner of Income-Tax (Central), Bombay (1958-34 ITR 259) Case of a banking concern where book entries were given effect to by allowing overdraft facilities; relevant to whether book entries constitute a natural method of transfer. Cited in the New India Colour Co. judgment and discussed by this Court as a case where overdraft/drawing power made book-entry transfers realistic.
K.P. Brothers v. CIT (1961-42 ITR 650) Listed among authorities supporting validity of book-entry gifts in appropriate circumstances. Cited as one of several decisions where gifts by entries have been held valid if circumstances point to actual transfer.
E.S. Hajee Abdul Kareem and Son v. CIT (1963-50 ITR 396) Authority on validity of book-entry gifts when accompanied by circumstances indicating a real gift. Included in the list of cases where book entries sufficed given the surrounding facts.
Bhu Ram Jawaharlal v. CIT (1971-82 ITR 772) Another decided instance cited for the general doctrine on book-entry gifts. Referenced among cases supporting the proposition that book entries may be evidence of valid gifts in appropriate factual settings.
Gopal Jalan v. CIT (1972-86 ITR 317) Authority dealing with book-entry gifts and their validity. Listed with other supportive cases; used to demonstrate the range of decisions where book entries were held sufficient when other circumstances existed.
Phool Chand Gajanand v. CIT (1973-89 ITR 148) Case supporting that book entries can evidence gifts where circumstances permit. Referred to in the survey of authority concerning book-entry gifts.
Jhaverbhai Patel v. CIT (1976-103 ITR 728) Decision cited among those where book entries were held sufficient in context. Included in the list demonstrating instances where courts upheld gifts evidenced by book entries with corroborating circumstances.
Srinath Das v. Income-tax Appellate Tribunal, Delhi Bench “B” (1977-109 ITR 315) Authority referred to in the compilation of cases on book-entry gifts. Used as part of the jurisprudential background illustrating variable treatment depending on facts.
CGT v. Tarachand Meghraj (1977-109 ITR 775) Listed among decisions addressing whether book entries can constitute gifts. Referred to as part of the body of authority on the subject.
Smt. S. Puniyamma v. CGT (1979-117 ITR 47) Another decision in the body of case law on book-entry gifts. Referenced in the Court's summary of relevant authorities.
CIT v. New Digvijayasinhji Tin Factory (1959-36 ITR 72) Example where book entries plus subsequent withdrawal by donees indicated validity of gift. Used to show that where donees were permitted to draw on credited accounts, courts have upheld the gift.
Balimal Nawal Kishore v. CIT (1966-62 ITR 669) Held that where donor had sufficient credit and firm had overdraft/unutilised drawing power, book entries and subsequent withdrawals established a valid gift. Adduced as an instance where book entries were accepted because the firm’s facilities and subsequent donee withdrawals showed implementation of the gift; New India Colour Co. distinguished this case on its facts.
Naunihal Thakar Dass v. CIT (1970-77 ITR 332) Followed Balimal Nawal Kishore: book entries plus circumstances of credit/drawing power can validate gifts. Noted as a follow-up authority to Balimal and considered in evaluating whether book-entry gifts could be effective.
S.P. Jain v. CIT (1964-51 ITR 6) Illustrates where mere credit entry without evidence of acceptance or other acts did not create a debt or valid gift. Used as a counter-example where book entries were held not to constitute a valid gift due to lack of acceptance or implementation.
Virji Devshi v. Commissioner of Income-Tax, Bombay (1967-65 ITR 291) Example where there was no evidence of acceptance or acting upon purported gift; declaration alone not sufficient. Referred to illustrate that unilateral declarations absent evidence of acceptance or implementation do not establish valid gifts.
CWT v. Gulab Rai Govind Prasad (1972-85 ITR 308) Case finding absence of acceptance, cash balance, or interest payments and use of gifted amounts in business indicated no valid gift. Cited as an instance where book entries failed to create a valid gift because subsequent conduct showed the amounts were used for business and not as gifts.
Baliram Mathuradas v. CIT (1966-59 ITR 278) Held an amount due by a partnership to a partner was a debt/actionable claim; transfer of such actionable claim required a deed in writing under Section 130 of the Transfer of Property Act; entries in books were not sufficient. The department relied on it to argue that the present transactions required written instruments; this Court declined to decide the point because the Tribunal had not addressed whether a writing existed and the issue had not been argued below.
C.E.O. v. S.M.M. Subramaniam Chettiar (1978-99 ITR 400) Distinguishes between a partner's current account in a subsisting partnership (freedom to withdraw) and the position where the account is a retirement/debt situation. Relied on by the assessee to argue that a current account in a subsisting firm is not necessarily an actionable claim and that transfers by entries can be equivalent to gift of cash.
Karria Venkata Reddi v. Kollu Narasayya (1908-ILR 32 Madras 76) Authority cited for the proposition that a current account is a debt payable on demand and thus stands out of the category of an actionable claim in certain contexts. Quoted in support of the view that a current account in a subsisting partnership may not be an actionable claim requiring written assignment; used to explain why Section 130 may not always apply.
Addanki Narayanappa & another v. Bhaskara Krishnappa (AIR 1966 SC 1300) Authority cited concerning the nature of a capital account and the point that capital cease to be the exclusive property of the partner during partnership subsistence. Referred to in the discussion of New India Colour Co. to explain why gifts purportedly made out of capital accounts might be treated differently.

Court's Reasoning and Analysis

The Court undertook a careful review of the legal principles and the authorities dealing with gifts evidenced by book entries. The analysis proceeded along these principal lines:

  1. The Court reiterated settled law: for immovable property a registered deed is necessary; for movable property there must be identification and delivery and acceptance by the donee. Mere entries in the owner's books without allocation of corresponding funds ordinarily do not constitute a valid gift.
  2. The Court then distinguished two broad situations: (a) entries in the books of the owner himself and (b) entries in the books of a third-party commercial entity (HUF, firm, company). It explained that in the latter situation it may be impractical and pointless to insist on literal withdrawal and physical delivery where the donor and donee effectively intend the monies to remain with the commercial entity. Thus prior authorities have recognised that book entries in such commercial contexts can constitute valid gifts if the surrounding circumstances make this a natural method of transfer (for example, sufficient cash, unutilised overdraft/drawing power, or a donor's account with adequate credit).
  3. The Court examined the jurisprudence in detail. It recognized authorities upholding book-entry gifts where there was evidence of acceptance by donees or where donees were later permitted to draw on credited accounts (e.g., Balimal Nawal Kishore, New Digvijayasinhji). It also reviewed authorities rejecting book-entry gifts where there was no acceptance, no cash balance, the funds were used for business, or entries were not made in the regular course (e.g., S.P. Jain, Virji Devshi, Gulab Rai).
  4. Turning to New India Colour Co., the Court explained that that decision turned on particular facts: gifts were purportedly made out of a capital account where the partner could not freely withdraw capital, and the firm lacked cash and drawing power to enable actual realization. The Court observed that New India Colour Co. should not be read as laying down a universal rule that book entries can never constitute gifts in the context of a firm. Rather, that decision endorsed the proposition that validity depends on whether book entries are a "natural method of transfer" in the circumstances.
  5. The Court found that the Tribunal had misconstrued New India Colour Co. as a blanket rule prohibiting all book-entry gifts in firms. Consequently, the Tribunal failed to examine crucial factual questions — specifically, whether the firm had adequate cash/bank balances or drawing power, and whether the entries were in a character of account (e.g., current/personal/drawing as opposed to capital) that made the book-entry method of transfer natural and effective.
  6. The Court therefore declined to uphold the Tribunal's categorical conclusion that the gifts were invalid. Instead, it answered the referred questions by holding that the Tribunal did not correctly apply New India Colour Co. and that, in view of that misapplication, the Tribunal was not right in concluding the particular gift to the minor was invalid. The Court remitted the matters to the Tribunal with directions to examine the factual matrix afresh in light of the principles discussed.
  7. The Court also addressed (but did not decide) the department’s submission based on Baliram Mathuradas that an amount due by a partnership to a partner is an actionable claim requiring writing under Section 130 of the Transfer of Property Act. The Court refrained from deciding this point because: (a) the Tribunal had not considered whether any relevant written documents existed (the argument had not been advanced below), and (b) the present case arguably involves transfer of money as evidenced by book entries (not transfer of an actionable claim), a factual distinction that requires Tribunal fact-finding.

Holding and Implications

Holding: The Court answered the referred questions by holding that the Tribunal did not correctly apply the ratio of New India Colour Co. and therefore was not right in holding that the gifts (including the gift by Jai Gopal in favour of his minor grandson) were invalid. The references are disposed of and the matters are remanded to the Tribunal for fresh disposal in accordance with law.

Implications:

  • The immediate practical consequence is that the appeals before the Tribunal are restored to its file; the Tribunal must reconsider them afresh applying the correct legal principles articulated by this Court.
  • The Tribunal is directed specifically to examine, on the facts, the extent of cash and bank balances of the firm (and any unutilised drawing power), the nature of the account in which the entries were made (capital account vs. current/personal/drawing account), and any other surrounding circumstances showing acceptance or implementation by the donees.
  • The Court did not decide the question whether transfers in these circumstances constitute assignments of actionable claims requiring written instruments under Section 130 of the Transfer of Property Act; that issue may arise only if the Tribunal, on re-examination of facts, concludes the transaction is an assignment of an actionable claim rather than a gift of money evidenced by book entries.
  • No order as to costs was made.

Disposition note (as in the opinion): Matters remanded to the Tribunal for disposal according to law; references disposed of; no order as to costs.

Show all summary ...

S. Ranganathan, J.:— All these references under the Income-tax Act raise the same question. They relate to the assessments of the firm known as Indian Glass Agency for the assessment years 1971-72 to 1974-75, the relevant previous year being the financial years 1970-71 to 1973-74. As we shall point out latter, the facts relating to the first of these years and the others are slightly different and we may, to start with, take the facts set out by the Tribunal in relation to the assessment year 1971-72.

2. The assessee firm had four partners: Jai Gopal, (and his three sons) Satish Kumar, Sushil Kumar and Santosh Kumar On 14-5-1970, Jai Gopal purported to make a gift to Deepankar, the minor son of Sushil Kumar. It is stated that the gift was made by Jai Gopal giving necessary instructions to the firm and the firm giving effect to the transaction by debiting the account of Jai Gopal giving necessary instructions to the firm and the firm giving effect to the transaction by debiting the account of Jai Gopal and crediting an account started for Deepankar with the said amount, Sushil Kumar accepting the gift on behalf of the minor.
3. For the assessment year 1971-72 the assessee firm claimed as a deduction a sum of Rs 1,587 credited to the account of Deepankar in respect of the sum of Rs. 15,000 said to have been gifted to him by his grand father. The Income-tax officer disallowed the deduction claimed by the assessee on the very short ground that, on the date of the alleged gift, the cash balance with the firm was only Rs 3,187 and bence there could have been no valid gift of Rs 15,000 by Jai Gopal in favour of Deepanker.
4. The assessee preferred an appeal to the appeal to the appellate Assistant Commissioner contending that it was not correct to say that there was not enough cash with the assessee firm on the date of the gift. It was claimed that the cash balance in the books and the bank account taken together exceeded Rs 1,00,000. It was, therefore, submitted that the interest claimed by the assessee should have been allowed and in this regard reliance was placed on the decision of the Supreme Court in Ramaratnam's case (1973-91 ITR 1) The Appellate Assistant Commissioner, however, did not accept this contention and confirmed the disallowance made by the Income-tax Officer.
5. The assessee preferred an appeal to the Appellate Tribunal. It was urged that, on 14-5-1970, the assessee firm had, in addition to the cash balance of Rs 9,197, bank balance, in three different banks, of Rs 50,521, Rs. 41,806 and Rs 1,000 respectively. It was also stated that the assessee had two accounts with the firm, one a capital account and the other a personal and drawing account. In the personal account there was a credit balance of RS 68,388 and it was this account that was debited with the sum of Rs 15,000. In the capital account, there was a balance of Rs 1,15,000. In the capital account, [On these facts the assessee tried to distinguish the decision of this Court in New India Colour Co. v. CIT (1971-80 ITR 206) (1) that was relied upon for the department and contended that a valid gift had been affected by Jai Gopal in favour of Deepankar on 14-5-1970.] The Tribunal, however, did not account this contention. It observed:
“Either the bank entries were made from the capital account or the personal drawing account, this fact is not important for our consideration. What is important is as a how the gift was made. The gift was made merely by book entries. The Delhi High Court in 80 I.T.R 206 (Supra) found as follows:—
“The gifts could not be considered to have been completed by any symbolic delivery and the transaction was no better than that of mere book entries.'
The gift transaction in the case of the assesse is better than that of a mere book entry. Following the rule laid down by the Delhi High Court, we hold that the gift made by the donor Shri Jai Gopal Rastogi in favour of the minor grand-son is not valid and therefore the assessee is not entitled to get any deduction of the interest.”
6. The decision of the Tribunal having gone against the assessee, it applied to the Tribunal for a reference to this Court and the Tribunal has referred the following questions in pursuance of this Court's directions under Section 256(2):
“1. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the gift made by the Donor Shri Jai Gopal Rastogi in favour of his minor grand-son was not a valid gift and the assessee was not entitled to get any deduction of the interest paid to the donee.
2. Whether the Tribunal correctly applied the ratio of the judgment in the case of New India Colour Company reported in 80 I.T.R page 206 on the facts and in the circumstances of the assessee's case?”
In the course of the proceedings for the assessment years 1972-73 and 1973-74 the assessee firm claimed, in addition to the interest paid to Deepankar, other sums of interest paid to Smt. Manju Rastogi, Smt. Beena Rastogi the Miss Anjula on the ground that the partners of the firm had made gifts to these persons. This was done by debiting their current accounts with the firm and crediting such amounts to the accounts of the donees ion the books of the firm. For purposes of convenience, the details of these gifts may be tabulated as under:
Sl.No Date of Gift Name of Donor Name of Donee & Relationship Amount Rs 1. 14-5-70 Sh. Jai Gopal Rastogi Master Deepankar Kumar (Minor Grandson) 15,000 2. 15-9-71 Sh. Jai Gopal Rastogi Smt. Beena Rastogi (Daughter-in-law) 10,000 3. 15-9-71 Sh. Jai Gopal Rastogi Smt. Manju Rastogi (Daughter-in-law) 10,000 4. 15-9-71 Sh. Satish Kumar Rastogi Miss Anjula (Sister) 5,00 5. 15-9-71 Sh. Sushil Kumar Rastogi Miss Anjula (Sister) 5,000 6. 15-9-71 Sh. Santosh Kumar Rastogi Miss Anjula (Sister) 5,000 50,000
7. The interest claimed by the assessee on these amounts came to Rs 6,000 in each of the accounting years relevant for the assessment years 1972-73 and 1973-74. These amounts were disallowed by the Income-tax Officer for the same reasons as had been given in the earlier assessment year. When the matter went up in appeal to the Appellate Assistant Commissioner, he upheld the disallowance following the order of the Tribunal in the earlier assessment year. On further appeal by the assessee to the Tribunal it was again held, following the order of the Tribunal for the assessment year 1971-72, that the interest had been rightly disallowed. The same was the position also in respect of the assessment year 1974-75.
8. Dissatisfied with the orders of the Tribunal for all these years the assessee applied for a reference in I.T.Rs Nos. 319 & 320/79. The Tribunal referred the following two questions:
“1. Whether, on the facts and in the circumstances of the cases, the Tribunal was right in holding, that the gifts made by the partners of the assessee firm in favour of their relating (relatives) were not valid gifts and the assessee was not entitled (to get any deduction for the interest paid to the) donees?
2. Whether the Tribunal correctly applied the ratio of the decision in the case of New India Colour Co. reported in 80 I.T.R 206 on the facts and in the circumstances of the case?”
(Words in brackets ours).
For the assessment year 1974-75 the questions referred are as follows:
“1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the gifts made by the partners, Shri Jai Gopal Rastogi, Shri Satish Kjumar Rastogi, Shri Santosh Kumar Rastogi and Shri Sushil Kumar Rastogi to different persons amounting to Rs 50,000 were not valid gifts and the assessee firm was not entitled to get any deduction of the interest paid to the donees?
2. Whether the Tribunal correctly applied the ratio of the judgment in the case of the New India Colour Co. reported in 80 ITR 206 on the facts and in the circumstances of the assessee's case?”
9. It will thus be seen that the deduction for interest claimed by the assessee has been disallowed by the Tribunal in all the years following its decision in the appeal for the assessment year 1971-72 In that order, the Tribunal had not accepted the assessee's attempt to distinguish the decision of this Court in the case of New India Colour Co. CIT (1971-80 ITR 206) on the two grounds (a) that the firm had enough cash and bank balances and (b) that the gift had been made by making entries ion the personal and drawing account of the donor which had sufficient credit balances on the date of the gift.
10. We are of opinion that the Tribunal has misconstrued the true scope of the decision of this Court in the case of New India Colour Co. (Supra).
11. It is settled law that a registered deed in necessary to effect a gift of immovable property and that even in respect of movable property, there should be an identification of the property and a delivery thereof to the donee who should accept the same. A gift cannot be said to have been made merely because the owner of a business makes entries in this books of account without allocation of funds corresponding to such entries. This is well entitled and is borne out by several decisions among which are E. M.V Muthappa Chettiar v. CIT (1 45 - 13 ITR 311) (2) Smt. Shyama Bibi (1966-59 ITR (1) (3) and Sukhlal Sheco Narain v. CWT (1973-89 ITR 157) (4). In such cases. There should be something more than more book entries to show that a gift has been made. One such circumstances, for example, would be the admission of the donees into a partnership with the donor consequent on the gift, about which there is sufficient evidence: P.A.C Ratanswamy Nadar & Sons v. CIT (1962-46 ITR 1148) (5) and A.M Abdul Rahman Rowther & Co. v. CIT (1965-56 ITR)(6).
12. But 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 a Hindu Undivided Family, a firm or a company. It will be appreciated that in this type of cases it would not always be realistic or practical to insist upon a withdrawal of cash in specie and delivery of the same to the donee by the donor particularly where the monies are intended to be redeposited with the firm by the donee. To give a concrete instance, where a firm has Rs 1,00,000 in its cash chest and a partner thereof, who is entitled to draw monies from the firm, vishes to make a gift of Rs 15,000 to his son, there is no purpose in purpose in insisting that the partner should formally withdraw Rs 15,000 from the cash chest, deliver it to the son, and then ask the son to deliver it back again to the cash chet of the firm. It has, therefore, been held, in cases involving transaction with the commercial concerns like H.U.F carrying on a business or a firm or a company, that it is not necessary for the donor to actually withdraw monies and deliver the same to the donee. There is no difficulty in giving of act to this principle where the family, firm or a company has enough funds and the partner or member making the gift sufficient credit balance in this favour in the books of the said entity. In such cases it is easy to draw an inference that valid gifts of money are effected by such book entries (see: CIT v. Ashok Glass Works. 1976-103 ITR 379) (7).
13. The question that next arises is whether it is always necessary for the validity of the gift that the family, firm or company should have sufficient cash on hand on the material date or that the donor should have sufficient credit balance in his account with such concern. It has been held in a large number of cases that a gift of money is perfectly valid if proper entries are made in account books notwithstanding that there is no transfer of possession, that the donor does not have sufficient balance in his account and that even the firm does not have sufficient cash balance on the material rate. (See: Chimanbhai Lalbhai v. Commissioner Of Income-Tax (Central), Bombay 1958-34 ITR 259 (8), K.P Brothers v. CIT, 1961-42 ITR 650 (9), E.S Hajee Abdul Kareem and Son v. CIT, 1963-50 ITR 396 (10), Bhhu Ram Jawaharlal v. CIT, 1971-82 ITR 772(11), Gopal Jalan v. CIT, 1972-86 ITR 317 (12), Phool Chand Gajanand v. CIT, 1973-89 ITR 148 (13), and Jhaverbhai Patel v. CIT, 1976-103 ITR 728 (14), Srinath Das v. Income-tax Appellate Tribunal, Delhi Bench “B”, 1977-109 ITR 315(15), CGT v. Tarachand Meghraj, 1977-109 ITR 775(16), and Smt. S. Puniyamma v. CGT, 1979-117 ITR 47) (17). What is necessary in all these cases is to examine whether, having regard to the circumstances, of the case, what has been done is a natural method of transfer or whether any circumstances exist which indicate that there is nothing more than mere book entries. Thus where, in addition to book entries, there is evidence to show that the gifts of money have been accepted by the donees or that the firm, family or company accepted the transaction by effecting necessary book entries and that these entries have been further implemented by the donees being permitted to draw upon the accounts to which monies have been credited the validity of the gifts will be upheld: This is what happened in CIT v. New Digvijayasinhji Tin Factory (1959-36 ITR 72) (18). Similarly in the case of Balimal Nawal Kishore v. CIT (1966-62 ITR 669) (19), the donor had made book entries in a firm of which he was the partner. The amount of gift was covered by sufficient credit balance in his account and though the cash and bank balance of the firm fell for short of the amount of gift, the firm had unutilised overdraft limit to a much more substantial extend. It was also found that the donees had withdrawn the amounts in the subsequent years and the gift was upheld. The above decision was followed in the case of Naunihal Thakar Dass v. CIT (1970-77 ITR 3323) (20).
14. On the other hand, the circumstances may clearly indicate that no real gift had been made or intended. Thus in the case of S.P Jain v. CIT (1964-51 ITR 6) (21), a share dealer credited a sum of Rs 3,00,000 to the account of a charitable institution by debt to his personal account. In a subsequent year he debited Rs 3,00,000 to the charitable institution being the value of certain shares transferred to it. There was no evidence regarding the acceptance of the gift by the donee, the charitable institution. In these circumstances it was held that the mere credit entry in the account of the institution did not create a debt in favour of the institution. So also, in the case of Virji Devshi v. Commissioner Of Income-Tax, Bombay. (1967-65 ITR 291) (22) an amount of Rs 3,00,000 was debited to the account of the father and a corresponding amount credited to the account of his minor son in the same firm Later, the assessee made a declaration before a Presidency Magistrate that the had made a gift and that the other partner of the firm was to act as a trustee and guardian of the minor in respect of the amount gifted. There was no evidence that this unilateral declaration was made known to the other partner and there was also no evidence of the acceptance of the gift by or on behalf of the donee or the gift having been acted upon. In these circumstances it was held that there was no valid gift. Again in CWT v. Gulab Rai Govind Prasad (1972-85 ITR 308) (23) though there were book entries transferring funds from the account of the Karta to that of his minor son, it was found that there was no acceptance of the gift, no cash balance on the date of the transfer, no payment of interest to the donees and, in addition, the gifted amount and the property purchased therefrom were utilised for the business of the H.U.F In these circumstances, it was held that there was no valid gift.
15. A review of these cases indicates that it is possible for a partner to effectuate a gift by instructing of firm, family or company which he has an account to give effect to the gift by debiting his account and crediting an account in the name of the donee. But in such cases it is not sufficient that there should be merely book entries: the circumstances attending upon the transaction must be such as to make it clear that there were sufficient funds at the disposal of the donor by reason of which he could make at the gift by means of such book entries. The firm may have sufficient cash balance or it may have sufficient provision for overdraft on the bank on the basic of which it could honour the instructions given by the assessee. It is also not necessary that the partner should have sufficient credit balance to enable him to make the gifts, so long as there is no ground to doubt the bona fides of the firm in choosing to allow on overdraft facility in the donor and the partnership deed contains no prohibition.
16. The decision of this Court in the case of New India Colour Co. does not run counter to these principles. In that case, A and his son B. were two partners of the assessee firm having 12 annas' and 4 annas' share therein. In January 31, 1956, the cash balance of the firm was Rs 3,429 and A's capital account in the firm stood at Rs 1,03,963. On that date, A wrote a letter to the firm requesting it to debit Rs 69,000 to his account and to credit the same ink different proportions to his sons and daughter stating that he had made gifts of those amounts to the respective persons. The latter was also signed by the donees in token of the acceptance of the gifts. The assessee firm carried out the directions of A and made the entries. The question arose whether the interest credited to the accounts of the alleged donees were allowable deductions in computing the profits of the firm. The Tribunal held that since A, as partner, was not free to withdraw his capital from the firm at any time he desire no delivery of the amounts of the gift could have been made and that the gifts were not valid. The conclusion of the Tribunal was upheld by this Court. At page 209, the Court referred to the decision of the Bombay High Court in the case of Chimanbhai Lalbhai v. Commissioner Of Income-Tax (Central), Bombay (1958-34 UTR 259) and pointed out that it was a case of a banking concern and that the book entries had been given effect to by allowing overdraft facilities to the donors. The decisions of the Punjab High Court in the case of Balimal Nawal Kishore v. CIT (9166-52 ITR 669) and in the case of Naunihal Thakar Das v. CIT (1970-77 ITR 332) were also distinguished. The observations of Falshaw C.J in the former case, viz.,
“The principles deducible from a study of these decisions appear 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 sums in cash from the firm to be reinvested by the donee or donees in the firm.”
were endorsed. It was pointed out that, in that case, though there was no enough cash balance in the firm, the firm had unutilised drawing power to the extent of Rs 1,27,088. So for as the case of Naunihal Thakar Dass v. CIT (1970-77 ITR 332) was Nawal Kishore's case but it was observed that in that case the nature of the rights of a partner during the subsistence of the partnership with respect to the capital account of the partnership was not taken into consideration. As regards the case before it, the Court found (a) that the firm had neither enough cash balance nor any unutilised drawing power on a bank such as would have enabled the parties, if they had wished to realise cash to the extent of the amount of the gifts, to give it to the donees; and (b) that the account, from which gifts were purported to have been made, was the capital account of the doner with the firm which had ceased to be his exclusive property as pointed out by the Supreme Court in the case of Addanki Narayanappa and another v. Bhaskara Krishnappa (dead) and thereafter his heirs and others (AIR 1966 SC 1300 (24).
17. On a careful consideration of the facts and observations above referred to we think that if the contentions made out by the asessee before the Tribunal were correct, the decision in the case of New India Colour Co. did not stand in the way of the Tribunal accepting the validity of the gift on an examination of all the surrounding circumstances of the case. The Tribunal, it appears to us, precluded itself from considering the contentions urged on behalf of the assessee because it interpreted the decision of this Court in the case above cited as laying down a general rule that a gift could not be effected by means of book entries in a firm of which the donor in a partner. It has, therefore, failed to give any finding about the correctness of the assessee's plea regarding the amounts available with the firm, the nature of the account in which entries were made and the extent of credit balance therein. Since the relevant facts have not been examined from this angle, we have no other option but to answer the question in such a way as to leave it open to the Tribunal to consider the facts of the case and come to its own conclusion in the light of our above discussion of the principle applicable in such cases.
18. Before, however, giving out answer to the question referred we have to refer to one more aspect that was brought to our notice. Learned counsel for the department invited our attention to the decision of the Bombay High Court in the case of Baliram Mathuradas v. CIT (1966-59 ITR 278) (25). In that case, the assessee was a partner in a firm consisting of himself and his sons. He retired from the firm and on 22-10-1949 there was a credit of Rs 1,39,00 In his favour in his account with the firm. That account was debited with the sum of Rs 50,000 and the account of his two grandsons credited with the sum of Rs 25,000 each, one of the grandsons being a major and the other, a minor. Interest was credited to the accounts of the grandsons and the question arose as to whether the Income-tax Officer was justified in treating the interest credited to the accounts of the grandsons as the interest earned by the assessee on the ground that there had been no valid or genuine gifts made by the assessee to his grandsons. The Income-tax Officer and the Appellate Assistant Commissioner held that more entries in the account books were not sufficient evidence for a valid gift and that, in any event the amount due by the partnership to the assessee was a debt and therefore an actionable claim which could not be validly transferred without executing a proper document as required by Section 130 of the Transfer of Property Act. On appeal, the Appellate Tribunal was not satisfied with the genuiness of the gift and was of opinion that the entries in the books had not been made in the regular course of the business and had no evidentiary value. That apart, the Tribunal also agreed with the Appellate Assistant Commissioner that the assessee could have transferred the debt due to him from that firm only by means of an instrument in writing and as there was no such document, no valid transfer has been effected. Both these findings of the Tribunal were upheld by the High Court on reference. Apart from sustaining the Tribunal's conclusion that the gift was not genuine, the Court also observed that the amount owed by the partnership to the assessee was a debt and was therefore an actionable claim was correct and that consequently, it could have been transferred only by means of a deed in writing as required by Section 130 of the Transfer of Property Act.
19. Relying upon the above decision, Mr. Wadhara contends that, in the present case also, since there was no document in writing executed by the partners who claimed to have made the gifts, the gifts were not valid and the claims were rightly rejected. Learned counsel for the assessee met this argument by pointing out that the amount in question in the case before the Bombay High court was an amount due by a firm to a partner at the time of his retirement from the firm. He referred to the decision of the Madras High Court in C.E.O. v. S.M.M Subramaniam Chettiar (1978-99 ITR 400) (26) to point out a distinction between such a case and a case where there is a current account between a partner and a subsisting firm in which he is a partner. Learned counsel also contended that even assuming that the argument is correct, the department could not succeed in the present case because, according to him there was such a document in existence. He stated that the gifts had been effected by means of letters written by the donors to the firm under their signatures requesting it to make entries and that the acceptance of the donees had also been indicated in writing.
20. We do not wish to enter into this controversy for two reasons. In the first place, the Tribunal has not examined the facts to find out whether there was a document in writing which could be sufficient compliance with Section 130 of the Transfer of Property Act for the good reason that no such argument, as has been addressed by Shri Wadhara, was put forward before the Tribunal. In the absence of the relevant facts it is not possible for us to deal with this contention because, if there had been a document as alleged by counsel for the assessee, the discussion on the contention raised by the departmental counsel would be purely academic. Secondly, we think that the question whether the existence of the amount standing to the credit of a partner in the books of a firm can be said to constitution an actionable claim or not may not arise for consideration in the circumstances of this case. In a case of this type where a gift is evidence by book entries, the subject matter of the gift could be one of two things. If the amount which is due from the firm, family or company to the donor is treated as an actionable claim than the book entries could be evidence of a transfer to the actionable claim and if that is the claim which is put forward then it may be necessary that it should be evidence by a document as envisaged under the Transfer of Property Act. On the other hand, the case of the present assessee, as well as the assessees in the various decisions to which we have referred, is not that there has been a transfer of an actionable claim but that there is a transfer of money to the extent evidenced by the book entries. The case is that the donor in question has gifted monies to the donees and that it is this gift of movable property in the form of money that is evidence by the book entries. The argument is that, through there has been no actual withdrawal of monies and delivery of possession thereof to the donee and acceptance of such money by the donee, the position practically tantamounts to that for, having regard to the nature of commercial transactions, the book entries represent a withdrawal of cash to a corresponding extent, delivery there if to the donee and the latter's deposit's thereof with the firm. It is this argument that has been accepted in all the decisions and it has been held that a gift of monies can be taken as having been validly made by means of such book entries provided the other conditions which are indicated earlier are fulfilled. The madras High Court in the decision relied upon for the assessee, refers at page 400 to a case where entries are made in a partner's current account and observes:
“In the case of a current account, it is a matter of agreement between the partnership and the partners that the partner is free to withdraw the amount. It is not, therefore, possible to say that it is a mere actionable claim. It is a debt due which were recognised by the partners as payable on demand and its recovery could be enforced against the firm without recourse to a suit for dissolution — Karria Venkata Reddi v. Kollu Narasayya (1908-ILR 32 Madras 76) The current account would thus stand out of the category of actionable claim. Any transfer of money from that account would be equivalent to gift of cash, as the donee will be free to dual with it in any manner and at any time he liked.”
In this view of the matter, the contention based on an assignment of an actionable claim will arise for consideration only if the assessee fails in making out before the Tribunal, with will be considering the matter afresh of the light of out discussion, that there have been gifts of money by the several partners to the various donees.
21. For the above reasons, we answer the questions referred to us in I.T.R 304/79 as follows:
Q. No. 2: The Tribunal did not correctly apply the ratio of the judgment of this Court in the case of New India Colour Co. (1971-80 ITR 206). It ought to have appreciated that a valid gift was possible by means to such book entries and should have examined the extent of Cash and Bank Balance of the assessee and the Nature of the account in which the entries were made before coming to a conclusion one way or the other.
Q. No. 1: In view of the answer to question No. 2, the Tribunal was no right in holding that the gift made by Jai Copal in favour of his minor son was not a valid gift and the assessee was no entitled to get any deduction of the interest paid to the donee.
The questions in the other three references are also answered in the same manner. The result of our decision will be to restore to its file the appeals before the Tribunal which it should proceed to dispose of afresh in the light of our above discussion. The references are disposed of accordingly but, in the circumstances, we make no order as to costs.
R. S. Matters remanded to Tribunal for disposal according to law