Law:

Section:

Section 36(1)(iii) of the income-tax Act, 1961-Interest on borrowed capital - Partners made gifts to their minor children by debiting their accounts and crediting accounts of donees in firm-Firm paid interests on amounts so credited in donees' accounts-Firm's claim for deduction of said interest payments disallowed on the ground that gifts were invalid since firm did not have adequate cash balance to cover value of gifts-Whether disallowence justified-Held, on facts, no Facts The partners in the assessee-firm made gifts to their minor children by instructing the firm to debit their account with the amounts so gifted and credit the accounts of the donees. The firm acted on their instructions. For the assessment year 1971-72, the assessee claimed deduction of the interests being paid on the amounts so credited in the donee's accounts. The ITO negatived the claim on the ground that, on the dates of gifts, the firm did not have adequate cash balance to cover the value of gifts, and hence there could not have been valid gifts. The AAC confirmed the disallowance, ignoring the plea of the assessee that the cash and bank balances put together were adequate to cover the value of gifts. On second appeal, the assessee contended, inter alia, that the impugned gift had been made by making entries in the personal and drawing account of the donor which had sufficient credit balances on the date of the gift. However, relying upon the of the Delhi High Court in the case of New India Colour Co. v. CIT [197I] 80 ITR 206, the Tribunal also upheld the disallowance. On reference: Held It is settled law that a registered deed is necessary to effect a gift of immovable property and that, even in respect of movable properly, there should be an identification of the property and a delivery thereof to the donee who should accept the same. A gift cannot be said to have been made merely because the owner of a business makes entries in his books of account without allocation of funds corresponding to such entries. In such cases, there should be something more than mere book entries to show that a gift has been made. But there is a substantial difference between a case where such entries are…

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