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Commissioner of Income-tax Vs. Sobhagmal Jorawar Mal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference Application Nos. 76, 77, 165, 312 and 313 of 1982
Judge
Reported in[1986]162ITR720(Raj)
ActsIncome Tax Act, 1961 - Sections 36(1) and 256(2)
AppellantCommissioner of Income-tax
RespondentSobhagmal Jorawar Mal
Appellant Advocate R.N. Surolia, Adv.
Respondent Advocate N.M. Ranka and; N.K. Jain, Advs.
Excerpt:
.....examine properly the factual as well as legal aspects of the allowance of interest payable by the assessee-firm to the minors upon the amounts gifted by the partners. the assessing authority did not allow the interest paid to the minors, as in his opinion, the assessee had failed to prove that the deposits are fresh borrowings made by the assessee firm for the purpose of the business. there was no fresh borrowing by the assessee firm for the purpose of the business and the assessee has miserably failed to prove that these deposits are fresh borrowings for the purpose of the business and hence it is not deductible and allowable under section 36 or 37 of the act. cit [1965]56itr52(sc) and, since the assessee has failed to prove that the amount was borrowed for the business of the..........by the assessee-firm to the minors upon the amounts gifted by the partners. partners of the firm (assessee) gifted various sums to the minors who are members of the family of the partners of the assessee firm. all these gifts were made by book adjustment entries. later on, after the transfer of the said gifted amounts to the names of minors, the assessee-firm allowed interest upon those advances. the assessing authority did not allow the interest paid to the minors, as in his opinion, the assessee had failed to prove that the deposits are fresh borrowings made by the assessee firm for the purpose of the business. in fact, there had been no fresh borrowings but simple transfer of the amount from one account to the other and, therefore, the assessee could not claim deduction of the.....
Judgment:

S.N. Bhargava, J.

1. These are five applications under Section 256(2) of the Income-tax Act, 1961, hereinafter referred to as the 'Act', for the assessment years 1973-74, 1974-75, 1975-76, 1978-79 and 1979-80 which are numbered as 76, 77, 165, 312 and 313 of 1982 respectively, making a prayer that the High Court may require the Tribunal to refer the question of law arising out of its order dated August 29, 1980, for the decision of this court. Since the parties are the same and the question of law involved is also the same, these reference applications are being decided by a common order. In D. B. Income-tax Reference Application No. 76 of 1982 and 77 of 1982 the following question of law has been framed :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest paid by the assessee to the minors on the gifts made by the partners by mere book entries is an admissible deduction '

2. In D. B. Income-tax Reference Application No. 165 of 1982 thefollowing question of law has been framed 3

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Appellate Assistant Commissioner allowing interest paid by the assessee to the minors on the gifts made by the partners merely by book entries '

3. In D.B. Income-tax Reference Application No. 312 of 1982 the following question of law has been framed:

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the finding of the Commissioner ofIncome-tax (Appeals) that the Interest of Rs. 4,184 was allowable under Section 36(1)(iii) of the Income-tax Act, 1961 '

4. In D.B. Income-tax Reference Application No. 313 of 1982 the following question of law has been framed;

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest paid by the assessee to the minors on the gifts made by the partners by mere book entries, is an admissible deduction '

5. We would like to take up the facts of the case in D.B. Income-tax Reference Application No. 76 of 1982 with regard to assessment year 1973-74. Assessment for the assessment year 1973-74 was originally completed by the assessing authority on November 29, 1975, which was set aside in appeal by the Appellate Assistant Commissioner by order dated July 15, 1977, and the matter was remanded with a direction to examine properly the factual as well as legal aspects of the allowance of interest payable by the assessee-firm to the minors upon the amounts gifted by the partners. Partners of the firm (assessee) gifted various sums to the minors who are members of the family of the partners of the assessee firm. All these gifts were made by book adjustment entries. Later on, after the transfer of the said gifted amounts to the names of minors, the assessee-firm allowed interest upon those advances. The assessing authority did not allow the interest paid to the minors, as in his opinion, the assessee had failed to prove that the deposits are fresh borrowings made by the assessee firm for the purpose of the business. In fact, there had been no fresh borrowings but simple transfer of the amount from one account to the other and, therefore, the assessee could not claim deduction of the said amount of interest under Section 36 of the Act. The assessee preferred an appeal before the Commissioner of Income-tax but the same was dismissed. On further appeal by the assessee before the Income-tax Appellate Tribunal, the Tribunal held that the interest claimed by the assessee was an admissible deduction by its order dated August 29, 1980, The Commissioner of Income-tax preferred an application under Section 256(1) of the Act for making a reference to this court but the same was rejected by the Tribunal by its order dated May 15, 1981. Hence, this application under Section 256(2) of the Act for directing the Tribunal to draw up a statement of the case and refer the above noted questions of law to this court for its opinion.

6. Notices were issued to the assessee and we have heard Shri R.N. Surolia for the Revenue and Shri N.M. Ranka and N.K. Jain for the assessee and have also perused the record.

7. Learned counsel for the Revenue vehemently argued that the interest paid to the minors cannot be allowed either under Section 36(1)(iii) or under Section 37 of the Act. Two partners of the firm, namely' Jorawar Mal and Sobhagmal, made gifts of various amounts to their near relations by book entries and the amounts said to have been gifted were debited to the accounts of the donors and credited on the same dates to the accounts of the donees. The firm credited interest to the accounts of the donees on the above amounts and claimed the same as a deduction in computation of its total income. There was no fresh borrowing by the assessee firm for the purpose of the business and the assessee has miserably failed to prove that these deposits are fresh borrowings for the purpose of the business and hence it is not deductible and allowable under Section 36 or 37 of the Act. He has placed reliance on Madhav Prasad Jatia v. CIT : [1979]118ITR200(SC) and Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT : [1965]56ITR52(SC) and, since the assessee has failed to prove that the amount was borrowed for the business of the assessee-firm or there were fresh borrowings, the amount of interest paid on the deposits of the minors by way of gift by the partners of the firm cannot be deducted under Sections 36(1) and 37 of the Act.

8. On the other hand, learned counsel for the non-petitioner assessee has submitted that the gifts were made by the partners of the firm and not by the firm and once the gifts were made by the partners, the amounts were debited to their accounts and the amounts so gifted ceased to belong to the partners or the firm and was the property of the minors and not of the firm and if the said amount was utilised for the purpose of the business of the firm, interest paid to the minors on such sums is deductible both under Sections 36 and 37 of the Act. He has placed reliance on Balimal Nawal Kishore v. CIT , as also CIT v. Ashok Glass Works : [1976]103ITR379(Cal) , wherein it has been held that gifts can be made by book entries and when the gifts were valid, interest paid in respect of the amounts standing in the names of the donees after the gift, was allowable as a deduction in the hands of the assessee firm. He has further submitted that under Section 36(1)(iii) of the Act, interest is payable in respect of capital borrowed for the purpose of the business or profession. There is no question as to whether they were fresh borrowings or not and the learned assessing authority as well as the Appellate Assistant Commissioner were wrong in insisting that the assessee has failed to show that these deposits are fresh borrowings. Requirement of Section 36(1)(iii) of the Act is only that the capital should have been borrowed for the purpose of the business. It is not necessary that there should be a fresh borrowing every year or every time and, when after the gift by the partners of the firm, the moneys stood transferred in the names of thedonees, though minors, and the amount was utilised for the purpose of the business, it was fully covered within the meaning of Section 36(1)(iii) of the Act. He has further submitted that whether the amount in question was being used by the assessee for the purpose of business or whether the amount was borrowed for the purpose of the business, is a pure finding of fact and does not involve any question of law whatsoever and hence this application should be dismissed.

9. We have carefully considered the submissions and the authorities cited at the bar and have given our thoughtful consideration to the whole matter. The two partners of the firm, viz., Jorawar Mal and Sobhagmal, made gifts of various amounts to their relations during the relevant accounting year. The said amounts were debited to the accounts of the donors and were credited to the accounts of the donees and, therefore, there were valid gifts though they were only book entries which are permissible under the law in view of the authority of Calcutta High Court in Ashok Glass Works' case : [1976]103ITR379(Cal) and that of the Punjab High Court in Balimal Nawal Kishore's case . As has been held in these two authorities, the validity of a gift made by way of debit and credit entries in the account books of a firm of which a donor is a partner must depend on the circumstances. This is only a method of transfer. It is not necessary for the donor to withdraw sums in cash from the firm to be reinvested by the donee or donees in the firm and, thus, we find that there were valid gifts by the two partners of the firm. The gifts were not made by the firm but by its two partners and after the valid gifts the amounts so gifted did not belong to and were not owned by the two partners but the amounts so gifted belonged to and were owned by the donees, though they may be minors and relations of the partners. Since the amounts of the gifts were not withdrawn by the donees and the amounts were utilised for the business of the firm during the relevant assessment year, it amounted to borrowing for the purpose of business of the firm and, therefore, the amount of interest paid on such borrowings was a permissible deduction under Section 36(1)(iii) of the Act. The question whether the amount was borrowed and used by the assessee firm for the purpose of its business is a finding of fact and this court cannot go beyond the same and since this finding is accepted, the interest paid on such borrowings is a deductible amount. Section 37 of the Act is very wide. Moreover, the Department itself has accepted the genuineness of the gifts made by the two partners, vide their assessment orders dated April 29, 1975, and which orders have become final and have not been challenged by the Department and since we have come to the conclusion that the amount of interest is an admissible deduction under Section 36(1)(iii) ofthe Act, we need not go into the provisions of Section 37 of the Act and, therefore, we do not find any question of law arising out of the judgment of the Tribunal.

10. In the result, these reference applications are dismissed. The parties are left to bear their own costs.


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