The question whether Gift by book entry to members is permissible or is recognized has to be seen in the light of the provisions of law in this regard.
In the erstwhile Gift-tax Act,1958 w’iich was repealed later though there was no provision which prohibited gift by book entry, but the consistent view which has been taken by the Courts of law is that in case of gift by book entry, the gift must be genuine and the subject matter of the gift should actually pass or in case of book entry by debit/credit in the account with a party, there should be sufficient balance in the account of the donor to effect the gift by book entry. It is possible in certain circumstances for a donor to make a valid gift by instructing a firm or a company with which HUF has a balance to effect for a gift by book entry to the members of the HUF.
Moreover, in the Wealth-tax Act, 1957 a provision is contained in Section 4(5A) of the Wealth-tax Act, 1957 wherein it has been provided that where a gift is made by book entry, then the value of such gift is liable to be included in the net wealth of the Donor unless he proves to the satisfaction of the Assessing officer that the money has actually been delivered to the Donee at the time the entries were made.
In this regard, reference can be made to the decision of the Apex Court in the case of Cu lab Rai Govind Prasad vs CIT, 1987 Supp SCC 337 1= (1987) 165 ITR 163], wherein the Apex Court dealing with a case of gift by book entry held the gift to be invalid on account of the fact that there was no evidence of the acceptance of the gift. The only act alleged to be connected with the gift was the making of entries in the books. There as no evidence that the karta in his capacity as the guardian of the minor had accepted the gift.
Another decision in this regard is contawed in CIT vs R.S. Gupta, (1987 2 SCC 841= (1987) 165 ITR 361 wherein he Apex Court held that It is possible in certain circumstances for a donor to make a valid gift by instructing a firm or a company or a HUF in which the donor has an account to give effect to the gift by debiting his account and crediting the account in the name of the donee. But in such cases merely book entries would not suffice. The circumstances must be such as to make it clear that there were sufficient funds at the disposal of the donor by reason of which he could make the gift by such book entries. Th firm in which the donor may have account may or may not have sufficient cash balance but it must have sufficient provision for overdraft with the bank on the basis of which it could honour instructions given by the assessee. This position of law has been referred to and reiterated by the Bench decision of the Delhi High Court in the case of Indian Glass Agency vs CIT Justice Ranganathan of the Delhi High Court after referring to several authorities has observed that book entries may be sufficient only when circumstances make it clear that the gift was genuine and the firms where accounts transfers are effected must have sufficient cash in hand or sufficient provision for overdraft facility upon the basis of which it would honour the instructions given by the assessee. The assessee must also have sufficient credit balance to enable him to make the gift. Reference may also be made for this proposition to the decision of the Delhi High Court in New India Colour CO. vs CIT.
Thus, in the light of the aforesaid provisions it is important that while making gift by book entry the following important things are kept in mind:
The gift is accepted by the Donee.
On the Date of gift by book entry, there is sufficient balance in the account of the Donor to gift.
The act of the parties subequent to the gift confirms the genuineness of the gift.