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Sharda Trust v. Commissioner Of Income-Tax, Jullundur
Factual and Procedural Background
The assessee is a trust registered under the Societies Registration Act, 1860. The assessment year in question ended on March 31, 1971. The trust received donations totaling Rs. 40,000 from the four partners of the firm M/s. Cheru Lal Bal Chand, with Rs. 10,000 contributed by each partner. These amounts were recorded in the firm’s books as debits to the partners' accounts and credited to the trust’s account before March 31, 1971. In the trust's balance sheet for the period ending March 31, 1971, the Rs. 40,000 was shown as donations receivable and added to the general funds.
At assessment, the assessee claimed exemption under section 11 of the Income-tax Act, 1961, for this amount. The Income Tax Officer (ITO) disallowed the exemption, applying section 13(2)(h) on the ground that the donated sum remained invested in the firm. The Assistant Commissioner of Income Tax (AAC) allowed the exemption, noting that the amount was physically handed over to the trust in two instalments in April 1971. However, the Tribunal reversed the AAC’s order, leading to the present reference under section 256(1) of the Income-tax Act, 1961. An identical question arising from a subsequent year’s assessment was also consolidated for disposal.
Legal Issues Presented
- Whether, on the facts and applying correct legal principles, the Tribunal was justified in law in holding that the assessee was not entitled to exemption under section 11 of the Income-tax Act, 1961?
Arguments of the Parties
Assessee's Arguments
- No completed gift had come into existence by the close of the relevant year (March 31, 1971), as actual delivery of money to the trust occurred only in April 1971.
- Under section 123 of the Transfer of Property Act, a gift of movable property requires either a registered instrument or delivery of the property; mere book entries do not constitute delivery.
- Reliance on Sukhlal Sheo Narain v. CWT where it was held that debit and credit entries alone do not effectuate a valid gift since the donor does not divest ownership and the donees do not acquire full ownership.
Court's Observations on Arguments
- The cited case was distinguishable because in the present matter, the gift was accepted by the donees and the trust management was informed, as reflected in the trust’s balance sheet.
- Entries in the firm’s books were made at the donors’ instance, debiting their accounts and crediting the trust’s account.
- Actual delivery of the money took place within a month after the end of the assessment year.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sukhlal Sheo Narain v. CWT, [1973] 89 ITR 157 (P & H) | Book entries alone do not constitute a completed gift as the donor does not divest ownership and donees do not acquire full ownership. | Distinguished on facts; the present case involved acceptance and actual delivery within a reasonable time, unlike the precedent. |
| Balimal Nawal Kishore v. CIT, [1966] 62 ITR 669 (Punjab) | Recognition that a gift of cash effected through debit and credit entries in account books can be valid. | Supported the court’s view that credit entries in the trust’s name constituted delivery of the gift. |
| CED v. Kamlavati, [1979] 120 ITR 456 (Supreme Court) | Upheld the validity of a gift of cash made by debit and credit entries in account books. | Reinforced the legal principle that delivery can be effected by agreed book entries, supporting the decision in the present case. |
Court's Reasoning and Analysis
The court analyzed whether the gift was completed within the relevant assessment year. It noted that under section 123 of the Transfer of Property Act, delivery of movable property is essential for a valid gift, and such delivery can be effected in the manner agreed upon by the parties, analogous to delivery under section 26 of the Sale of Goods Act. The court observed that the debit and credit entries in the firm’s books, made at the donors’ instance, effectively put the amount in the possession of the trust, as the firm thereafter held the money as debtor for the trust’s benefit.
The trust’s balance sheet reflected the amount as donations receivable, indicating acceptance and acknowledgment of the gift. Although the actual cash was delivered after March 31, 1971, the court held that the book entries constituted delivery sufficient under the law. The court distinguished the precedent Sukhlal Sheo Narain on the basis that in the present case, the gift was accepted and the donees had acquired rights, unlike in the precedent where no acceptance was shown. The court also relied on authoritative decisions affirming that debit and credit entries can effectuate a valid gift of cash.
Holding and Implications
The court answered the question in the affirmative, holding that the Tribunal was not justified in denying exemption under section 11 of the Income-tax Act, 1961.
The decision means that the assessee is entitled to exemption for the donated amount despite the actual cash delivery occurring after the assessment year, as the book entries constituted valid delivery and completion of the gift. The ruling directly affects the parties by allowing the exemption claim but does not establish a new precedent beyond affirming existing principles regarding delivery of movable property by book entries in the context of gifts.
S.P Goyal, J.:— The following question of law arising out of order dated December 21, 1976, in Income-tax Appeal No. 83 of 1976-77 has been referred to this court under s. 256(1) of the I.T Act, 1961:
“Whether, on the facts and in the circumstances of the case and on an application of correct legal principles, the Tribunal was justified in law in holding that the assessee was not entitled to exemption under section 11 of the Income-tax Act, 1961?”
2. The facts found and mentioned in the statement of the case are that the assessee is a trust registered under the Societies Registration Act, 1860. The assessment in issue relates to the year which ended on March 31, 1971. The amount of Rs. 40,000, Rs. 10,000 by each of the four partners of the firm M/s. Cheru Lal Bal Chand, was donated to this trust; Rs. 20,000 in equal proportion were debited to the accounts of Shankar Lal and Lalit Mohan and credited to the account of the turst in the books of the firm on March 23, 1971.
3. Similarly, a sum of Rs. 10,000 was debited to the account of Parshotam Lal on March 26, 1971, another sum of Rs. 10,000 to the account of Bal Chand on March 27, 1971, and credited to the account of the trust. In the balance-sheet of the trust relating to the period ending March 31, 1971, the aforesaid amount of Rs. 40,000 was added to the general funds and shown as donations receivable.
4. At the time of assessment, the assessee claimed that the said amount was exempt under s. 11 of the I.T Act. However, the ITO did not allow it holding that the provisions of s. 13(2)(h) become operative because the sum of Rs. 40,000 donated by the four partners remained invested in the firm in which they were partners. On appeal, the AAC held that as the actual amount was later on handed over to the trust in two instalments of Rs. 20,000 each on April, 10 and 15, 1971, respectively, it could not be said that the amount remained invested with the firm and allowed the claim of the assessee. The order of the AAC was reversed by the Tribunal which led to this reference at the instance of the assessee. As an identical question is involved in another reference (I. T.R No. 165 of 1979) by the assessee which relates to the subsequent year, the same shall also be disposed of by this order.
5. The only contention raised by Mr. R.C Setia, the learned counsel for the assessee before us, was that no completed gift came into being in the present case by the close of the relevant year. It was argued that according to the provisions of s. 123 of the Transfer of Property Act, a gift of movable property can be made either by a registered instrument or by the delivery of the property. In the present case only book entries were made prior to March 31, 1971, and actual money was delivered to the trust only in the month of April, 1971. By making book entries, it cannot be said that the money, subject-matter of the gift, was delivered to the trust and, therefore, the gift was not completed till the month of April, 1971. In support of his contention, the learned counsel relied on Sukhlal Sheo Narain v. CWT, [1973] 89 ITR 157 (P & H). In that case, the assessee claimed to have made a gift of Rs. 28,000 each in favour of his three sons, two of whom were minors, by debiting his own account with Rs. 84,000 and crediting Rs. 28,000 each in the accounts of his three sons. It was held that no valid gift had been made by the assessee because by such entries alone, the assessee had not divested himself of his property and the donees had not become full owners thereof. The case is obviously distinguishable on facts. As there was no acceptance of the gift on behalf of the donees, a completed gift could not come into being. The question as to whether the delivery of the money could be effected by making debit and credit entries in the account books, therefore, did not strictly arise in that case. But even then it was observed by the Bench that the case of a partnership firm would be distinguishable from the case of a sole proprietor of the business because in the case of a partnership firm where the donor is one of the partners he would not be able to change entries in the account books as and when he chooses to do so.
6. In the present case, the entries had been made in the account books of the firm at the instance of the donors whereby the amount in dispute was debited in their account and credited in the account of the trust. The information of the gift, it is evident, was duly given to the management of the trust who also made entries to that effect in their balance-sheet as stated above. The amount had actually been delivered also to the trust within a month. The making of the gift was communicated and the same was duly accepted by the donees. So far as s. 123 of the Transfer of Property Act is concerned, it required that movable property, the subject-matter of the gift, has to be delivered in the same manner as the goods sold are delivered to the buyer. Section 26 of the Sale of Goods Act says that delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or any person authorised to hold them on his behalf. In the present case, the moment the credit entries had been made in the name of the trust, the amount, subject-matter of the gift, would be deemed to have been put in possession of the buyer as the firm henceforth would be holding money only as a debtor or on behalf of and for the benefit of the trust. The fact that the amount has been shown as recoverable in the balance-sheet of the trust would further show that the parties had agreed to the arrangement that the amount shall be allowed to remain with the firm till it was demanded and paid to the trust. We are fortified in our view by another Division Bench decision of this court in Balimal Nawal Kishore v. CIT, [1966] 62 ITR 669 (Punj) and the Supreme Court decision in CED v. Kamlavati, [1979] 120 ITR 456, where a gift of the cash amount made through debit and credit entries in the accounts books was upheld.
7. Consequently, the question in both the references referred to above is answered in the affirmative. No costs.
Bhopinder Singh Dhillon, J.:— I agree.
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