Law:

Section:

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest paid by firm to partner - Assessment year 1961-62 - Partners of assessee-firm individually effected some gifts by transfer entries in books of assessee-firm - Assessee credited interest in donees' accounts and claimed deduction thereon - ITO rejected claim on ground that gifts were invalid and that cash balance on dates of gifts was insufficient for purposes of enabling actual cash to pass - Whether adequacy of a cash balance in book of firm on relevant date is of no moment when financial resources of firm are sufficient and amount in donor's account is large enough to cover amount gifted by him. - Held, yes - Whether so long as entries made in respective accounts put gifted amount beyond control of donor and result in his ownership in it being replaced by ownership of donee, transfer effected through such book entries would amount to valid gift - Held, yes - Whether entries made in instant case was sufficient to make out a case of allocation of gifted amounts and thus, gifts in question were valid gifts - Held, yes - Whether, therefore, assessee was entitled to deduction claimed - Held, yes FACTS Two of the partners of the assessee-firm gifted certain a mounts to their three relatives by effecting transfer entries in the books of accounts of the assessee-firm. For the assessment year 1961-62, the assessee-firm claimed deduction of interest credited in the donee's accounts on their gifted moneys. The ITO rejected the claim on the ground that cash balance on the dates of gifts was insufficient for the purposes of enabling actual cash to pass; and that there were neither gifts deeds nor actual delivery effected. On appeal, the AAC treated the transactions as an indirect transfer attracting section 16(3). On second appeal, the Tribunal did not affirm the basis of disallowance on which the AAC proceeded but held that the gifts were invalid. On reference : HELD It is not necessary in every case for the validity of a gift that there should be physical delivery of the amount by the donor to the donee, and in every case the decision of the question turns upon whether the modus operandi results…

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