Valid gift by book entries and interest deduction on credited amounts upheld for business liability treatment.

A gift of money forming part of a firm's assets can be validly completed by a bona fide declaration and book entries where physical cash delivery is impracticable and the donor has done all that was possible to divest beneficial ownership. Here, the donees were credited in the firm's books and treated as entitled to interest, so the gifts were valid. Once valid, the credited sums became liabilities of the firm, and interest paid on them was allowable as interest on capital borrowed for business purposes under Section 10(2)(iii) of the Income-tax Act, 1922. The deduction was therefore admissible.

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Issues: (i) Whether the gifts made by the donor on 31 March 1953 were valid gifts notwithstanding that they were evidenced by book entries and no actual cash delivery was made. (ii) If the gifts were valid, whether the interest paid on the credited amounts was allowable as interest on capital borrowed for the purposes of the business under Section 10(2)(iii) of the Income-tax Act, 1922.

Issue (i): Whether the gifts made by the donor on 31 March 1953 were valid gifts notwithstanding that they were evidenced by book entries and no actual cash delivery was made.

Analysis: The subject-matter of the gift was money forming part of the firm's assets, and the donor had done all that was possible in the circumstances to divest himself of the beneficial interest. The declaration of gift was followed by debit and credit entries in the firm's books, the donees were thereafter credited with interest year after year, and the surrounding circumstances showed that the transaction was accepted as genuine. Physical delivery of cash was not possible without an impractical liquidation of the business, and the validity of the gift depended on the nature of the property gifted.

Conclusion: The gifts were valid.

Issue (ii): If the gifts were valid, whether the interest paid on the credited amounts was allowable as interest on capital borrowed for the purposes of the business under Section 10(2)(iii) of the Income-tax Act, 1922.

Analysis: Once the gifts were held to be valid, the amounts standing to the credit of the donees constituted liabilities of the firm, and the interest paid on those amounts represented interest on capital borrowed for business purposes. The earlier disallowance based on invalidity of the gifts could not survive the finding that the donees had enforceable rights in the credited amounts.

Conclusion: The interest was allowable as a deduction.

Final Conclusion: Both referred questions were answered in favour of the assessee, with the result that the deduction claimed was admissible and the assessment challenge failed.

Ratio Decidendi: Where the nature of the property makes physical delivery impracticable, a gift of money may be validly completed by a bona fide declaration and effective transfer of beneficial ownership through book entries and subsequent recognition of the donee's rights.

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