JAGDISH SAHAI - (1.) THIS is a reference made by the Income-tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the Tribunal), under section 66(1) of the Income-tax Act of 1922. The assessment years in respect of which the reference has been made are 1940-41, 1941-42, 1942-43, 1943-44, 1944-45, 1945-46 and 1946-47. The assessees are a firm, Messrs. Juggilal Kamlapat of Kanpur. In the account books of the assessee firm, there is an account styled as Kamlapat Ji Dharam Khata. The following amounts were credited as interest in this account in each of the assessment years noted below :
(2.) THE assessees claim that the balance in the Kamlapat Ji Dharam Khata account was utilised for the purpose of its business and was treated as a loan and as such the interest paid by the assessee firm to Kamlapat Ji Dharam Khata was business expenditure admissible under section 10(2)(xv) of the Income-tax Act. THE facts as given in the statement of case submitted by the Tribunal in short are as follow : L. Kamlapat died on 31st of May, 1937. On the 29th of May, 1937, at about 5 p.m. he is said to have informed Sri Gopi Krishna, the munim of the assessee firm, which is a banking concern, as admitted by the learned counsel for the parties, that he (Kamlapat Ji) had donated the following amounts for the purpose stated thereunde : (1) Rs. 5 lakhs to be set apart for the purpose of charity, the object of which was to construct 100 school buildings in the district of Kanpur, a hall and a ghat on the banks of the river Ganga in Kanpur meant for the use of the general public. (2) To give the amounts to the tune of Rs. 2,46,500 to some of his relations. (We need not give the details of these amounts because we are not directly concerned with them in the disposal of this reference.) The same day, the munim of the assessee firm opened an account as Kamlapat Ji Dharam Khata and showed a credit entry of Rs. 5 lakhs. The dispute between the assessees and the department is a very short one, the same bein : whether or not a trust had been created and the amounts held in Kamlapat Ji Dharam Khata can be treated to be the amounts belonging to the trust and not to the assessees? The case of the department was that on date when the alleged trust is said to have been created, L. Kamlapat had sum of Rs. 3,73,550-8-7 only to his credit in the assessee firm and it is contended that it is obvious that it was not possible to create a trust of Rs. 5 lakhs and also pay a sum of Rs. 2,46,500 to some relations when he had only Rs. 3,73,550-8-7 in his hand. The contention of the learned counsel for the assessee on the other hand is that the existence or non-existence of enough cash in the hands of L. Kamlapat on the 29th May, 1937, is quite immaterial, because the material circumstance was that in fact the assessee firm did open an account in the name of èKamlapat Ji Dharam Khata and made an entry of credit of Rs. 5 lakhs in respect thereof. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal rejected the claim made by the assessee but on the request of the assessee, as already mentioned above, the Tribunal made a reference to this court. The following questions of law have been referred to us for our opinio : (1) Whether a legal and valid Trust known as L. Kamlapat Ji Dharam Khata setting apart Rs. 5 lakhs for religious and charitable purposes had been created by late L. Kamlapat Singhania? (2) Whether there was material on which the Tribunal could hold that the deposits made by Ch. Gopal Hari, Ch. Vijaipat and Ch. Hari Shanker out of the share income which they had received from the firm, Messrs. Hari Shanker Gopal Hari, belonged to their respective Hindu undivided families and not to them in their individual capacities and as such the interest on those deposits paid by the firm was not admissible? (3) Whether there was material on which the Tribunal could hold that the deposits made by Ch. Gaur Hari and Ch. Vijaipat out of the share income which they had received from the firm, Messrs. Juggilal Kamlapat, ex-managing agents to J.K. Cotton Manufacturers, belonged to their respective Hindu undivided families and not to them in their individual capacities and as such interest paid on these deposits by the firm was not admissible? (4) Whether the surplus realised by the sale of the shares of the Aluminium Corporation of India Ltd., J.K. Investment Trust and Raymond Woollen Mills amounting in aggregate to Rs. 3,99,587 or any part thereof was the revenue income of the assessee liable to tax under the Income-tax Act, 1922? At the very outset of the hearing of the case, the learned counsel for the department conceded questions Nos. 2 and 3 in favour of the assessees. Consequently, we answer those question in favour of the assessee and against the department. Coming to question No. 1, it may be stated that the only ground on which the Tribunal decided against the assessees was that inasmuch as the balance standing to the credit of L. Kamlapat on 29th May, 1937, was only Rs. 3,73,550-8-7, he could not obviously create a trust in respect of a much larger amount, i.e., Rs. 5 lakhs. If the Tribunal had treated this as a pure question of fact, then perhaps the finding of the Tribunal would not have been open to any serious challenge but actually what the Tribunal did was that it held that if the settlor himself had not the amount with him, he could not in law create a valid trust of the amount. Having heard the learned counsel for the appellant, it appears to us that it cannot be laid down as a general legal proposition that only because a party has not with him ready cash, he cannot create a trust or that he cannot create one in excess of the amount which he has. We are living in a banking age in which actual transactions in cash are not always made and the same object is achieved by making corresponding entries in bank accounts without actual transfer of hard cash. The point of importance is that the assessees on 29th May, 1937, not only opened an account in the name of Kamlapat Ji Dharam Khata but also credited it with a sum of Rs. 5 lakhs. As to how and on èwhat grounds did the assessee firm credit to the account of the trust an amount which was larger than that held by it, is not for us to enquire. It may have been good business; it may have been bad business; but the bald fact remains that in that particular day the trust came to own a sum of Rs. 5,00,000 and in respect of this amount L. Kamlapat lost his ownership. The actual adjustment of accounts did take place in the following manner. L. Kamlapats three sons purchased some shares belonging to him for a sum of Rs. 4 lakhs with the result that even though the opening balance of L. Kamlapat on 29th May, 1937, was Rs. 3,73,550-8-7 at the close of the day, it stood at a sum of Rs. 7,73,550-8-7 by the addition of the sum of Rs. 4 lakhs, the price paid by L. Kamlapats sons in connection with the purchase of 400 shares belonging to J.K. Cotton Spinning & Weaving Mills Ltd. and which stood transferred from the account of the sons to that of the father. In Chimanbhai Lalbhai v. Commissioner of Income-tax the assessee had made a gift of Rs. 5 lakhs to his son, S, and of Rs. 2 lakhs to his daughter, P, on 17th November, 1952. Necessary entries were made in the account books on that date. On 8th November, 1953, he instructed the joint family firm which acted as his banker and with which he had an account, to debit him with the two sums and interest earned up to that date and credit the accounts of S and P with the corresponding amounts. The firm carried out the instructions and submitted a voucher which the assessee signed. Although it considered the transaction bona fide, the Tribunal held that the gift was not effectuated on the grounds (i) that there was no transfer of possession, (ii) that the assessee did not have sufficient amount in credit with the firm on 8th November, 1953, and (iii) that the firm itself did not have sufficient cash on that date to carry out the directions of the assessee. When the matter came up before the Bombay High Court, Chagla C.J., while disposing of the second objection of the Tribunal, observed as follow : The second equally extraordinary reason given by the Tribunal is that the assessee did not have sufficient amount to credit of his account with his bankers on the 8th of November, 1953. Now that is a matter between the assessee and his bankers. If the bankers choose to give overdraft facilities to their constituent and accept his order and give credit to a third party for an amount which exceeds the amount to the credit of their constituent, as far as the third party and the bankers are concerned, the bankers become liable to the third party to pay that amount. Therefore, it is difficult to understand what possible relevance the fact of the assessee not having sufficient funds to his credit with the bank has got to do with the question as to whether the gift was made by the father to his son and daughter; and as the account shows, although the assessee was short by about Rs. 60,000 when he asked the bank to pay Rs. 7 lakhs, within a short time he made good that shortfall. But that is neither here nor there. That again is a matter of accounting between the èbank and its constituent.
(3.) WE are in respectful agreement with the observation of the Chief Justice in the case mentioned above. In Commissioner of Income-tax v. New Digvijaysinhji Tin Factory an objection similar to the one taken by the department before us was rejected by the Bombay High Court in the following word : Before we proceed to consider another argument of Mr. Joshi, we may observe that two elements were stressed by Mr. Joshi. It was said that when the entries were made in the books of account of the assessee firm, there was no sufficient cash in hand and, therefore, there could not, in law, be delivery of the moneys to the donees. The ingredient and question of delivery has its importance in the case of gift but in the context of the transaction before us, actual physical delivery is not the sine qua non of the matter. Delivery can be symbolical. This court had occasion to deal with a similar question in Chimanbhai Lalbhai v. Commissioner of Income-tax, and in view of what this court there decided, it is not necessary to dwell any more on the subject. The same view finds expression in K.P. Brothers v. Commissioner of Income-tax, AIR 1962 Raj 152 where the Rajasthan High Court followed the decision of Chimanbhai Lalbhai v. Commissioner of Income-tax. It is not necessary to multiply authorities because it appears to us that even on first impressions the answer to question No. 1 has got to be made in favour of the assessees. With regard to question No. 4, in the assessment of the assessees, the Income-tax Officer included in this total income the surplus in the sale of shares as shown belo : (1) Rs. 60,278 on account of surplus realised from the sale of shares of the Aluminium Corporation of India Ltd. (2) Rs. 72,364 surplus realised by the assessees through sale of shares of J.K. Investment Trust. (3) Rs. 2,66,945 on account of surplus realised from the sale of shares of the Raymond Woollen Mills Ltd. The assessees purchased 50,000 ordinary shares of the Raymond Woollen Mills Ltd. at the rate of Rs. 139-8-0 per share for a sum of Rs. 69,75,255 in the year 1944. A sum of Rs. 7 lakhs was paid as earnest money on November 4, 1944, and the balance up to December 6, 1944. These shares were sold in the open market from time to time. During the period 23rd November, 1944, to 2nd April, 1946, the total sale proceeds of these shares were Rs. 72,42,200 which resulted in a profit of Rs. 2,66,945. The assessees purchased 67 debentures, 5,582 preference shares and 18,576 ordinary shares of the Aluminium Corporation of India Ltd. in the period commencing from 26th January, 1945, and ending with 5th April, 1946, for a sum Rs. 8,57,480. During the period, February 1, 1945, to August 13, 1945, 2, 118 preference shares were sold for Rs. 7,05,957. The cost of these shares left in the stock amounted to Rs. 2,11,800. The assessees received a sum of Rs. 60,278 as profit from the sale of these shares. With regard to the J.K. Investment Trust shares the position is that the assessees purchased 290 shares for a sum of Rs. 1,45,000 and sold them on August 22, 1945, for a sum of Rs. 2,17,264, thus making a profit of Rs. 72,364. ;