Judgment:
1. The appellants have filed these appeals against the separate orders of the Dy. CIT(A), Pune, dated 29-11-1991 on the common ground that the Dy. CIT(A) erred in upholding the status of the appellants as AOPs as against the status of an HUF.2. I have heard the learned counsel for the appellants Shri G.D.Gargieya and the learned departmental representative, Shri A.K.Khaladkar. Their arguments relating to the factual as well as legal aspects are taken into consideration.
3. Mr. Rajkumar Bansilal Agarwal married to Mrs. Ami Agarwal. They have two minor sons Bharat and Sharad. For the sake of brevity the HUF consisting of Rajkumar Bansilal Agarwal, his wife Ami Agarwal and his two minor sons Bharat and Sharad would be hereafter called as bigger HUF. Mr Rajkumar B. Agarwal is the karta of bigger HUF. He has allegedly created other five more HUFs and treated himself as karta of other alleged HUFs. Those HUFs are as follows :1. Ami Bharat Agarwal (HUF) (a) Rajkumar Bansilal Agarwal, Karta (b) Mrs. Amita Rajkumar Agarwal2. Ami Sharad Agarwal (HUF) (a) Rajkumar Bansilal Agarwal, Karta (b) Mrs. Amita Rajkumar Agarwal3. Sharad Bharat Agarwal (HUF) (a) Rajkumar Bansilal Agarwal, Karta (b) Master Sharad R. Agarwal4. R.K. Sharad (a) Rajkumar B. Agarwal, Karta (b) Master Sharad R. Agarwal5. R.K. Bharat Agarwal (HUF) (a) Rajkumar B. Agarwal, Karta (b) Master Bharat R. Agarwal6. R.K. Agarwal (HUF) (a) Rajkumar B. Agarwal,1 Karta (b) Mrs. Amita R. Agarwal.
4. The concept of an HUF under the Hindu Law including both Mitakshara and Dayabhaga is a lawful status which comes into existence by virtue of law. The HUFs cannot be created by an act of a man. The concept of creation of an HUF by an act of a man is unknown to Hindu Law. By a fiction of law an entity can be brought into existence but that does not mean an entity of an HUF can be created. Mostly a Karta of an HUF acts as Karta or Manager of one HUF only. It is also not known to the Hindu Law that one man to act as a Karta is eligible to create HUFs as in the instant case.
5. Mr. Rajkumar B. Agarwal, Karta of Bigger HUF, gifted Rs. 7,500 each to the HUFs created by him. The ITO held that such HUF cannot come into existence and cannot be treated as an HUF. He levied the tax on the income of the said HUFs at a maximum marginal rate. The Dy. CIT(A) held the same view and upheld the order consisting of an HUF in question at a maximum marginal rate in the status of AOPs. For upholding the assessment order the Dy. CIT(A) relied on the decision of the Supreme Court in the case of Surjit Lal Chhabda v. CIT [1975] 101 ITR 776. The Supreme Court on page 783 has made the following observations : The joint Hindu family, with all its incidents, is thus a creature of law and cannot be created by act of parties, except to the extent to which a stranger may be affiliated to the family by adoption. But the absence of an antecedent history of jointness between the appellant and his ancestors is no impediment to the appellant, his wife and unmarried daughter forming a joint Hindu family. The appellant's wife became his spinda on her marriage with him. The daughter too, on her birth, became a spinda and until she leaves the family by marriage, the tie of sapindaship will bind her to the family of her birth. As said by Golapchandra Sarkar Sastri in his 'Hindu Law' (eighth edition, page 240), 'those that are called by nature to live together, continue to do so' and form a joint Hindu family. The appellant is not by contract seeking to introduce in his family strangers not bound to the family by the tie of sapindaship.
The wife and unmarried daughter are members of the family. He is not by agreement making them so. And as a Hindu male, he himself can be the stock of a fresh descent so as to be able to constitute an undivided family with his wife and daughter.
6. The Dy. CIT(A) also relied on the decision of the Calcutta High Court in the case of CIT v. P.N. Talukdar [1982] 135 ITR 628. The observations made by the Supreme Court on page 638 are as follows : In the case of CWT v. Smt. Champa Kumari Singhi [1972] 83 ITR 720 (SC), the expression 'Hindu undivided family' appearing in Section 3 of the WT Act. 1957, fell for consideration before the Supreme Court and the Supreme Court observed that the said expression included a 'Jain undivided family'. The Supreme Court reiterated that the words 'Hindu undivided family' were not used in the context of status with reference to one school of Hindu law only but to all schools of law.
The question may be looked at from another point of view as was looked at by the Supreme Court in the case of Surjit Lal Chhabda v. CIT [1975] 101 ITR 776. There, the Supreme Court observed that a joint family under the Dayabhaga law was like a Mitakshara family normally joint in food, worship and estate. In both systems the property of a joint family might consist of ancestral property, joint acquisition and self-acquired properties thrown into the common stock. In fact, whatever be the school of Hindu law by which the person was governed, the basic concept of an HUF in the sense of who could be its members was just the same. Generally speaking, the Supreme Court noted, the normal state of every Hindu family was joint and, in the absence of proof of a division, such was the legal presumption. A joint Hindu family with all its incidence, the Supreme Court pointed out, was a creature of law and could not be created by an act of parties except to the extent to which a stranger might be affiliated to the family by adoption.
7. By following these two decisions of the Supreme Court, the Dy.
CIT(A) held that a karta of a Bigger HUF cannot create any HUFs as purported by him. Creation of such HUFs cannot assume the legal status as an HUF. Therefore he confirmed that the assessment of the income of such HUFs should be made at a maximum marginal rate by confirming the status of such an HUF as AOPs. The appellants have agitated this order before the Tribunal.
8.The appellant's trump card in support of creating several HUFs by an act of a man is the judgment of the Gujarat High Court in the case of CIT v. Shanlikumar Jagabhai [1976] 105 ITR 795. They have also relied on another judgment of the Supreme Court in the case of State of Maharashtra v. Narayan Rao Sham Rao Deshmukh [1987] 163 ITR 31. This case was filed under Maharashtra Agricultural Lands (Ceiling on Holidngs) Act. 1961. The Supreme Court held in this case that, in the instant case, no action was taken by either of the two females concerned to become divided from the remaining members of the family.
Notwithstanding the death of S. the remaining members of the family continued to hold the family properties together though the individual interest of the female members thereof in the family properties had become fixed. Hence N, his mother and his grandmother were, together entitled to retain only one unit of the ceiling area. This decision has no relevance with the creation of, to say, an artificial HUF.9. The learned counsel also made a reference to the decision of the Supreme Court in the case of Gurupad Khandappa Magdum v. Hirabai Khandappa Magdum [1981] 129 ITR 440. In that decision the point of notional partition on the death of a Karta was involved with reference to the partition after his death. Appellants also cited the decision of the Ahmedabad Bench of the Tribunal in the case of ITO v. Thakershi Chunilal Parikh [1987] 23 ITD 505 wherein it has been held that it was not disputed that the order passed by the ITO under Section 171 recognising partial partition was very much there. Once the ITO had recorded recognition of the partial partition in the manner the assessee had claimed, he could not change the status of the assessee from HUF to that of an 'AOP in the manner he did. Therefore, the order of the ITO was bad in law and the order of the AAC was justified. It is not the case of the appellants in these appeals that either any partial partition under Section 171 of the Act was claimed or it was accepted by the ITO and having done so he could not have changed the status of an HUF to AOPs. This decision is also mis-placed. On the action of changing the status the decision of the Rajasthan High Court in the case of CWT v. Ridhkaran [1972] 84 ITR 705. It was pointed out that in view of the said decision of the Supreme Court in the case of CIT v. K.Adinarayana Murty [1967] 65 ITR 607 the ITO do not have any jurisdiction to change the status of HUF to AOP. According to them the assessment made is a nullity. But two decisions relied upon by the Dy.
CIT(A) are not at all either tried to be distinguished or not applicable to the action adopted by the Assessing Officer and upheld by the Dy. CIT(A). There is no dispute about making gifts of Rs. 7,500 to each HUF in question. The dispute is regarding creation of HUFs, their doing business in clothes and assessment of income from such cloth business is in dispute. A karta of Bigger HUF gifted a sum of Rs. 7,500 to each smaller HUFs. Thus a karta of a Bigger HUF is giving gift to himself and accepting the same on behalf of other HUFs created by him.
In view of the decision of the Calcutta High Court in the case of P.N.Talukdar (supra) and relevant observations at page 638 the HUFs cannot be created by an act of a karta.
10. Mr. Khaladkar argued that partition was recognised method of division and further splitting up of HUFs. No such partition had taken place in the instant appeals either of the properties or of the members. Recognising the partition would split the bigger HUF by bringing new HUFs into existence. What is held by the Bombay High Court in the case of CIT v. M.M. Khanna [1963] 49 ITR 232 that there was no legal obstruction whatsoever in the way of the assessee giving away his self-acquired property not to the entire main family but to the similar family consisting of himself, his wife and children; (2) that the smaller family was an assessable unit capable of holding property as belonging to it and the circumstance that it was also a branch of another larger assessable unit did not in any way affect it from being an assessable unit itself. It was not necessary in order that the smaller family could be an assessable unit that the larger family should have been completely disrupted by a partition; and (3) that, therefore, the income from the property thrown into the hotchpotch of the smaller family could not be assessed as the income of the assessee.
The point involved in that case was that income from property thrown in the hotchpotch of the smaller family could not have been assessed as income of the assessee. Moreover, the larger family was not disrupted by a partition. Therefore it was not necessary in order that smaller family could be an assessable unit, that the larger family should have been completely disrupted by a partition.
11. It is pertinent to note the view taken by the Full Bench of the Madras High Court in the case of P.C. Balasanjanna v. Fourth GTO [1972] 86 ITR 748. The Madras High Court in that case held that Hindu law recognises only the entire joint family or one or more branches of that family as an entity or entities and property acquired by that entity in the manner recognised by law would be considered as joint family property. The Hindu undivided family, a corporate body with its heritage, is purely a creature of law and cannot be grouped by act of parties. Therefore, some of the members of a joint family cannot group themselves into an independent unit as a joint family within the larger unit. Some members may, however, divide themselves off from the corporate body and leave the rest of the members of the corporate body united. Therefore, the Madras High Court held that the facts were not sufficient to indicate in that case that the father had blended his self-acquired properties with those of a joint Hindu family consisting of the persons stated in the declaration purporting to throw the property into the hotchpotch. Again none of the members of Bigger HUF divided themselves off from the corporate body and leave the rest of the family off the corporate body united in this case. All the decisions cited on behalf of the appellants are either in respect of partial partition of the members of properties or notional partition.
The said concepts have not arisen in the instant appeals. However, it was much emphasised on the word "entity" which does not lend any help to the creation of an HUF by an act of a party.
12. The HUFs in question are not eligible to assume the character of an HUF created by virtue of law either by division of members or a division of property. In the instant appeals the Karta of a Bigger HUF gifted the amounts to the HUFs created by him and received the same on behalf of their members. Shri Khaladkar has pointed out that the gifts were not made for a pious purpose. Moreover, the entire property was not gifted. However, the appellants did not claim that the gifts were made for pious purpose. Therefore the question of making gifts for pious purpose does not arise. He contended that so-called HUFs cannot be created in view of the decision of the Bombay High Court in the case of M.M. Khanna (supra). There is also no case that any of the family members gone out of an HUF. No partial partition is involved. While advancing arguments on these points Shri Khaladkar made a proposition to treat the HUFs in question as constructive trusts brought into existence and to assess such trusts in the representative capacity. He has justified the action adopted by the Assessing Officer and upheld by the Dy. CIT(A).
13. On the basis of the above referred decisions cited on behalf of the appellants that the status of an HUF in question cannot be converted to that of AOPs by the Assessing Officer and the decisions cited on behalf of the department that HUF cannot be created by an act of a party, the question arises in which status the assessment of income earned by the so-called HUFs should be assessed. It cannot be said that the Karta of a Bigger HUF gifting certain amount to smaller HUFs created by him also received by him on hehalf of smaller HUFs. The business is done by him.
He carried on the business on behalf of so-called smaller HUFs as karta of those HUFs. Therefore he has a representative capacity. There is no doubt to arrive safely to a conclusion that a principle of constructive trust is applicable to the alleged HUFs in question brought into existence by a karta of Bigger HUF and therefore having no doubt in this respect the assessment can be made in the representative capacity of the constructive trust. It cannot be ignored that a karta of Bigger HUF created all the smaller HUFs to divide the income carried on by himself on behalf of other HUFs. The colour of being carried on the business by so-called smaller HUFs independently is tried to be given but the fact remains that all these smaller HUFs business is being carried on by the same karta in the same business premises diverting the income in the form of giving Rs. 7,500 to each, so-called HUFs, from the income of the Bigger HUF. Therefore the device is visible to divert the income. Hence the judgment of the Supreme Court in the case of McDowell &. Co. Ltd. v. CTO [1985] 154 ITR 148 cannot be said that the same is not applicable. By creating such smaller HUFs by an act of parties the payment of income-tax as well as wealth-tax is reduced by claiming to charge the income at a minimum marginal rate.
14. In his reply Mr Gargieya urged that even after the Judgment in the case of Shantikumar Jagahhai (supra) the Full Bench of the Madras High Court has not restricted the creation of legal entity. According to him even after throwing self-acquired property into stock is not helpful.
There is no doubt that karta has a right to make a gift as per the decision of the Rajasthan High Court in the case of CIT v. Braham Dutt Bhargava [1962] 46 ITR 387 and relevant observation on page 397. But the purpose and limit of making such gifts cannot be ignored. According to the appellants the pious purpose and reasonable limits of making gifts are not essential factors. He has also urged that the decision of the Bombay High Court in the case of M.M. Khanna (supra) is also not applicable. He has contended that no constructive trust can be brought into existence and his reply to the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) is that no colourable device to divert the income is applied.
15. After examining the facts, considering the contents of letter of declaration for making gifts, considering creation of HUFs by an act of a party and the decisions for and against regarding the change of status by the Assessing Officer, it can be correctly arrived to a finding that the so-called HUFs in question created by an act of parties cannot assume the character of the HUFs by virtue of concept of law. Secondly it does not appear justifiable for a karta of a Bigger HUF to gift Certain amounts to smaller HUFs and to receive the said gifts on their behalf. Thirdly carrying out the business of clothes by the same karta of a Bigger HUF in the business premises of the Bigger HUF on behalf of the alleged smaller HUFs also does not lend any support to the alleged creation of HUFs to assume the legal entity. Of course, there is no doubt the ITO was not entitled to change the status from that of HUFs to AOPs and the assessments made in that status also does not hold good. There are good and convincing reasons to conclude that the Karta of a Bigger HUF has acted in a manner of representative capacity and it would not be incorrect to say that the concept of constructive trust has come into existence. Having the constructive trust came into existence the assessment is required to be made in the representative capacity. Therefore it is just and proper to direct the Assessing Officer to assess the income of the constructive trusts in their representative capacity as per Section 94 of the Indian Trust Act, at the maximum marginal rate. In this view of the matter the order of the Dy. CIT(A) is upheld on different reasons.