COMMISSIONER OF INCOME TAX Vs. ASHOK GLASS WORKS

JUDGEMENT

(1.) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922, We are concerned in this reference with the assessment year 1958-59. The assessee is a registered firm carrying on business of manufacture of glass and money-lending. The accounts of the glass business were maintained for the Ram Navami year, i.e., the year ending 12th April, 1958. The money-lending books were closed on June 29, 1957. Two partners were Ramnivas Jhunjhunwalla and Birmadutt Jhunjhunwalla. They claimed to have made gifts of Rs. 3,75,000 to their respective nephews, and also other gifts by them. In the case of another partner, Murarilal, there were also certain gifts. We need not refer in detail to the actual amounts of gifts made. In all the cases, respective gifts were only by debiting the accounts of the respective donors and crediting the accounts of the respective donees, who were all minors. Before these gifts in June, 1955, Ramnivas had to his credit with the firm Rs. 7,12,914 and Birmadutt Rs. 6,37,368. The capital accounts of the partners stood at Rs. 18,43,000 in 1952 and Rs. 11,07,835 in June, 1955. There were loans taken from other parties amounting to Rs. 13,00,000. Thus, the working funds of the firm came to nearly Rs. 32,00,000 (sic). All the entries relating to the gifts had been made contemporaneously. The Appellate Assistant Commissioner in this case had found that the entries were made at a later date and suggested thereby that the entries had been made with ulterior motive after the introduction of the Gift-tax Act, 1958. The Tribunal has categorically found that the entries were made contemporaneously meaning thereby at the time when the gifts were made. The firm was carrying on money-lending business on a substantial scale. The amount of interest earned on the transaction in the year under reference came to Rs. 1,64,141. The assessee claimed the interest earned in the last column as mentioned in the table annexed to the statement of claim as deductions. We need not mention the different amounts. It was not disputed that cash available as on the dates of gifts was enough to meet the respective gifts. The Income-tax Officer considered that the gifts by Ramnivas and Birmadutt to their nephews being cross-gifts were not valid. He further held that no cash was actually handed over to the donees and the gifts were by adjustment entries and according to the Transfer of Property Act where possession of movable property was not transferred or where transfer of movable property was not effected by registered instrument, it would not be valid. According to the officer, the said gifts were not valid. He disallowed the claim for interest and held the same to be payments to the respective donor partners. There was an appeal before the Appellate Assistant Commissioner who took the view that the amounts to the credit of the capital account of partners were actionable claim within the meaning of Section 3 of the Transfer of Property Act, and under Section 130 of the said Act transfer could only be made by an instrument in writing. The Appellate Assistant Commissioner distinguished the cases cited before him and came to the conclusion that there was no gift or a valid transfer and the moneys credited in the accounts of the minors remained the property of the partners, who effected the alleged transfer and the interest credited by the firm was held to be interest paid to the partners. There was further appeal to the Tribunal. The assessee contended that the amount lying to the credit of a partner of a firm was not an actionable claim and the cross-gifts were not invalid and the gifts could be made by making proper entries in the books. The departmental representative controverted these contentions. The Tribunal held that it was not proper to characterise the amount due to a partner as an actionable claim so as to attract the provisions of Section 130 of the Transfer of Property Act. The Tribunal further held that cross-gifts were not invalid and the gifts were valid and the firm could, if necessary, have paid the amount and was carrying on money-lending business. The Tribunal further held that the question as to how far the interest was assessable in partner's hands would be discussed in the case of partners.

(2.) In the aforesaid circumstances, under Section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to this court :

(3.) The question how the gifts of money or movable property like the money should be judged and what are the necessary ingredients of constituting such gifts have come up for consideration in several decisions.