A partner in a firm does not have the exclusive right to claim or exercise any exclusive right over the property which he has brought in as trading assets of the partnership for making gifts of specified amounts.

( 1 ) THE following question of law has been referred by the Income-tax Appellate Tribunal (Delhi Bench "b"), under provisions of section 66 (1) of the Indian Income Tax Act, 1922 (hereinafter referred to as "the Income Tax Act") :-

"whether on the facts and in the circumstances of the case, the interest credited to the accounts of the four donees was a permissible deduction ?"

( 2 ) MESSRS New India Colour Co. , Delhi, a partnership firm registered under section 26a of the Income Tax Act, is the assessee in the case. The assessment years under reference are 1957-58 and 1958- 59; the relevant previous years being the years ending on the 31st January 1957 and the 31st January 1958 respectively.

( 3 ) THE assessee-firm had two partners, Kartar Singh and one of his sons named Kahan Chand. The share of Kartar Singh was twelve annas in a rupee while that of Kahan Chand was four annas in a rupee.

( 4 ) BY a letter dated the 31st January 1956 Kartar Singh requested the assessee firm to debit his account by Rs. 69,000. 00 and to credit the accounts of his sons and daughter as under:-

( 5 ) ACCORDING to the above-mentioned letter of Kartar Singh he had gifted the amounts which were to be credited to the accounts of the persons named therein. The letter was as well signed by the donees in token of acceptance of the gifts in their favour.

( 6 ) ON January 31, 1956 the account of Kartar Singh with the assessee-firm showed a balance of Rs. 1,03,963. 00. In pursuance of the letter a debit entry of Rs. 69,000. 00 was made in that account and the balance was shown at Rs. 34,963. 00 A credit entry of Rs. 15,000. 00 was made in the account of Kahan Chand. Accounts in the names of Hari Chand, Kundan Lal, Rai Kumar and Vidya were started with credit entries showing the amounts gifted in their favour by their father. Gifts were also made in favour of them by their mother, Hans Kaur, but with her gifts we are not concerned in this reference.

( 7 ) FOR the assessment years 1957-58 and 1958-59 the assessee-firm credited to the accounts of Hari Chand, Kundan Lal, Raj Kumar and Vidya certain amounts by way of interest and claimed that the interest so credited to the account of donees was a permissible deduction within the meaning of sub-section (2) of section 10 of the Income Tax Act as representing interest on amounts invested by the donees with the firm.

( 8 ) THE claim of the assiessee-firm having been disallowed by the Income Tax Officer appeals were filed to the Appellate Assistant Commissioner, which were accepted on October 23, 1961. The Appellate Assistant Commissioner took the view, by differing from the Income Tax Officer, that the gifts were valid as "delivery" could be symbolical and it was not a material consideration "that on the day of the entry the firm did not have sufficient cash in hand". An appeal was then filed by the Department to the Income Tax Appellate Tribunal. The Tribunal allowed the Revenue s appeal by holding that the gifts were not valid. It was considered that there was nothing besides the book entries and an un-registered letter written by the donor to the assessee- firm and on the material date the assessee-firm, which is not a banking firm, had a cash balance of Rs. 3,429. 00 only. The Tribunal also took the view that though the capital account stood at more than rupees one lakh on January 31, 1956, Kartar Singh, as a partner, was not free to withdraw his capital from the firm any time he desired to do so but had a right "to receive a share of the profits and a right to receive on dissolution of the firm the share in the assets of the firm in proportion to the share held by him after all debts and liabilities of the firm are satisfied". As such no constructive delivery of the gift amounts was regarded to have been made and, therefore, the gifts were not to be valid. In the result it was found that no loans could be said to have been advanced by the donees to the assessee-firm and it had no liability to p