VIRJI DEVSHI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a consolidated reference arising out of the income-tax assessment for the assessment for the assessment year 1958-59 and the wealth-tax assessments for the assessment years 1957-58 and 1958-59, and involves mainly a question relating to the validity of a gift alleged to have been made by the assessee in favour of his minor son on the last day of the account year S. Y. 2008.

(2.) THE assessee was a partner in several registered partnership firms, one of which was M/s. Jethalal Gopalji and Co. At the end of S. Y. 2008 there was to the credits of the assessee's account in the books of the partnership an amount of nearly Rs. 2,60,000. On the last day of the said year, which was October 18, 1952, certain further additions were made to the said account bringing the total to about Rs. 3,16,000 and then that account was debited by an amount of Rs. 3,00,000 and an identical amount was credited to a new account opened in the name of his minor son, Madhu Kant, on the same day. Six days later, on October 24, 1952, the assessee made a declaration on a stamp paper of Rs. 3 before the Presidency Magistrate, Esplanade, Bombay, stating therein that he had made a gift of Rs. 3,00,000 to his minor son, Madhu Kant, out of nature love and affection on October 18, 1952, by debiting his account in the partnership firm of M/s. Jethalal Gopalji and Co. and crediting the account of the son, Madhu Kant, in the books of account of the said firm. The declaration further stated that in respect of the said sum of Rs. 3,00,000, gifted by him to his son, Shri Jadavji Pragji, the other partner of the firm would act as a trustee and guardian of his son and he alone would deal with the amount so gifted by him to his son and all the income in any wise arising therefrom. In subsequent years, the account of the said Madhu Kant was continued in the said partnership firm and interest on the amount was credited in the said account at the end of each account year. In the assessment of the firm for the year 1955-56, the firm claimed the interest paid on the amount as a deduction under section 10 (2) (iii) on the ground that it was interest paid on borrowed capital. The claim was disallowed on the ground that there was no valid gift of the amount in favour of the son and, consequently, the amount of interest was paid to the partner and not capable of being claimed as a deduction under section 10 (2) (iii) of the Indian Income-tax Act.

(3.) IN the wealth-tax of the assessee for the assessment years 1957-58 and 1958-59, the Wealth-tax Officer included the amount of Rs. 3,00,000 together with the accumulated interest thereon which came to Rs. 3,80,887 for the first year and Rs. 4,03,418 for the second year in the computation of the net wealth of the assessee. In the income-tax assessment of the assessee for the assessment for the year 1958-59, the Income-tax Officer included an amount of Rs. 52,049 as representing the assessee's share of income in the registered firm of M/s. Jethalal Gopalgi and Co. This amount of Rs. 52,049 included a sum of Rs. 22,531 which represented the amount of interest paid by the partnership firm on the amount which stood the credit of Madhu Kant in the books of account of the partnership for the year S. Y. 2013. In addition to the said amount, some more interest was also received by the assessee on the money standing to his account also and the total of the interest amount received by the assessee came to Rs. 24,444. The Income-tax Officer showed the whole amount of Rs. 24,444 as interest received by the assessee from the registered firm of M/s. Jethalal Gopalji and Co. The assessee's contention was that the entire amount of Rs. 24,444 was not interest received by him from the partnership firm but an amount of Rs. 22,531 out of the said amount was the interest which was received by his son on the amount, which he had gifted over to him. According to the assessee, therefore, this position should have been clarified by the Income-tax Officer, although did not dispute that the amount of Rs. 22,531 was capable of being included in his account under the provisions of section 16 (3 ). This contention of the assessee was negatived by the Appellate Assistant Commissioner as well as by the Income-tax Appellate Tribunal, both the aforesaid authorities having taken the view that there was not a valid gift of the sum of Rs. 3,00,000 by the assessee in favour of his son, Madhu Kant, and, consequently, the said amount remained as the assessee's own money and the interest paid on it was, therefore, rightly treated as interest received by the assessee. The same view was also taken by the appellate authorities in the wealth-tax assessments for the assessment years 1957-58 and 1958-59. Thereafter, on applications made by the assessee under the Income-tax Act for a reference in the income-tax assessment and under the Wealth-tax Act in the wealth-tax assessments, the Tribunal has made a consolidated reference and referred to this court the questions of law which arise on its orders in the said matters. The two questions relating to the income-tax assessment are as follows :