RANAWAT, J. - This is a reference by the Income-tax Appellate Tribunal (Delhi Bench) under section 66(1) of the Indian Income-tax Act. The following questions have been referred :
'(1) Whether on the facts and in the circumstances of this case, the debit entry of Rs. 1 lakh made to the account of Kishan Chand and the credit entries of Rs. 60,000 and Rs. 40,000 made to the accounts of Shri Maya Ram and Shrimati Jasodha Bai operated as valid gift of the said sum of Rs. 1 lakh in their favour in the face of there being only a cash balance of Rs. 603 in the account books of the assessee firm ?
(2) If the answer to the first question is in the negative whether still the assessee firm is entitled to claim a deduction of the interest credited in the two accounts under the provisions of section 10(2)(iii) of the Income-tax Act ?
The Tribunal has stated the facts and circumstances of this case as noted below.
The assessment year under consideration is 1954-55, the previous year being the period ranging from October 10, 1952, to October 26, 1953 (both inclusive). The assessee is a partnership firm registered under section 26A of the Indian Income-tax consisting of 4 partners, one of them being Shri Kishan Chand, son of Maya Ram, opposite party No. 2. He had an account with an opening credit of Rs. 2,94,644 in the books of the assessee firm. On September 31, 1953, on the instructions of the said Kishan Chand the assessee firm debited Kishan Chands account with a sum of Rs. 1 lakh and credited Rs. 60,000 in the account of his father, Maya Ram, and Rs. 40,000 in the account of his mother, Shrimati Jasodha Bai. Copies of the accounts of Kishan Chand, his father and his mother are parts of the statement of this case and are marked as annexures A,B and C. On this date, the cash book of the firm showed a cash balance of Rs. 603 only. The assessee firm allowed interest on the sums of Rs. 60,000 and Rs. 40,000 to Maya Ram and Shrimati Jasodha Bai and credited Rs. 1,657 and Rs. 1,108 to their respective accounts. The Tribunal in agreement with the Department held that as there was no actual payment of cash to the donees in whose accounts the sums of Rs. 60,000 and Rs. 40,000 were credited and as the firm had only a cash balance of Rs. 603 as per its cash book, the credit and debit entries made in the accounts of the donor and donees did not operate to create valid gifts and the amounts of Rs. 1,657 and Rs. 1,108 credited to the accounts of the donees by the assessee firm could not be regarded as allowable deductions under section 10(2)(iii) of the Indian Income-tax Act. The Tribunal relied on the following decisions in coming to this conclusion : Chambers v. Chambers; Muthappa Chettiar v. Commissioner of Income-tax; Hanmantram Ramnath v. Commissioner of Income-tax.
Kishan Chand is one of the four partners of the assessee firm. He had an account with the assessee firm showing a credit balance of Rs. 2,94,644 in his favour, on the opening day of the year 1954-55. The statement of the case shows that the he instructed the said firm to transfer from his account a sum of Rs. 60,000 to the account of his father, Maya Ram, and a further sum of Rs. 40,000 to that of his mother, Jasodha Bai, as cash gifts. Mayaram Chellaram and Shrimati Jasodha Bai had accounts with the partnership firm and the sums of Rs. 60,000 and Rs. 40,000 were credited to the respective accounts accordingly, and a sum of rupees one lakh was debited to the account of Kishan Chand Mayaram. The statement of the case is silent as to whether the donees, Mayaram and Shrimati Jasodha Bai, had any intimation of the entries made in their accounts in the books of the partnership firm and whether they accepted the gifts and greed to keep the sums so donated in their favour in their accounts with the partnership firm. The assessee firm at the close of the year credited to the accounts of Mayaram and Shrimati Jasodha Bai Rs. 1,657 and Rs. 1,108 respectively by way of interest that remained outstanding in their accounts including the said sums of Rs. 60,000 and Rs. 40,000. The Income-tax Tribunal has followed the decisions in Chambers v. Chambers, Muthappa Chettiar v. Commissioner of Income-tax and Hanmantram Ramnath v. Commissioner of Income-tax in holding that book entries were not sufficient to create gifts in the eye of law and the amounts of interest on the sums donated could not, therefore, be allowed under section 10(2)(iii) of the Act. In Chamber v. Chamber, it was held that the donee had the intention of making gifts but the mere entries in the books of account of the company did not complete the gift for the reason that delivery of possession was not made. In arriving at the decision, the court followed the decision of the Privy Council in Hariram Serowgee v. Madan Gopal Bagla. In Muthappa Chettiar v. Commissioner of Income-tax it was laid down that credit entries in the books of account without allocation of specific assets or funds corresponding to such entries cannot operate as valid gifts or trust of the sums credited.
In Hanmantram Ramnath v. Commissioner of Income-tax the karta of a joint Hindu family which carried on business made an oral declaration of trust resolving to set apart a sum of rupees two lakhs for religious and charitable purposes and to create a trust of it and directed that the above sum should be kept credited to the said trust but the amount was not, however, set apart or credited to any accounts in the assessees books on the date of the declaration and the amount was utilized along with other family property in carrying on the family business. Later on an account in the name of the trust was opened and an amount of rupees two lakhs was credited to it and interest at 41/2% which had accrued from the date of the declaration was also credited to it. It was held that as there was no setting apart of ascertained property and as there was no evidence to show that the settlor had divested himself of the ownership, the entries in the account books did not create a valid trust and the assessee was not entitled to claim a deduction of the interest credited in the books to the trust account from his income under section 10 of the Indian Income-tax Act.
In the cases discussed above, the donees made entries in their own books of account in pursuance of their intentions to make gifts of their property but as there was no evidence to show that the corpus of the property gifted was set apart and delivered to the donees and accepted by them, the court held that there was no gifts in the eye of law. In the present case, the statement of the case shows that the donee was one of the partners of the partnership firm of Messrs. K. P. Brothers, Jaipur, a private banking concern, and the two donees as well as the donor had current accounts in it which were operated upon by them from time to time. On instructions from the donor, an amount of rupees one lakh was debited to the donors account in the books of the partnership company and sums of Rs. 60,000 and Rs. 40,000 were credited to the accounts of Mayaram, the father of the donor, and Shrimati Jasodha Bai, his mother, respectively. The accounts of the donees which form part of the statement of the case show that Shrimati Jasodha Bai withdrew in course of the accounting year a substantial portion of the said amount of Rs. 40,000 in constructing a house property. There was a cash balance of Rs. 603 only as per the books of the firm on August 31, 1953, when the alleged gifts were made. The firm allowed interest on the accounts and credited in them amounts by way of interest at the close of the year. In these circumstances the first question that has been referred is whether gifts can be held proved in the eye of law particularly when there was a cash balance of Rs. 603 only in the firms books on the day when gifts involving a sum of Rs. 1 lakh was made.
Section 123 of the Transfer of Property Act prescribes two modes for affecting a gift of movable property. Firstly, a gift may be effected by a registered instrument signed by the donor and secondly by delivery of the property. The delivery according to section 123 may be made in the same way as goods sold may be delivered.
Section 33 of the Sale of Goods Act, 1930, which provides for delivery of goods sold, is as follows :
'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 of any person authorized to hold them on his behalf.'
In the present case, the gift has been effected not by execution of a registered instrument of gift but by delivery of goods. The case of the assessee is that the delivery of the amounts of Rs. 60,000 and Rs. 40,000 was effected by the donor issuing instructions to the firm, which as mentioned above is a private banking concern, for delivery of the said amounts to the donees by making book entries in the respective current accounts of the donor and donees and the firm making the credit and debit entries as per instructions of the donor in the current accounts accordingly. It is urged on behalf of the assessee firm that the donees accepted the gifts and instead of receiving the amounts donated to them in cash, they instructed the firm to credit them to their respective accounts. In the statement of the case, there is mention about the instructions of the donor for making credit and debit entries in respect of the amounts gifted by him but there is no mention as regards the acceptance of the gifts by the donees or their consent for keeping the said amounts credited to their current accounts with the firm. The argument of the learned counsel of Messrs. K. P. Brothers is that the copies of the entries in the books of account of the donor and the two donees have been included in the statement of the case which show that the donees withdrew a substantial portion of the said sums and it can be inferred from this that the amounts of gift were credited to the current accounts of the donees with their consent and under their instructions. It may be noted that the income-tax authorities have not questioned the validity of the gifts for want of the acceptance of the gifts or for the reason that the firm credited the amounts of donations to the current accounts of the donees without their consent or instructions. We may, therefore, assume that credit entries to the donees current account were assumed by the authorities to have been made with their consent. We need not, therefore, enter into this aspect of the question which is not covered by the reference. We would confine ourselves to the points of law that have been referred to us. On the date when an amount of Rs. 1 lakh is alleged to have been gifted away there was a cash balance of Rs. 603 only with the firm. The argument is that the firm was not in a position to deliver one lakh of rupees when it had a small cash balance with it and it should, therefore, be inferred that gifts could not and did not take place for want of delivery, even though book entries were made in the books of the firm to evidence the gifts. The idea is that the cash balance, being a far smaller amount than the amount donated, is conclusive proof of want of delivery and of the inability of the firm to make delivery. It may be noted that the assessee is a firm carrying on banking business and though it may have had a petty amount of Rs. 603 only as its cash balance on the date when the gifts were made, yet the firm may have had sufficient resources to make cash payments, and if called upon to do so it may have arranged to make cash payments. The firm may have had deposits with other banks, or it may have had other liquid assets or it may have some arrangements with other banks to allow its overdrafts and it would, therefore, be highly unsafe to judge the ability of the firm to discharge its liability merely from the state of the cash balance in its coffers on a particular day. The amount of cash balance in hands is, in the case of a banking concern, not a sure indication of the capacity of the firm to meet its liabilities. The proposition which has been submitted for our opinion by the Appellate Tribunal is in our opinion not a sound one and no inference one way or the other can be drawn from the amount of the cash balance regarding the capacity of a banking concern to make payments of amounts larger than the amounts of its cash balance. In Chimanbhai Lalbhai v. Commissioner of Income-tax the assessee made a gift of rupees five lakhs in favour of his sons and of two lakhs in favour of his daughter and he made necessary entries in his books of account on the date when he made the gifts. A few months later he instructed his joint family firm which acted as his banker and with which he had an account to debit him with the sums so donated together with interest thereon from the date of the gifts up to date and to credits the accounts of his sons and daughter with the corresponding amounts. The joint family firm carried out the instructions and submitted a voucher which the assessee signed. The Income-tax Tribunal held that the gift was not effected on the grounds, (1) that there was no transfer of possession, (2) that the assessee did not have sufficient amount in credit with the firm on the day on which he issued instructions to the joint family firm and (3) that the firm itself did not have sufficient cash balance on that date to carry out the directions of the assessee. On a reference, the High Court of Bombay held inter alia that the gifts were not invalid for want of delivery and it was observed that it was not necessary that the joint family firm should have had, on the date of the transfers, in its accounts sufficient funds to carry out the directions of the assessee and the transfers made in the firms books were in accord with the normal banking practice. The fact that the firm did not have sufficient cash balance on the date of his transfer was also held not to afford any indication of the incapacity of the firm to make cash payment, and the gifts were held valid in spite of the meagre cash balance. The facts and circumstances of this case are similar to those in Chimanbhais case and we are of the opinion that we cannot infer absence of delivery of gifts from the fact of the state of the cash balance on the date of the gifts.
Mr. Kan Singh for the Income-tax Department has referred to the provision of section 130 of the Transfer of Property Act and he has argued that in case the assessee had no liquid assets, the gifts would only amount to transfer of an actionable claim : as no instrument in writing signed by the transferor or his duly authorised agent was executed, the transfer cannot be regarded as valid. The assessee has not taken up the stand of a transfer of a chose in action before the Income-tax Tribunal and the Appellate Tribunal did not, therefore, go into this aspect to the question. This point has urged independent of the question that has been referred to us and we need not, therefore, examine it.
Our answer to the first question is that in spite of the fact of there being only a cash balance of Rs. 603 in the account books of the assessee firm, the debit entry of rupees one lakh made to the account of Kishan Chand and the credit entries of Rs. 60,000 and Rs. 40,000 made to the accounts of Shri Mayaram and Shrimati Jasodha Bai may operate as valid gifts.
The answer to the first question being in the affirmative, we are not called upon to return any answer to the second question.
Let the reference be answered accordingly.
We make no order as to costs.
Reference answered accordingly.