Interest on borrowed capital allowable.

SRINIVASAN J.

The assessee is a firm which consisted of two partners, Abdul Kareem and his son, Abdul Gaffer Sahib. On the 31st March, 1953, Abdul Kareem made a declaration before the Masjeed Committee of Mahammadpara, whereunder he made certain gifts to his wife and children. In the books of the assessee, transfer entries were made on the same date, debiting the account of Abdul Kareem with these amounts and crediting the accounts of the above parties, the donees under the gifts. The cash balance on that date was not sufficient to enable Abdul Kareem to withdraw any amounts and make the gifts by way of cash. Following this, the constitution of the assessee firm underwent several changes. Besides Abdul Kareem and his eldest son, six other employees of the firm were taken in as partners. In the assessment year following these gifts, the accounts of the various parties to whom the gifts had been made figured as depositors in the accounts of the firm and interest was credited to their accounts. In the assessment year 1954-55, such interest was claimed as a deduction but was disallowed by the Income-tax Officer. This view was accepted by the Tribunal in due course. In the subsequent years 1955-56 and 1956-57, again interest payments on these accounts were disallowed. For the assessment year 1956-57, however, the Appellate Assistant Commissioner allowed interest credited to the accounts of the minor children, but directed that these amounts should be assessed in the hands of the father. Though the statement of the case does not say whether the interest credited to the accounts of the major children of Abdul Kareem was disallowed or not, that appears to have been the case. The assessment year now in question before us is 1957-58, and in respect of this assessment year, the assessee firm claimed that certain amounts have been paid by way of interest on the above said accounts, except to Abdul Gaffer, who was a partner. It was accordingly claimed that these deposits amounted to capital borrowed for the purpose of the business and that the interest payments were, therefore, allowable, But the Income-tax Officer disallowed the claim following his earlier orders. The view that he took was that the gifts had been made only by means of book entries and that there had been no delivery of the gifts, and that, even otherwise, in so far as the interest payments to the minors were concerned, such interest payments were includible in the assessment of Abdul Kareem under section 16. The matter went in due course before the Tribunal, and the Tribunal held that these gifts remained as book entries only and that they were not valid gifts. Certain affidavits proceeding from the parties were also filed before the Tribunal, but the Tribunal took the view that these affidavits had been brought into existence by the interested persons and could not be accepted as they stood. In the opinion of the Tribunal, in order that there should be a valid gift, there should have been actual delivery of cash, which admittedly was not done. The Tribunal thought that the declaration and the entries made in the account books did not amount to valid gifts On the application of the assessee, the following questions have been referred to us

" 1. Whether there had been valid gifts on the 31st March, 1953 ?

2. If the answer to the above question is in the affirmative, whether the interest of Rs. 7, 950 is interest paid on capital borrowed for purposes of business allowable under section 10(2)(iii) ? " *

Nowhere in the order of the departmental officers or in the order of the Tribunal do we find any suggestion that these gifts were not genuine. That Abdul Kareem made a solemn statement before certain other persons, the Masjeed Committee of Mahammadpara, voluntarily making these gifts is beyond question. It is not also denied that following this declaration, Abdul Kareem caused necessary debit entries to be made in his accounts as well as credit entries in favour of t