PHOOL CHAND GAJANAND Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal has referred the following two questions for the opinion of this court :

(2.) THE assessee is a registered partnership firm, one of the partners being Phool Chand with a share of 4 annas. In the assessment proceedings for the assessment years 1962-63 and 1963-64, the Income-tax Officer found that the sums of R's. 8,083 and Rs. 8,049, respectively, had been credited in the account of the wife of Phool Chand as interest for these two years. THE assessee explained that the interest was paid to the lady because Phool Chand had transferred a sum of Rs. 1,00,000 to her account on April 23, 1959, by way of gift by instructing the assessee to debit his account and credit his wife's account correspondingly. THE Income-tax Officer held that the gift was invalid. Treating the interest in question as paid by the assessee to Phool Chand, a partner, he disallowed the claim. THE Appellate Assistant Commissioner, on appeal by the assessee, held that the amounts were allowable as an expense in the hands of the assessee. He also found that the amount of interest had been assessed since in the hands of the wife. THE Income-tax Officer appealed to the Income-tax Appellate Tribunal. THE Tribunal allowed the appeal on the finding that the assessee was not carrying on a banking business and a gift effected by entries made in the books of the assessee, therefore, could not be considered to be valid. THE question whether a gift is invalid merely because it purports to have been effected by entries made in the account books of a partnership firm which does not carry on banking business was considered by this court in Bhau Ram Jawaharmal v. Commissioner of Income-tax, 1971 82 ITR 772 (I.T.R. No. 191 of 1961, decided by Hon. Pathak and Hon. H.N. Seth JJ.). and it was held that it was not necessary that a partnership firm should carry on a banking business in order that such a gift be valid. That was also a case where the donor had an account in the books of the partnership firm and by instructions issued to the firm, entries were made debiting the account of the donor and crediting the account of the donee with the amount sought to be transferred. This court, after considering the several cases on the point, came to the conclusion that the nature of the business carried on by' the partnership firm was not a necessary criterion for determining the validity of the gift. In the case before us, there is no dispute that the account of the donor had a sufficient amount in it for meeting the gift which the donor purported to make. THE Appellate Assistant Commissioner has found that the gift was accepted by the donee and that finding has not been upset by the Tribunal. THE Tribunal has proceeded merely upon certain observations made by this court earlier in Commisioner of Income-tax v. Shyamo Bibi, 1966 59 ITR 1.. In that case, the assessee was an individual. She purported to make a gift of Rs. 1,00,000 in favour of one Om Nath, THE transaction was sought to be made by entries made in her own account books. THE court pointed out that by making these entries, the possession, dominion and control over the amount in question had not passed from the donor to the donee and that it was always within her power to delete the entries at any time she liked subsequently. But, the Tribunal has adverted to the observations contained in a subsequent part of the judgment where the learned judges disagreed with the basis on which the decision in Commissioner of Income-tax v. New Digvijaysinhji Tin Factory, 1959 36 ITR 72. was rendered, which in turn appeared to follow the earlier decision of the Bombay High Court in Chimanbhai Lalbhai v. Commissioner of Income-tax, 1985 34 ITR 259 . This court expressed the view that the proposition laid down in Chimanbhai's case could apply only in the case of a banking concern and was erroneously applied in New Digvijay's case where the concern did not carry on banking business. We may point out that so far as these observations of this court are concerned they can be construed as obiter. THE considerations upon which the court held the gift to be invalid had already been set out earlier and it was only when discussing the case law on the subject that the observations were made. Since then, the matter has been considered in a number of cases by this court and it has been clearly laid down that whether the partnership firm does or does not carry on banking business does not affect the validity of the gift.