The validity of a gift made by way of debit and credit entries in the account books of a firm depends on whether it is a natural method of transfer in the circumstances, and the payment of interest on the gift amounts to the donees constitutes acceptance of the gifts.

D.K.Mahajan, J.

1. The Income-tax Appellate Tribunal, Delhi Bench "B", has referred the following question of law for our opinion under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act):

"Whether the assessee is entitled to the claim of Rs. 977 as interest paid in the year 1960-61 and Rs. 1,148 in the assessment year 1961-62 in the circumstances narrated above ?"

2. The circumstances that have been narrated by the Tribunal may now be stated : Naunihal and his two sons, Parshotam Singh and Iqbal Singh, constituted a registered firm. Naunihal had sufficient credit balance in his capital account and he issued instructions that the following sums be transferred to his daughter and daughters-in-law. Smt. Kamal Kumari is the daughter and Smt. Simla Devi and Smt. Tripta Devi are daughters-in-law, the former being the wife of Parshotam Singh and the latter being the wife of Iqbal Singh. A sum of Rs. 9,500 was gifted to Smt. Kamal Kumari and Rs. 4,500 each to the two daughters-in-law. The method adopted was that these amounts were debited in the books of account of the registered firm and were credited in the names of these three ladies. On these credit balances in the assessment year 1960-61 and the assessment year 1961-62, the following amounts were paid as interest respectively to each of the three ladies :

Name Assessment year 1960-61 Assessment year 1961-62

Miss Kamal Kumari Rs.579 Rs. 613

Smt. Bimla Devi Rs.227 Rs. 255

Smt. Tripta Devi Rs.171 Rs. 280

Total Rs.977 Rs.1,148

3. During the course of the assessment proceedings for these two relevant assessment years, the assessee claimed that the aforesaid payments of interest were admissible deductions in the case of the registered firm. These sums were not allowed as deductions from the income of the assessee by the Income-tax Officer, on the ground that the gifts were not valid. The principal reason that prevailed with the Income-tax Officer was that the firm had neither sufficient cash balance nor bank balance on the date of the alleged gifts to cover the amounts gifted. The order of the Income-tax Officer, on appeal, was affirmed by the Appellate Assistant Commissioner. The Tribunal, on further appeal, affirmed the decision of the Appellate Assistant Commissioner principally on the ground that the book transfers were of no consequence, inasmuch as the firm was not a firm of bankers. The assessee was dissatisfied with the order of the Tribunal regarding these two assessment years and applied under Section 66(1) of the Act for reference of the question of law, arising from the order of the Tribunal, for opinion of this court. The Tribunal allowed this application ; and that is how the matter has been placed before us.

4. Before proceeding to deal with the various cases that have been cited at the Bar by the learned counsel for the assessee as well as by the learned counsel for the department, it will be proper to boldly state the facts that have been found and on which necessarily the answer to the question referred will depend. The facts found are :

(1) that Naunihal had sufficient credit balance in his capital account;

(2) that the respective amounts, that were gifted, were debited to his account and credited to the accounts of the three ladies;

(3) that the respective interest due on these amounts was paid to the three ladies, in the relevant account years.

5. The contention of the learned counsel for the assessee is that, on these facts, the irresistable conclusion is that there was a completed gift, inasmuch as the gift was made and it was accepted by the donee, particularly when the donee received interest thereon, which could only be received if the gift of the corpus had been accepted, whereas on the side of the department, two contentions have been advanced, namely :

(1) that, in view of the finding of fact by the Tribunal, that there is no acceptance of the gift, it is not open to this court to go behind that f