Income Tax Appellate Tribunal - Hyderabad
Chunnilal Prakash (Huf) vs Income-Tax Officer on 29 June, 1993
Equivalent citations: [1994]48ITD271(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. These are appeals filed by the assessee against common orders passed dated 8-3-1990 by the Commissioner of Income-tax, A.P.II, Hyderabad under Section 263 of the I.T. Act.
2. The common question at issue in each of these appeals is whether the heads of some branches of a bigger H.U.F. is entitled to be recipients of the gifts and if so, whether such branches by themselves can be considered to be a H.U.F. and can be assessed as such with regard to the property gifted or with regard to the income derived from the gifted property. In order to correctly appreciate the point at issue involved in this and other batches of appeals, it is essential to have the family tree of the bigger H.U.F. before us. Copy of such family tree is furnished at page 1 of the paper book filed before this Tribunal. It is as follows:
Shri Chunnilal Agarwal Smt. Pratibha Devi Agarwal (wife) Sri C. Prakash. Agarwal Sri C.Vinay Agarwal Sri C. Ajay Agarwal Smt. Leela Devi Agarwal Smt. Manjari Agarwal Smt. Ranjani Agarwal (wife) (wife) (wife) (1) Master Arun Agarwal (1) Master Shivendra Master Nitin Agarwal (son) Agarwal (son) (son) (2) Master Amit Agarwal (2) Baby Abha (son) (daughter) (3) Baby Anuradha (daughter) Each of the four heads of the respective branches constitutes a H.U.F., the head acting as its manager. Thus there are 4 HUFs within the bigger H.U.F., namely, (1) Shri Chunnilal Agarwal, (2) Shri C.Prakash Agarwal, (3) Shri C. Vinay Agarwal, and (4) Shri C. Ajay Agarwal. It is the case of the assessee that the assessee-H.U.F. consisted of the branches headed by Shri Chunnilal & Shri Prakash. It is the further case of the assessee that Shri Kamal Kishore Bihari had made cash gift of Rs. 4,000 to Shri Chunnilal and by the confirmatory letter addressed to Shri Chunnilal dated 30-7-1975 it is stated that the said gift shall be owned and held by him as the property of the Hindu joint family of which he shall be the Karta and Shri Prakash as the coparcener to the exclusion of other branches in the bigger H.U.F. and that it should be enjoyed as a family property consisting of joint family of only Shri Chunnilal and Shri Prakash. It was the further case of the assessee that the gifted amount of Rs. 4,000 was initially invested in money-lending business and later on invested for carrying on business of trading commission agency and other businesses. Further the assessee-H.U.F. under the recitals of the settlement deed dated 25-6-1975 executed by Smt. Shantabai received 260 gms. of gold jewellery and 2190 gms. of silver untensils. Admittedly no books of accounts were maintained for business carried on by the assessee. Therefore, incomes were being estimated and offered to tax under Amnesty Scheme. For assessment years 1978-79 to 1983-84, the assessing officer Issued notice under Section 148 of the Income-tax Act for regularising the returns filed for these years beyond the time limits prescribed under Section 139(2) of the Income-tax Act.
3. For assessment years 1978-79 to 1986-87, assessments were completed as under:
Assessment year Section under which Date of
asst. was completed Asst.
1978-79 143(1) 10-4-1987
1979-80 to 1981-82 143(1) 8-2-1988
1982-83 143(1) 14-4-1987
1983-84 to 1986-87 143(1) 27-4-1987
and returned incomes were accepted in all the above assessment years.
4. Assessments thus completed came under scrutiny of the learned Commissioner of Income-tax who felt that assessment orders were erroneous and were completed without making proper enquiries regarding the source of initial capital and the status adopted was wrong and it was determined without any legal basis. The learned Commissioner of Income-tax was of the strong opinion that a H.U.F. can be created only by operation of law and not by Act of individual. By mere receipt of the gift from a third party, two or more individuals who are recipients of gift would not form an entity called H.U.F. as between themselves. A gift can certainly be made to an existing joint family. But a gift cannot by itself create a joint family for the first time. He felt that in the facts and circumstances of this case, the assessee should have been assessed in the status of AOP as there was a combination of persons formed to produce income, profits or gains, in view of the decision in CIT v. Pushpa Devi [1987] 164 ITR 639 (Pat.). He felt that the order of assessment by the Income-tax Officer gives rise for a revision under Section 263 of the Income-tax Act. He, therefore, sent notice dated 2-2-1990 to show cause why the assessment order for the above years should not be revised under Section 263 and why status of the assessee should not be determined as AOP instead of H.U.F. The assessee filed his objections for the proposed action of the Commissioner of Income-tax. The assessee raised the following objections. Firstly it was contended that since returns were filed under Amnesty Scheme, there was no justification to make probing or roving enquiries regarding the status of the assessee. The incomes were declared by the assessee for the relevant assessment years and they were not being utilised to explain any investment either in its own case or in the case of any other person. Secondly it was contended that the status was correctly claimed and determined as that of H.U.F. Prior to the receipt of gift by the assessee -H.U.F., there was in fact a coparcenary existing between the members of the donee family. No joint family was created by means of gift. On the contrary, the gift was made to the existing members of the joint family. Such gift was valid in law in view of the A.P. High Court's decision in A. Hanumantha Rao v. CWT [1967] 65 ITR 586 the ratio of which is equally applicable to the facts on hand.
5. These explanations of the assessee were not accepted by the learned Commissioner of Income-tax. He held the following.
6. Firstly he held that no enquiries at all were made by the assessing officer regarding the correct status to be adopted. He did not enquire as to the nature of source of income, the background of the capital investment etc. As per the ratio of the Supreme Court's decisions in Ram Pyari Devi Saraogi v. CIT [1968] 67 ITR 84 and Smt. Tara Devi Aggarwal v. CIT [ 1973] 88 ITR 323, the order of assessment is liable for revision not only in cases where it is found that the assessment orders are erroneous and prejudicial to the interests of the Revenue but also where it is found that the ITO had passed a stereo-typed order by simply accepting the assessee's stand made in his return without making any enquiries which were called for in order to substantiate the assessee's contention made in the return. According to the Calcutta High Court's decision in Dawjee Dadabhoy & Co. v. S.P. Jain [ 1957] 31 ITR 872, the words "prejudicial to the interests of Revenue" mean that the assessment orders are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. Following the aforesaid decisions, the learned Commissioner of Income-tax found ample justification for holding that the impugned assessment order made under Section 143(1) were erroneous insofar as they are prejudicial to the interests of the revenue. The learned Commissioner of Income-tax had rejected the arguments of the assessee that because the income-tax returns filed by the assessee were under Amnesty Scheme, the assessing officer would be completely restrained from making any enquiries. He held after quoting CBDT Circular No. 451 dated 17-2-1986 especially Question No. 9 as well as 31 under that circular held that Amnesty Scheme was designed in order to attract returns declaring higher incomes or wealth and it does not refer to the status in which the assessee is to be assessed. He further held that there was no bar imposed under the Amnesty Scheme for adopting the correct status of the assessee in place of the status declared in the income-tax return filed under Amnesty Scheme.
7. Next he took up for consideration the nature of the joint family, whether it is a creature of law or created by a contract. He held that it is only a creature of law and cannot be brought about by any act of parties. In support of this proposition, he relied upon the Full Bench decision of the Madras High Court in P.C. Balasanjanna v. Fourth GTO [1972] 86ITR 748 in which it held, inter alia, as follows, at page 750:
Some only of the members of a joint family cannot group themselves into an independent: unit as a joint family within the larger unit. The Hindu undivided family, a corporate body with its heritage is purely a creation of law and cannot be grouped by act of parties. Of course, some members may divide themselves off from the corporate body and leave the rest of the members of the corporate body united.
The learned Commissioner of Income-tax distinguished the A.P. High Court's decision in the case of A. Hanumantha Rao (supra) from the facts of the case before him. Ultimately he held that in the instant case before him, the different groups of relatives such as father, one or more sons or two or more brothers had admittedly utilised the gifted amounts received by each group for the purpose of earning the income. Therefore, he felt that each group should be treated as an Association of Persons under Section 2(31) of the Income-tax Act, as per the authoritative pronouncement of the Supreme Court in G. Murugesan & Bros. v. CIT [1973] 88 ITR 432. Therefore, he held that the assessee should be assessed in the status of AOP for each of the assessment years under consideration, instead of the status of H.U.F., as wrongly adopted in the impugned assessment orders, passed under Section 134(1). In view of the correct status having been determined by him as A.O.P. he gave the following two directions:
(a) The status adopted by the Income-tax Officer as H.U.F. in the assessment order passed by him is cancelled and the status should be adopted as A.O.P. and additional tax demand, if any, is to be raised as per each of these assessments.
(b) Since the shares of different members of the assessee A.O.P are specific and unambiguous, being equal for each of them, the respective share incomes from the A.O.P as computed in the A.O.P's assessment for each of the assessment years under consideration should be included for rate purposes in the individual assessments of each of the members under Section110 read with Section 86(v) of the I.T. Act. In other words, the total income of each member should be assessed at the tax rate applicable to the aggregate income including the share income from A.O.P. In case one or more of the members of the A.O.P. is/are assessed by some other assessing officer, the information regarding the respective share income/incomes of these persons in the concerned H.U.Fs., should be communicated to the concerned assessing officer, for necessary action at his end.
8. Aggrieved against the above orders passed by the Commissioner of Income-tax, A.P.II, Hyderabad dated 8-3-1990, the assessee camp up in second appeal before this Tribunal. The question involved is whether property can be held by some of the branches comprised in the bigger H.U.F. and whether some of the branches of such bigger H.U.F. can be recipients of gifts. In such cases, with regard to the income derived from these gifted properties, whether the recipient or donee branches of the bigger H.U.F. only can be considered to be H.U.Fs. for the purposes of assessment. Here in this case the bigger H.U.F. comprising of the branches of Chunnilal and his three sons, namely, Prakash, Vinay and Ajay are being separately assessed in the status of specified H.U.Fs. by the assessing officer, Ward No. 3(3) under G.I.R. Nos. C-203, P-216, V-209 and A-207. Shri Chunnilal, Shri Vinay and Shri Prakash were partners in their individual capacity in M/s. Bharat Metal Box. Co., Hyderabad and are assessed by the Asstt. Commissioner of Income-tax, Central Circle -I, Hyderabad, Shri Ajay in his individual capacity is assessed by the Income-tax Officer, Ward-3(3), Hyderabad under G.I.R. No. A-907. In the Amnesty returns which were all filed on 28-3-1987, the same male members of the family to the exclusion of one or more of the other male members were purported to have received some gifts from third parties to be enjoyed by them and not by others, Shri K.V.S. Bhaskara Rao, learned advocate for the assessee contended that whether it has got property or not, the bigger H. U. F. constituted by Shri Chunnilal and his three sons is valid under law. In the bigger H.U.F. there are at least four branches, one branch represented by the father and the other three branches represented by his three sons respectively. The question which arises for consideration in these appeals is whether any two branches in bigger H.U.F. can constitute a H.U.F. He cited the following authorities in support of this proposition that the intention of the donor is very essential to find out whether the gift is to a H.U.F. or an individual, and nothing prevents a gift to be made in favour of two different branches in abigger H.U.F. He also propounded that existence of multiple H.U.Fs. within a bigger H.U.F. is not unknown in law.
9. In C/Tv. MM. Khanna [1963] 49 ITR 232 (Bom.) the question was whether during the existence of a larger H.U.F. the self-acquired property of a member of a H.U.F. can be thrown into the common hotchpotch of a smaller H.U.F. of himself, his wife and children and whether such a smaller H.U.F. can be an assessable unit while larger unit still continued undivided. The Bombay High Court held that there was no legal obligation whatsoever in the way of the assessee giving away his self-acquired property not to the entire main family but to the smaller family consisting of himself, his wife and children. It further held that the smaller family was an assessable unit capable of holding property, as belong to it, and the circumstances that it was also a branch of another larger assessable unit did not in any way affect it frombeing 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. Therefore in that case, the property thrown into the common hotchpotch of the smaller family could not be assessed as income of the bigger H.U.F. (the assessee in that case). Shri K.V.S. Bhaskara Rao, learned Counsel for the assessee argued that in the Bombay case a member of the bigger H.U.F. throwing the self-acquired property into the common hotchpotch is concerned. He submits that even if a stranger gives a gift of property to such a smaller H.U.F. comprising of any one branch or two branches of a bigger H.U.F., consisting of many other branches, the position would remain the same. He commends this argument of his for the acceptance of this Tribunal. At pages 239 and 240 of the reported judgment, the Bombay High Court had laid down the concept of Hindu joint family as follows:
It is true that a Hindu undivided family, which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters, and the Hindu coparcenary, which is narrower body within the joint family consisting of persons, who acquire by birth an interest in the joint or coparcenary property, are creatures of law and cannot be created by act of parties save insofar that by adoption a stranger may be introduced as a member thereof. It. must, however, be remembered that a joint Hindu family springs from a Hindu male and every Hindu male can be the stock of a fresh descent constituting a joint Hindu family or a Hindu coparcenary. Where from a Hindu male a joint Hindu family springs into existence, this family goes on having its different branches and sub-branches. Each branch starts with the male descendant of the common ancestor and each sub-branch with the male descendant of the head of the branch. While the entire groups proceeding from the common ancestor with its several branches and sub-branches in the normal undivided estate is a Hindu joint family, each of the branches and each of the sub-branches again is a Hindu joint family according to the concept of a joint family under the Hindu law. It is, therefore, possible for a main Hindu undivded family to be composed of a large number of branch families, each of the branches itself being a Hindu joint family and so also the sub-branches of those branches. As to the property possessed by the Hindu joint family, property may be possessed by the entire family in which members of the family have interest by birth. Individual members of the family again may possess property which belongs to them separately as distinct from the joint family of which they are members. Where a Hindu joint family consists of brapch families it may also be that each of the branch families may possess property which constitutes the joint family property of that branch alone and in which the other branches or the main Hindu family as such have no right or interest. That such is the position under the Hindu law is clearly pointed out in Sudarsanam Maistri v. Narasimhulu Maistri [1901] ILR 25 (Mad.) 149.
He pointed out that the Bombay High Court had relied upon the decision of the Madras High Court in Sudarsanam Maistri v. Narasimhulu Maistri [1901] ILR 25 (Mad.) 149 for its conclusion. This decision provides a complete answer against the notion entertained by the Commissioner of Income-tax holding that a Hindu undivided family is a creature of law and cannot be created by act of parties. Shri Bhaskara Rao contended that there is no question of any creation of H.U.K. in this case. Shri Chunnilal and his sons are already heading their respective branches. A combination of one or two such branches can by themselves hold the property and with regard to the income of that property, the interested branches can constitute smaller HUFs and can be assessed as such. The following other authorities were cited in support of this proposition:
(1) A. Hanumantha Rao's case (supra), (2) CITv. Shanti kumar Jagabhai [1976] 105ITR795 (Guj.), (3) CITv. Budhalal Amulakhdas [1981] 129 ITR 97 (Guj.), (4) Satyendra Kumar v. CIT [1983] 140 ITR 840 (Mad.), (5) CITv. Radhambal Ammal [1985] 153 ITR 440 (Mad.) and (6) CIT/CWT v. M. Balasubramanian [1990] 182 ITR 117 (Mad.)(FB).
10. In A. Hanumantha Rao's case (supra), the bigger H.U.F. consisted of the assessee, his father and his two sons. The maternal grand father of the assessee had gifted a sum of money to the assessee in 1943. The assessee threw it into the joint stock of the smaller joint family consisting of himself and his sons. In earlier years the existence of smaller H.U.F. was accepted but later for assessment year 1957-58 the Department refused to recognise the smaller H.U.F. within a larger H.U.F. which can hold property as a unit to the exclusion of the larger H.U.F. and that separate property of any of the coparceners of the larger H.U.F. can be impressed with the character of joint family property of the smaller H.U.F.
11. In Satyendra Kumar's case (supra) the facts of the case in brief are that S gave funds belonging to himself to her son A with the intention that the money should be used for the benefit of the entire family. With the funds so provided as a nucleus, A did business and also acquired various properties in his name as well as in the names of others utilising the money derived from the business and from the properties acquired therefrom. Cer tain disputes which arose in the family were referred to arbitration and the award of arbitration was filed in the High Court and a decree in terms thereof was passed. Under the terms of the award which was entered in the decree, the properties which were acquired with the funds provided by S to A were divided by metes and bounds and allotted to all the members of the family. The claim of the assessee, a son of A who was allotted certain properties in the award was that the properties got by him under the award had to be treated as the properties of an H.U.F. of which he was the karta. Ultimately in the reference made to the High Court, the High Court held that the properties having been given to A, not for his individual use but for the benefit of the family as a whole the properties in the hands of A were joint family properties. Consequently, the properties allotted to the assessee by the arbitrators by the partition of the properties, were joint family properties in his hands and not his individual properties. In the said decision, the Madras High Court specifically held the following as per the headnote of the decision:
It is well settled that under the Mitakshara law there can be a gift or settlement of property for the benefit of a joint family as such and it does not matter whether the donor is a male or a female or whether he or she is a member of the family or an outsider but what matters is the intention of the donor that the property given is for the benefit of the family as a whole.
12. In Radhambal Ammal's case (supra) a will was executed bequeathing certain properties in favour of the assessee. The income arising out of those properties were being assessed in the individual hands of the assessee up to assessment year 1966-67. However, in assessment proceedings for 1967-68, the assessee claimed the status as that of H.U.F. with regard to the income arising out of the said properties bequeathed to him. Justifying the refusal of reference by the Tribunal, the High Court held that the intention of the testator was clear especially, when he had stated that in respect of the properties given to the wife, she should take them absolutely with full powers of alienation but in respect of bequest in favour of the assessee, it was stated that it should be taken for the assessee and for the benefit of a son, if any, born to the testator before his death. Consequently, the testator had not given the power of alienation to the assessee. Therefore, the refusal to give reference was held justified.
13. In M. Balasubramanian's case (supra) the facts as well as the decision in that case were succinctly given in the headnote of the decision at page 118 and they are as follows:
In June 1966, the assessee's father gave him a cheque for Rs. 10,000 and cash of Rs. 100. Contemporaneously, he gave him a letter stating that the benefit of these sums should go to his wife and children when he got married and that he should enjoy it as a Hindu undivided family. The gift was accepted by the assessee. The assessee was a bachelor at the time of the gift. Subsequently, he married and during the relevant assessment year namely, 1972-73, he had a wife and a daughter. The Revenue wanted to treat the income from the sums gifted as individual income under the Income-tax Act and the sums and accretions thereto as individual properties under the Wealth-tax Act. The assessee claimed that the properties and income therefrom were assessable as belonging to his Hindu undivided family. His claim was accepted by the Tribunal. On a reference:
Held, (i) that the income from the gifted properties arose to the Hindu undivided family and could not be clubbed with the assessee's individual income:
(ii) that for purposes of wealth-tax, the sum of Rs. 2,61,136 belonged to the Hindu undivided family and was not assessable in the hands of the assessee in his individual capacity.
14. Thus Shri K.V.S. Bhaskara Rao contended that the gift as well as the settlement being made to two out of several branches consisted of the larger H.U.F. the two branches can be validly considered as a H.U.F. with regard to the income derived from the gifted or settled properties and, therefore, the determination of the status of the assessee by the Asstt. Commissioner for these several years, while completing the assessments under Section 143(1) is perfectly justified and there is no error involved in such a decision. Since there is no error, the orders of the Asstt. Commissioner under Section 143(1) are not liable to revision under Section 263 or the orders of the Commissioner for any of these assessment years cannot be upheld.
15. As against the argument of Shri K.V.S. Bhaskara Rao, learned Advocate for the assessee, Shri V. Raghavendra Rao, learned Departmental Representative contended that the main question involved in these appeals is to consider whether all the members of two branches of major H.U.F. can constitute a H.U.F. and can be recipients of the gift or settlements. One branch of a bigger H.U.F. can by itself constitute a bigger H.U.F., no matter whether it has nucleus of its own or not. But the learned Departmental Representative contended strongly that two branches of a bigger H.U.F. cannot constitute a H.U.F. or H.U.F. cannot be formed by mere averments made in document by an outsider, since there is no volition on the part of the members, comprised in the two branches, constituting a H.U.F. and in support of this proposition, he brought to our attention para 228A of Mulla's Hindu Law (15th Edition) which is as follows:
228A. Joint acquisition by some members.- So long as a family remains an undivided family, two or more members of it, whether they are members of different branches or of one and the same branch of the family can have no legal existence as a separate independent unit; but all the members of a branch of a sub-branch can form a distinct and separate corporate unit within the larger corporate family and hold property as such. But the law does not recognize some of the members of ajoint family belonging to different branches or even to a single branch, as a corporate unit. Any acquisition of property by some such persons could be held by them only as co-sharers or co-tenants and the property would pass by inheritance and not by survivorship.
This proposition was stated to have been laid down into the Supreme Court's decision in the case of Bhagwan Dayal v. Reoti Devi AIR 1962 SC 287. It is contended on the basis of the above authority that all the authorities cited by Shri K.V.S. Bhaskara Rao do not support the proposition for which they were cited or do not support the proposition that two branches of H.U.F. can constitute a H.U.F. Therefore, the learned Departmental Representative submitted that the Commissioner of Income-tax is perfectly justified, in revising the orders of the assessing officer and directing the Income-tax Officer to consider the donees or settlees as constituting an association of persons. Shri K.V.S. Bhaskara Rao in his reply stated that multiple H.U.Fs may be postulated within the frame of a larger H.U.F. He says for example that if some heads of the branches relinquish their shares, others may automatically constitute a H.U.F. with regard to the relinquished property. In this case, the donor's intention was that different branches of H.U.F. should enjoy the gifted properties as H.U.F. properties. The gift or settlement was made in favour of all the members comprised in two branches of a H.U.F. It is not as if that a H.U.F. is sought to be carved out with some members comprised in the branches or with different members of different branches in which case it may not be possible to treat it as a H.U.F. The cited statement of law in Mulla's Hindu Law, if closely scrutinised would clearly support the case of the assessee rather than going against it. Out of the quoted portion, the following statement of law is most important:
... but all the members of a branch or of a sub-branch, can form a distinct and separate corporate unit within the larger corporate family and hold property as such.
Therefore, there is no impediment for all the members of one branch or of all the members of two different branches constituting a H.U.F. and holding property as H.U.F. property of those two branches. Thus after considering the arguments of both sides, this Tribunal completely agrees with the argument advanced on behalf of the assessee. It rejects the plea of the learned Departmental Representative that the decisions cited by the assessee's counsel do not support the proposition laid down by him. It holds that every one of the decisions cited comes to the support of the proposition put forward by the assessee especially in M.M. Khanna's case (supra) which completely supports the case of the assessee. It is clearly held in that decision that where a joint Hindu family consists of branch families, it may also be that each of the branch families may possess property which constitutes the joint family property of that branch alone and in which other branches or the main Hindu family as such have no right or interest. This proposition is also supported by the Madras High Court's decision in Sudarsanam Maistri's case (supra). The intention of the donor while making the gift or settlement would decide whether the gift is for the individual or for the family. Here in this case recitals of the settlement deed as well as the statement made at the time of making the gift would clearly reveal that the gift or settlement was made in favour of all the members comprised in two branches of a Hindu joint family to the exclusion of all other branches in that family. Even in such an instance, the gift or settled property should be taken to be the H.U.F. property of the two branches. Therefore, agreeing with the arguments advanced by Shri K. V. S. Bhaskara Rao this Tribunal holds that the Assessing Officer is quite correct while treating the status of the assessee as H.U.F. in each of the original assessments framed under Section 143(1) of the I.T. Act. This Tribunal holds that the revisionary order passed by the learned Commissioner is not all correct. The original assessment passed treating the status of the assessee as H.U.F. is perfectly justified and it is neither erroneous nor prejudicial to the interests of the Revenue and, therefore, the revisionary order is bad in law.
16. In the result, the appeals of the assessee are allowed and the revisionary order of the Commissioner of Income-tax is hereby cancelled.